Unusual payments to suppliers

Most stock promoters will have a disclaimer stating how much they were paid and how they were paid.  Typically, they are paid with one or a combination of the following:

• Cash
• Stock
• Stock options, warrants

Normally, the 10-K of the promoted company will mention the phrase “investor relations” or “investor awareness”.  In some cases however, neither of the two phrases will appear.  Instead, the 10-K will mention “consultants” that were paid in stock or stock options.  This is a red flag.  While it is possible that legitimate consultants to a company are willing to take payment in stock or stock options, such a practice is fairly unusual in the business world.

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Shorting VIC (ValueInvestorsClub.com), PRXI, PVG

Occasionally, I find myself shorting long ideas that are written up on VIC (ValueInvestorsClub.com).  VIC is an exclusive website where a mix of professional money managers and non-Wall Streeters post investment ideas.  Non-members like myself can sign up for a guest account and see ideas with a 45-day delay.

Here are situations where I have taken the opposite side of their trades.

Oil and Gas 101

Here’s what I know about the sector so far:

1. The independent oil & gas sector as a whole has a poor track record of profitability.
2. Reserve estimation is an educated guess.  Small changes in assumptions can have a massive effect on the economics of a reservoir.
3. One common pattern in the oil & gas sector is for a company to overstate its reserves and to continually raise capital.  See #1.
4. PUD (proven undeveloped) reserves are especially prone to abuse (overstatement of reserves).
5. Most of the value creation in the industry comes from exploration.  Exploration is the most open-ended and uncertain aspect of E&P (exploration and production).
6. Technology is another area of value creation.
7. Historically, debt has often been dangerous to the companies which use it.
8. Opportunities are the greatest when overly leveraged companies are forced to sell.