Friday, March 9, 2012

Bought 40 SD at $7.68-LT Category/Bought 50 of the ADR NABZY at $24.55/Sold 1 Belo 7.75% Senior Bond Maturing in 2027 at 97/Lottery Ticket Basket Table

Mueller Water Products rose 21.05% yesterday, closing at $3.45 per share, after announcing an agreement to sell the United States Pipe and Foundry Company for $89.8 million in cash, subject to closing adjustments, and another estimate $10.2 payment for "certain liabilities". Form 8-K While I have bought and sold the common twice as a Lottery Ticket, I only own now 1 MWA senior subordinated bond. I view this development positively as an owner of the bond. This unit has been losing money, though the amount of its loss did decrease in the prior quarter to $1 million from $2.4 million in the 2010 4th quarter. (page 23, MWA.12.31.2011 - 10-Q).

Frequently, I observe widely disparate yields for two bonds that have the same rating and mature about at the same time. I always pay attention to these divergences since bond investors are expressing their disagreement about the ratings in their pricing of the bonds:

8% Maturing 11/15/2017
Last Close 105.25
Moody's Caa1

Colt Defense
8.75% Maturing 11/15/2017
Last Close 69
YTM 17.6%
Moody's Caa1

If I was going to draw a conclusion from the foregoing, I would infer that bond investors believe the Colt Defense bond will be downgraded further. I own both of these bonds.

1. Bought 40 Sandridge Energy (SD) at $7.68 Last Wednesday-LT Category (Lottery Ticket Basket Strategy)(see Disclaimer): Sandridge has both a lot of potential and risk. The risks involve the high amount of leverage and the frequently bold actions of Sandridge's CEO. 

The company is being led by Tom Ward, who was a co-founder of Cheasapeake Energy (CHK). In 1989, Ward and Aubrey McClendon started Chesapeake Energy with a $50,000 initial investment and that company is now the largest producer of natural gas in the U.S. and was added as a component of the S & P 500 in 2006. Ward left CHK in 2006 and became the CEO of SandRidge. Tom L. Ward Profile 

Ward appears to me to be someone who will bet big on his convictions.

The most recent move involves the acquisition of Dynamic Offshore Resources, L.L.C., for an aggregate consideration of $1.275 billion. The consideration consists of approximately $680 million in cash plus 74 million Sandridge shares. This would give the current owners of Dynamic about a 20% ownership stake in Sandridge. (Equity Purchase Agreement; SEC Filed Press release). Dynamic operates primarily in shallow water in the Gulf of Mexico with a current production of 25Mboed, and about 50% of Dynamic's current production is oil. The year end proved reserves are 62.5MMboe and "are value at approximately $1.9 billion using SEC net present value discounted at 10 percent (PV-10)".

Dynamic had filed a S-1 registration statement with the SEC to go public. That registration provides the history of this company which was recently formed to acquire assets in the Gulf, completing 10 material ones since its formation in 2008. SEC Filing Two of those acquisitions are discussed at page 7 of that filing.

A critical analysis of the Dynamic acquisition can be found at TheStreet. I have no quarrel  with the author's conclusion that Sandridge paid a "fair" price for Dynamic and not a "cheap" one, assuming no substantial long term downdraft or updraft in current energy prices. Of course, the acquisition would be cheap if oil shot up to a range of $150 to $250 a barrel and stayed there for years.

Prior to the announcement of the Dynamic acquisition, which surprised analysts, the company had been focused on the Permian Basin, West Texas Overthrust (including the Pinion gas field), and the Mississippian formation. The Mississippian play is discussed in this recent article at Investopedia published yesterday.

For several years, the company has been an aggressive acquirer of onshore leases and has financed its activities in part by selling acreage, selling interests in royalty trusts (SandRidge Mississippian Trust ISandRidge Permian Trust), and forming joint ventures. Some of this activity can be reviewed by simply reading several pages at Reuters Key Developments section.  Some of these activities are summarized in this recent article at Seeking Alpha.

Sandridge acquired Arena Resources in 2010 for $4.5 per share in cash and 4.7771 SD shares for each Arena share.

Profile at Reuters
2011 Annual Report: SEC FORM 10-K
Earnings Call Transcript for the 2011 4th Quarter

When looking at the long term chart of Sandridge, I probably need to mention the spike up to over $65 per share in 2008: SD Interactive Chart Personally, I thought that it was crazy but traders were in control during a brief period of skyrocketing natural gas prices.

The five year P.E.G. ratio, which may be too optimistic, is .17. SD Key Statistics

Yahoo Finance has started a Fantasy stock challenge, and I am playing in it. In that fantasy world, I own far more than 40 shares of SD.

2. BOUGHT 50 NABZY at $24.55 Last Wednesday (see Disclaimer): NABZY is an ADR, traded on the pink sheet exchange, that represents one ordinary share of the National Australia Bank.

National Australia Bank Profile Page at Reuters
NABZY page at Morningstar
National Australia Bank at Wikipedia

In the U.S., NAB owns the Great Western Bank  with branches in SD, NE, IA, KS, MO, CO and AZ.

Dividends are paid semi-annually in July and December and will go ex dividend generally in June and November. At the 2011 rate, the dividend yield would be about 7.2% at a total cost of $24.59 according to Marketwatch. That was the closing price last Wednesday.

I bought and sold this security in 2010. Bought 50 NABZY at $24.7 (March 2010);   ADDED 50 NABZY AT $19.51 (May 2010); Sold 100 NABZY at $25.2 (September 2010).

2010 NABZY Realized Gain 100 Shares +$285.6
I recall receiving one dividend for those shares but do not remember paying a withholding tax. I went back to my July 2010 brokerage statement and did not see any indication of a tax withholding for that dividend, though a $1 fee was charged:

NABZY Dividend Payment July 2010
See also Item #2  NABZY and the AUD/USD Exchange Rate A primary concern about this purchase is the current value of the Australian dollar against the USD. The Australian Dollar has already experienced a significant rally agains the USD and could easily decline for a number of reasons including a significant slowdown in China's consumption of commodities. If that happened, I could lose money by owning this ADR even when the price of the ordinary shares remains the same.

On the day of my purchase, the ordinary shares, NAB.AX, close at 23.43 AUDs rising .36 for the day. Without more, that would inform an investor that one AUD is worth more than 1 USD. On 3/7/12, last Wednesday, 23.43 AUDs converted into $24.74 USDs. AUD/USD Currency Converter

Since I am already familiar with this large Australian based bank, I simply reviewed its last earnings report before making this purchase. The highlights can be found at NAB's web site: Annual Reports and Presentations - National Australia Bank Group - NAB

I am always looking for assets to buy for diversification purposes that are priced in Swiss Francs, Australian and Canadian Dollars and the Norwegian Krone.

3. Sold 1 Belo 7.75% Senior Bond Maturing in 2027 at 97 Last Wednesday (Junk Bond Ladder Basket Strategy)(see Disclaimer): This bond was sold at break-even. I have been paring my lower yielding junk bonds. Moreover, given the maturity date in 2027, this bond also has a ton of interest rate risk.

4. Lottery Ticket Basket Table as of 3/8/12: This basket is growing. Although the limit for each purchase is $300, a few positions are worth more than that amount due to appreciation since purchase. The total realized gain from 2009 to date is currently $9,313.22 which is being tracked at the end of the Gateway Post, Lottery Ticket Strategy: New Gateway Post.

This strategy is run by the RB and is a form of entertainment for the OG. It was devised in response to losing money playing the Tennessee Powerball. LOTTERY TICKET PURCHASES: LINKS IN ONE POST

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