Monday, September 17, 2012

Still Seems Cheap: Petroquest Energy Preferred Stock ($PQ, $PTEQP)

The PetroQuest Energy Inc., 6.875% Series B Cumulative Convertible Perpetual Preferred Stock was trading at $30.5 (60 percent of par) when I last mentioned it.

It has rallied to $38 and is now yielding 9%. Conversion price is $14.52, making parity $11 vs the current common share price of $7.

Market cap is $450 million. The company has $17.5 million of bank borrowings, and there's $150 million in bonds that trade at a premium to yield 9%. Only $65 million in preferreds.

The YTD EBITDA is roughly $40 million, or $80 million annualized, which gives EV/EBITDA of 8.5x and Debt+pref/EBITDA of under 3x.

One of the best, most epistemologically rigorous types of investing is low loan-to-value lending. If you can avoid downside risk, by making a loan against assets that are worth multiples of the loan amount, then you have positive expected value and a outcome distribution that avoids capital losses.

A subset of this type of opportunity is low LTV loans where you have a conversion option. Here, you have the same probability distribution that lacks sharply negative outcomes. However, the conversion option skews the distribution sharply more favorably because there's the chance that good results/hyperinflation/etc will move the option into the money.


Anonymous said...

Company has shrinking sales and operating cash flows never cover their capex. Have they had a positive return on investment in any of the last three years?

CP said...

The right way to analyze this is: what are the assets worth, relative to the debt + preferreds?

It doesn't matter that results deteriorated a bit during a natural gas crash.

Anonymous said...

That might be the right way to analyze this if you anticipate a distressed debt recovery in a bankruptcy. But in that case I would be buying this in the days before or after they enter formal Chapter 11, when fear is highest.

As an operating company, I want to see free cash flow, or at least some indication of a positive return on investment over several years.

CP said...

I see where you're coming from.

The way I look at fixed income is LTV.

In this case, the LTV is low, the V is stable because the company is not very leveraged and we are near the bottom of the relevant commodity cycle.

The interest rate is attractive, and there is nominal value protection and real protection because of the conversion option.

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