Thursday, January 29, 2015

Canadian Oil Sands Cuts Dividend

Canadian Oil Sands Limited ("COS") (COS.TO) generated cash flow from operations of $1,106 million ($2.28 per Share) in 2014 and $207 million ($0.43 per Share) during the fourth quarter of the year. Cash flow from operations in the fourth quarter was down about 47 per cent compared with the same period of 2013, largely reflecting lower crude oil prices and higher operating expenses. The decline in crude oil prices has continued into 2015 with West Texas Intermediate ("WTI") benchmark prices to date averaging US$47 per barrel. While the decline in oil prices has been significant, a weaker Canadian dollar has offset some of the impact.

In response to the price environment, Syncrude is undertaking a comprehensive review of costs. An effort was already underway at Syncrude to reduce the cost structure, but this work has intensified to identify near-term opportunities. The initial efforts have identified potential cost reductions in 2015, net to COS, of $260 million to $400 million, or about 10 to 15 per cent, in operating, development and capital costs relative to the budget COS released on December 3, 2014. COS has revised its Outlook for 2015 to incorporate $294, net to COS, of these potential cost reductions. COS does not anticipate these reductions to have an impact on production or reliability initiatives underway at Syncrude, and we are maintaining our production range of 35 million to 40 million barrels net to COS for 2015.

COS is reducing its quarterly dividend to $0.05 per Share for the first quarter of 2015. COS had previously indicated its intention to reduce the quarterly dividend, based on the 2015 Budget assumptions released on December 3, 2014, to $0.20 per Share; however, crude oil prices have declined materially from the Budget assumptions, requiring a further reduction in the dividend to better align with the current price environment and as a prudent step to preserve balance sheet strength in the short and medium term.[...]

The estimate for operating expenses has been reduced to $1,521 million, or about $40 per barrel, based on a production estimate of 103 million barrels at Syncrude and a natural gas price assumption of $3 per gigajoule, as well as the other assumptions outlined in our guidance. The decrease is comprised of $166 million in cost reductions and $45 million due to the lower natural gas price assumption.

Wednesday, January 28, 2015

Review of Ling: The Rise, Fall and Return of a Texas Titan (1972) by Stanley H Brown

Few remember 1960s conglomerate managers James Ling, subject of Ling: The Rise, Fall and Return of a Texas Titan, but if things had worked out better for him, he would probably be profiled in The Outsiders. The story is:

"In 1947 he founded his own Dallas electrical contracting business, Ling Electric Company, where he lived in the rear of the shop. After incorporating and taking his company public in 1955, Ling found innovative ways to market his stock, including door-to-door soliciting and selling from a booth at the State Fair of Texas. In 1956 Ling bought L.M. Electronics and transformed it into the conglomerate Ling-Temco-Vought."
The book is worthwhile as a case study because Ling must have been the first guy to frenetically tinker with his capital structure the way Malone or the other Outsiders do today. The book is from 1972 and the author is really taken with the novelty of all the acquisitions, capital structure changes, and spinoffs.

(Henry Singleton and Teledyne aren't until later. Singleton and Kozmetsky started working together in 1960, the IPO was in 1961, and the acquisition spree is the latter half of the decade. The Teledyne stock buybacks were between 1972 and 1976; the bear market.)

Anyway, the Amazon summary foreshadows what happens to Ling. "The trouble with financial games is that they are easier to play than focusing on sound management and products, and they are surely more fun to watch." A valuable lesson for our time, perhaps?

Now, Ling was actually a bad capital allocator, even objectively speaking, because he had the bizarre goal of being high in the Fortune 500 (ranked by sales), so he made bad acquisitions just to grow revenue. This goal is difficult to understand, so I think we have to remember that back in the 60s, being at the helm of a company with big revenue would have been (in terms of status) like commanding a huge army in a bygone time or running a major activist hedge fund today.

And obviously there are lots of really crappy businesses that always trade at low P/S (commodity businesses), so if you're just trying to grow sales, you will end up with a portfolio of commodity businesses that will tank in the next recession. (It might have been different if Ling had bought bad business model companies out of bankruptcy.)

Just like the Outsiders, Ling had all his money in the stock. "Owner operator"!

4/5 because it is a cautionary tale. Ling experienced adulation for maybe twenty years until the subtle flaws in his strategy brought the whole thing crashing down.

When we say someone followed a "flawed" strategy, it sounds like he is dumb or a bad guy, but it just means that the strategy hits an environment that it is not adapted for. Someday I will write the review of Why Most Things Fail and talk about that, but the same concept is in Nature: An Economic History which I mention in the Conquer the Crash review.

Deadline For Dendreon Bids Extended

Item 7.01. Regulation FD Disclosure.

