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My approach to shorting oil and gas

When oil and gas companies sell assets to each other in private transactions, they will often open a data room where the acquirer’s team of engineers can look at the data and perform their due diligence.  I find it strange that supposedly sophisticated institutional investors are comfortable with oil and gas stocks without being able to perform this level of due diligence.

Maybe I’m crazy but I think that institutional investors are making huge mistakes in the oil and gas sector.
Either they’re wrong or I’m wrong.  Time will tell.

I believe that there are currently very high levels of deceptive stock promotion and many opportunities for short selling.  The nice thing about the current situation is that institutional investors are involved and are lending out their shares.

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Oil trap or value trap?

The website “Oil On My Shoes” contains a short and excellent introduction to petroleum geology.  In particular, it explains how economic oil and gas reservoirs are often found in either structural or stratigraphic traps.  What I took away from the website is that petroleum geology is quite complex.  There are many factors that affect the exploration potential for a piece of land and therefore how much that land is worth.  Just because two parcels of land are close to each other (what I would call “closeology”) doesn’t necessarily mean that wells drilled on both parcels will have similar economics.

Many publicly traded companies avoid disclosing information about geology and would like investors to focus on closeology.  They want to trick investors into valuing acreage on the sale price of nearby land rather than the geologic potential of the land (or lack thereof).  Without knowing the geological details, it’s hard to say if closeology is a reasonable shortcut in valuing acreage. At the end of the day, I think that it is a red flag whenever an oil/gas company tries to steer investors towards closeology.  Usually it is an attempt to mislead.

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March 2014 portfolio update: Feeling the squeeze…

Unfortunately, I’ve had a bad start in 2014.  My long positions and my short positions are moving against me.  I suppose that this is bound to happen because stocks are never perfectly correlated.  (If they were perfectly correlated then there would be no point in trying to pick stocks or to profit from short selling.)

While I have a large number of short positions (30+), I have managed to find many stocks (mainly Chinese and solar stocks) that have quickly moved against me.

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Ocwen/Altisource update and links

Lately, the share prices of OCN and ASPS have dropped around a third since the beginning of the year.  This is presumably due to the negative press coverage that Ocwen has been receiving due to its regulatory problems.

  1. Ocwen reached a settlement with the Consumer Financial Protection Bureau (CFPB), authorities in 49 states, and the District of Columbia.  Many articles in the media have reported that the settlement amount was $2.125B ($2B in principal reductions to homeowners and $125M in cash).  This is misleading.  Ocwen likely would have provided at least $2B in principal reductions anyways without the settlement.  As for the cash settlement, Ocwen only pays part of it.
  2. Wells Fargo’s sale of MSRs to Ocwen has been blocked by the New York State’s Department of Financial Services (DFS).  (The DFS was not party to the settlement mentioned above.)
  3. The press has reported speculation that MBS investors might sue Ocwen.  I believe that this is misleading because such lawsuits would be silly.  While the contracts that structure securitizations have problems, Ocwen has not breached their contractual obligations.  As a servicer, Ocwen is allowed to modify mortgages and to reduce the principal on mortgages.  When it comes to principal reductions, Ocwen’s incentives are aligned with investors.

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