Saturday, January 2, 2016

2016 Begins with Ultra Distressed Energy Companies on the Brink

Judging by the bond prices, many of these are likely to file in 2016:

  • ZINC, the July 2017 3.8% note trading at 20 cents; ytm 155%
  • GDP, the 8.875% notes traded at 8; current yield >100%.
  • EXXI, the 3% notes traded at 6; current yield 50% and ytm 145%
  • TC, the 7.375% notes traded at ytm of 134%
  • SD, the 8.75% notes traded at 12; ytm >100%
  • PVA, the 7.25% notes traded at 13; ytm>100%
  • BTU, the 6% notes traded at 18.2; ytm 88%
  • CLF, the 5.95% notes traded at 28; ytm 88%
  • LINE, the 8.625% notes traded at 16; ytm 78%
  • XCO, the 7.5% notes traded at 27; ytm 72%
  • SSE, the 6.5% notes traded at 16; ytm 54%
Energy and resources. These companies have a combined market cap of $1.67 billion. In all likelihood based on the bond prices, that is illusory. Maybe in 2016 lots of illusory wealth will be revealed as worthless.

What if FB ad revenue that is funded by VC equity contracts, and the multiple contracts, and much of that $300 billion market cap is revealed as illusory? What if the Amazon flywheel runs in the opposite direction (both AWS, as an expression of the VC bubble, and the traditional business, as an expression of consumer spending), and some of that $317 billion market cap is revealed as illusory?

What if the replacement cycle on Apple devices lengthens, or consumers get tired of paying 100% markups for memory, and some of that $587 billion market cap is revealed as illusory wealth?

Well, then, we'd have a bear market.

4 comments:

Lurker said...

I've got a friend who is pretty senior at AWS, and when I saw her this summer she said AWS is absolutely kicking the crap out of everybody. At that time all of FB's US videos were being hosted by AWS, though FB swore AMZN to silence on that fact. I'm not going to say AMZN can't crash, but I will say that in my 25 years of tech investing experience rule #1 is that valuation doesn't matter as long as business is improving. Anyone who disagrees, enjoy your LXK and HPQ - they're only 7x forward earnings!!!

(Disclosure: long FB, no position in AMZN.)

James said...

What if FB ad revenue that is funded by VC equity contracts, and the multiple contracts, and much of that $300 billion market cap is revealed as illusory?

It's like a legal Ponzi scheme: The success of FB and TWTR encourages VCs to throw money at web startups, the startups spend a lot of it on FB/TWTR mobile ads, which makes FB and TWTR even more successful, which encourages even more startups that blow money on ads, etc. I don't know how much longer it will last, but when it ends these stocks will get a much lower multiple on lower earnings.

And FB and TWTR both hand out tons of stock compensation. IIRC, TWTR's stock comp exceeds its EBITDA. At Facebook, according to WSJ, "earnings on the basis of generally accepted accounting principles, which include stock compensation, were only 43% of its adjusted net income."

I get the impression people are ignoring stock comp at FB and TWTR because they're excited about the growth story, but if sentiment changes on these stocks, then people will start caring about compensation, and that will push the stocks down even further.

CP said...

James, good point about the stock comp as well. Can't imagine owning any of this stuff except at liquidation value prices.

Anonymous said...

Arch Coal filed for bankruptcy this morning.