As previously announced, on November 10, 2014, Dendreon Corporation (the "Company") and its wholly owned subsidiaries, Dendreon Holdings, LLC, Dendreon Distribution, LLC and Dendreon Manufacturing, LLC (collectively, together with the Company, the "Debtors") filed voluntary petitions for relief (the "Chapter 11 Cases") under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").

On November 9, 2014, as previously disclosed, the Debtors and (i) certain holders representing approximately 47.8% and (ii) certain other holders representing approximately 35.9% (collectively, the "Supporting Noteholders") of the outstanding principal amount of the Company's 2.875% Convertible Senior Notes due 2016 (the "2016 Notes") entered into two separate Plan Support Agreements (as amended and restated, the "PSAs"). Under the terms of the PSAs, the parties agreed to work to effectuate a restructuring of the Debtors' obligations pursuant to a stand-alone plan of reorganization in Chapter 11 under which holders of the 2016 Notes would receive new shares of common stock in the reorganized Company (the "Reorganized Company"), subject to the outcome of the competitive process contemplated in the PSAs (the "Competitive Process"). On December 17, 2014, the Bankruptcy Court entered an order (the "Bidding Procedures Order") that, among other matters, established the bidding procedures (the "Bidding Procedures") proposed to be employed with respect to the Competitive Process and established the deadline for submitting Qualified Bids (as defined in the Bidding Procedures).

On January 27, 2015, the Debtors announced that they would be extending the bid deadline set forth in the Bidding Procedures Order from January 27, 2015 at 5:00 p.m. (prevailing Eastern Time) to January 29, 2015 at 5:00 p.m. (prevailing Eastern Time) to continue discussions with potential bidders.

Cautionary Statements Regarding the Chapter 11 Cases

The Company's securityholders are cautioned that trading in the Company's securities during the pendency of the Chapter 11 Cases will be highly speculative and will pose substantial risks. Trading prices for the Company's securities may bear little or no relationship to the actual recovery, if any, by holders thereof in the Company's Chapter 11 Cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities. The Bankruptcy Court has entered an order that places limitations on trading in the Company's common stock, including options and certain other rights to acquire common stock, and certain instruments convertible into common stock, during the pendency of the bankruptcy proceedings.

A plan of reorganization or liquidation will likely result in holders of the Company's capital stock receiving no distribution on account of their interests and cancellation of their existing stock. If certain requirements of the Bankruptcy Code are met, a Chapter 11 plan can be confirmed notwithstanding its rejection by the Company's equity securityholders and notwithstanding the fact that such equity securityholders do not receive or retain any property on account of their equity interests under the plan. The stand-alone plan of reorganization provided for under the Amended and Restated Plan Support Agreements entered into by the Debtors and certain holders of the Company's 2.875% Convertible Senior Notes due 2016 contemplates no recovery for the Company's equity securityholders.

Monday, January 26, 2015

An investing strategy is the systematized exploitation of an inefficiency

I've been saying that there are no evergreen investment strategies that will always work. As I said in that essay, having your investment operation in New York, having a Bloomberg terminal, and just being able to do a fundamental or technical screen of stocks were all alpha-delivering advantages once - long ago.

One of the good commenters on the Motley Fool boards gives a great example of this,

"These days I like not to have to travel into the city, and it is nice to be able to pull up a 10k or something at will. Decades ago I was comfortable in the knowledge that there we only two government offices (in the entire country!) that I could go to when I wanted to peruse a company’s recent SEC filings. At least for awhile, my office was conveniently just a couple of blocks away from one; less than a five minute walk.

That proximity was like having super-hero powers. Of course back then you could pay a third-party service to go make a copy of a particular filing you needed and mail it to you, but that wasn’t quite the same as just perusing filings on those little microfiche cards at will. I remember getting the phone message that someone wanted to talk to me about some company or other, I took a walk over to the SEC library and looked through the company’s recent filings, and when I returned the call a half hour later was asked incredulously and somewhat anxiously 'how do you know that!' There were some benefits to general inefficiency for those able to capitalize on it."
Making money is all about finding inefficiencies. Institutional investors aren't able to do anything with small companies, and they aren't able to go to cash, so it's amazing that individual investors and small funds don't take bigger advantage of these two inefficiencies.

An investing strategy is the systematized exploitation of an inefficiency. Keeping your money in munis 80% of the time and switching to stocks during a panic would be a strategy that would outperform but that institutional investors wouldn't be allowed to do.

"These Shale Companies Will File For Bankruptcy First: Goldman's 'Best And Worst' Shale Matrix"

From ZH:

Group 4: Weak balance sheet/weak assets

This group includes companies with leverage above 2.5x and assets we rate “B-“ or lower. Names we highlight are Approach Resources (NC), Exco Resources (NC), Goodrich Petroleum (NC), Halcon Resources (IL), Magnum Hunter (NC), Midstates Petroleum (NC), Rex Energy (NC), Sabine Oil & Gas (U), Samson Investment (NC), Sandridge Energy (IL), and Swift Energy (U).

