I expected both Colorado Propositions 112 (ban fracking) and Amendment 74 (just compensation) to pass. They both failed.
I expected BCEI and HPR stocks to pop after the fracking ban was defeated. So I loaded up on them pre-market. I bought BCEI at $32.5. HPR I bought at $5.4.
HPR is just play money. But BCEI is a big position. I didn’t buy BCEI to make 20% or 40%. I bought because I think this could be a double or even triple. The removal of an existential risk in Prop112 prompted me to go big.
I chose to ignore the obviously weak price action in WTI oil prices. That was a mistake. Oil prices accelerated downward the past few days, and it’s broken some key support levels. Someone commented today that it’s the longest losing streak in history.
It's official. Crude Oil closed lower for the 10th day in a row, the longest streak in history. Down 23% in the past month, giving back all of its gains on the year. $WTIC pic.twitter.com/2Q8lj3r72h— Charlie Bilello (@charliebilello) November 9, 2018
So instead of the pop I was looking for, both stocks got faded right after I bought, and now I’m sitting on big losses. After what I bought this week, and even after the price drop, BCEI is almost 7% of my portfolio.
Wow, that was rough.
I’m always hesitant to say the market is wrong, but the market seems a bit confused. These E&P stock tend to move with WTI futures on a day to day basis. But most hedge their productions for the next year or two. So what really matters is how much BCEI can sell their oil for, over the next 10 years or so (which is about the length of their reserve life).
So oil stocks should move relative to long dated oil futures, not spot prices – and WTI futures for 3 years out actually have not moved that much.
Floor Value and Calculations
At $27.9/share now, BCEI has a market cap of ~$580mm. Let’s do some rough calculation of floor value. We’ll assume liquidation.
Assume WTI averages out to $50/bbl for the next decade, knock back $6-7/bbl for location discount, you get ~$43/bbl for realized oil prices. Take into account non-oil products, BCEI can probably still fetch total realized price of $30/bbl, across all products. Operating cost (lease operating expense, midstream cost, taxes and G&A) are declining and can get to ~$15/boe. That would leave $15/boe of EBITDAX.
BCEI could ramp to 10mmBoe of production by 2020. That’s $150mm a year of EBITDAX. They’ll probably have still over 80 mmBoe of reserves, so call it 8 years of reserve live. This means total liquidation cash flows would be $150mm*8 = $1.2bn. You’ll want to discount that stream of cash flow, but the result is sure to be more than $570mm.
Let’s look at it another way. What WTI prices are BCEI stock prices implying? i.e. do the above calculation backwards. Shown below is my back of the envelope calculation. I believe that at <$28/share, BCEI’s stock price implies longer term WTI of about $40-$45/bbl.
Elsewhere in my portfolio
Bojangle (BOJA) got a buyout bid for ~$16/share. Basically $0 premium. As I bought it around $13 this is at least profitable. Still, as I tweeted out, it was very disappointing.
very disappointed in $BOJA sale. The company has options: strong brand name, strong balance sheet, possibility to go capital light by turning company stores into franchises...Time is on their side!! and board gives away those upside options for no premium!— mspacey (@mspacey4415) November 7, 2018
This is all pretty demoralizing. Investment just hasn’t worked out this year. I’m now losing money. At least it's just my own money. I'm glad I'm not managing someone else's.