We view management teams in this group as facing the most difficult decisions. Given the general lack of “core” assets, we believe strategic interest from a larger acquirer is less likely than for Group 3. Furthermore, with the bonds in this group generally trading below $80, we believe 101% change of control provisions act as de facto “poison pills” for acquirers.

Given high leverage and the lack of strategic interest, we believe many companies will need to seek alternative sources of capital. While the options here will vary case by case, we note that most of these names have secured debt baskets that can be used to bolster liquidity. Based on the phone calls we receive, investor interest in this type of security remains high, which suggests to us we will see robust second-lien issuance as soon as the conclusion of 1Q earnings. The bottom line is that, for now, we think investors should tread lightly in this group, despite the average bond yield of 19% (excluding obviously distressed names Swift Energy, Samson Investment, and Sabine Oil & Gas).

Thursday, January 22, 2015

Review Of "Inside the House of Money" by Steven Drobny

I forgot that Youngmoney already reviewed Inside the House of Money and didn't like it, but I skimmed it in one night, so I didn't waste too much time.

Most important conclusion: these interviews support my theory that there are no evergreen investment strategies that will always work. As I said in that essay, having your investment operation in New York, having a Bloomberg terminal, and just being able to do a fundamental or technical screen of stocks were all alpha-delivering advantages once - long ago.

Similarly, Jim Leitner got his start trading currencies in the 80s when markets were inefficient,

"Markets were so much easier in those days. The industry was still in its infancy and mispricings occurred much more frequently. There were so many more currencies to trade. Back then, nobody could keep 4 currencies straight, much less 20."
So then he started an $80 million dollar "high yield versus low yield currency fund." Being able to start the first carry trade fund is like Buffett being able to buy growth stocks at single-digit P/Es. Both are conditions that don't exist anymore because the frontier is closed. He goes on to say,
"Real arbitrage, in the old sense of the word, meant that there was no risk at all. Arbitrage today means a huge amount of risk is required to take advantage of small perceived mispricings.
[...A]ll this money being directed toward macro funds and hedge funds is, in a sense, driving out all the easy inefficiencies that are so well documented. The large inefficiencies [like value vs growth] do not get arbitraged out because there's very little capital that actually gets allocated toward extracting value over multiple years."
One funny Leitner story is he says that his prime broker called him in 1998 just to say they weren't worried about him (unlike other clients), because he was always long volatility. Another interviewee John Porter says,
"[H]edge funds in general are all about leveraged selling of volatility... under immense pressure to perform, so they wan't worry about market distress."
Which I believe is true. The reason is that most investors, and especially institutional investors, want a return pattern that looks like Madoff. And from a hedge fund manager perspective, selling mispriced catastrophe insurance is a great way to make it look like you're making money.

It occurs to me, if a hedge fund manager makes money while consistently being long volatility, there's a much better chance that he's not just a monkey than if he's consistently short volatility.

Two other good points, one from Leitner,
"A really important lesson in investing is that being either too far in front or too far behind is when you get hurt, whereas being right at the edge of the wave is where the money is made."
And one from Scott Bessent, who left Chanos to work for Soros in 1991,
"[Y]ou don't have to be skeptical about everything. Maybe the guys at Starbucks really are good managers and it really is one of the greatest concepts ever. Maybe eBay is the perfect business model. Short sellers can't think that way."
This book is like The Outsiders in that it gets high reviews but is pretty flawed (although it doesn't try to be as much as Outsiders, so it doesn't fail as badly).

People should be suspicious if they enjoy reading books about rich guys. Vicarious success is fun, but are you learning anything? I've decided that business biographies are just selection bias and I'm not going to read them anymore.

So, this book has the selection bias aspect, but it also has the old-news aspect of a book like Risk Arbitrage. Gee, thanks for telling us about some investment techniques that worked when Michael Douglas was still young.


Tuesday, January 20, 2015

A Couple Papers About the Inefficient Market in Stock Lending


  1. "Market prices would be more accurate if it was easier (and cheaper) to borrow shares to sell short."
  2. "The stock lending market is too opaque, borrowing costs are too high, leading to not enough stock being shorted and prices being less accurate than they should be. However, short selling is 'bad,' so there is no political pressure to clean up the stock lending market."
Two papers worth mentioning,
  • "Securities Lending, Shorting, and Pricing": "The prospect of lending fees may push the initial price of a security above even the most optimistic buyer’s valuation of the security’s future dividends. A higher price can thus be obtained with some shorting than if shorting is disallowed."
  • "A Dynamic Model for Hard-to-Borrow Stocks": "Consequences of our model for dynamics are elevated volatilities, sharp price spikes and occasional crashes followed by often dramatically lower hard-to- borrowness."