Monday, November 24, 2014

Bought 80 PMOIY at $3.7 -Lottery Ticket Basket/Bought 50 SLRC at $18.38-Flyer's Basket/Bought 50 of the ETF ENY at $13.55

Big Picture: No Change

Stable Vix Pattern (Bullish):

Recent Developments:

Sources told Reuters that China is prepared to cut rates against due to concerns about deflation accelerating debt defaults. 

Markit reported its flash service PMI at 56.3 for November.


1. Bought 80 PMOIY at $3.7 (Lottery Ticket Basket Strategy)(see Disclaimer): 

Some pundits are predicting that there is a 60% chance that OPEC will cut production during its meeting later this week. I have no idea, and everyone appears to be guessing in my opinion. My guess would be 50/50.

In case there is a production cut, and Brent Crude spikes to over $80, I wanted to have a few Lottery Tickets that might benefit significantly with a change in perception about energy prices.

The share price of Premier Oil has already been smashed in response to the precipitous oil price decline starting in June. The same would be true for my buy last week of 300 WFREF: Bought 300 WFREF at $2.6932

The crude oil price decline was significant, swift, and unexpected, and caused a bone crushing share price decline in energy stocks.

Graph: Crude Oil Prices: West Texas Intermediate (WTI)-St. Louis Fed

When looking at a longer term WTI chart, the most recent decline looks similar to price corrections in 2011 and 2012, and nowhere near as bad as what happened in 2008:

I try to keep things in perspective.

Snapshot of Trade: 

2014 Bought 80 PMOIY at $3.7
1 ADR=1 Ordinary PMOIY Premier Oil plc 

The ordinary shares are priced in U.K. pence: Premier Oil PLC-Bloomberg

100 Pence=1 British Pound

I made the following snapshot of a Bloomberg quote for the U.K. ordinary shares shortly before entering my limit order for PMOIY:

I then used the Bloomberg currency converter to calculate the USD value of 2.38 GBP.

Investor Presentation Made in November_2014.pdf

Reserves in MMBOE (Million Barrels of Oil Equivalent):

Premier Oil Key Developments Page at Reuters

Last week, Premier announced that it was reducing the Falkland Islands' Sea Lion project due to low oil prices. Bloomberg

Dividends: Premier has paid an annual 5 pence per ordinary share during 2013 and 2014. Shareholder Information | Premier Oil At the time of my purchase, 5 pence was worth about USD$.0785. The dividend yield at that conversion rate would be about 2.12% at a total cost of $3.7 per share. The low dividend yield is one reason for the LT classification. 

Chart: In June 2014, this stock traded at over $6. The recent downdraft qualifies this purchase as a "falling knife", a standard criteria for Lottery Ticket selections: 

That is not pretty.  

Recent Earnings Report: This company reports in USDs. Premier Oil reports every six months. The last report was for the six month period ending 6/30/14: Press Release2014-Half-Year-PR.pdf

For the first six months, Premier reported diluted E.P.S. of $.313 per share, up from $.291 per share during the first six months of 2013. The 2013 diluted E.P.S. was $.432

At the time of my purchase, the consensus 2014 E.P.S. was for $.55. PMOIY Analyst Estimates 

Rationale and Risks: According to Bloomberg, the P/E based on estimated 2014 earnings is less than 7, with a price to book of less than 1 using the current estimates and market price per share. The estimated P.E.G. is about .33.

I will frequently make Lottery Ticket purchases based on that type of statistical data that is accompanied by a smashed stock price without thinking too much.

Since the ordinary share are ultimately priced in British Pounds, the decline in GBP will flow through into the USD priced ordinary shares. GBP/USD Interactive Stock Chart The recent decline in the GBP has resulted in the USD priced ordinary shares underperforming the ordinary shares priced in Pence by close to 5% over the past 3 months.

See, generally: Stocks, Bonds & Politics: International Trading and Currency Risks (7/11/2010 Post); Stocks, Bonds & Politics: Strong U.S. Dollar + Weak Market=Time to Start Looking Overseas (6/1/2010 Post)

Future Buys/Sells: I am not likely to buy more shares. I do not have a price target. I would consider selling this 80 share lot when and if the shares return to the $5 to $6 range or after a material deterioration in its operations.

Closing Price 11/24/14: PMOIY: $3.72 -0.03 (-0.80%) 

2. Bought 50 SLRC at $18.38 ($500 to $1,000 Flyer's Basket Strategy With Snapshots of Round Trip Trades)(see Disclaimer): 

I noticed when researching material for my recent post discussing BDCL that Solar Capital was selling at an unusually large discount to its last reported net asset value per share. After researching this company, I placed it in the Flyer's Basket risk category due to its declining weighted average net yield on its income producing investments, the current payout in excess of its net interest income per share, the external management, the prior dividend cut, and the usual assortment of risks inherent in BDCs.

Snapshot of Trade:

2014 Bought 50 SLRC at $18.38
Prior Trades: None

Company Description: Solar Capital Ltd. (SLRC) is an externally managed BDC that targets investments in U.S. firms with EBITDA between $20M to $100M.

The managers are paid a base fee calculated at an annual rate of 2% of Solar's gross assets, plus a generous incentive fee. (see pages 7-11, Form 10-K)

A list of investments can be found starting at page 7 of the last SEC filed Form 10-Q.

One reason for placing this stock in the Flyer's category is the history of realized losses (where are the realized gains?):

Historical Financials Page 57 of 2013 Annual Report
Another reason is yield compression, as the weighted average annualized yield drifts down and has continued to do so in 2014. That is a common problem with BDCs now, and many will reach for yield by making riskier loans further down in the capital structure. Solar appears to be sticking mostly to senior secured loans which may result at some point in a dividend cut.

As of 12/31/13, Solar had 17.9% of its total assets invested in another company called Crystal Capital Financial Holdings LLC (page 15, Form 10-K). A 98% interest in Crystal was acquired in December 2012 for $275M in cash (page 61).

On March 31, 2014, Solar "exchanged" $137.500M of its "equity interest" in Crystal for floating rate senior secured notes issued by Crystal bearing interest at LIBOR plus 9.5% and maturing on 3/31/19 (page 29, Form 10-Q).

I was initially perplexed by that last sentence, since the same document shows the investment in Crystal to be worth $300M as an equity investment based on a $275M cost number with no mention of that senior secured note in the debt section (page 7 lists senior secured loans as of 9/30/14, page 8 lists equity investments:Form 10-Q) The treatment has to do with Crystal being consolidated with Solar, as clarified by the CFO in the last conference call during the question and answer session.

As of 9/30/14, Crystal had investments in 25 companies with a total "par value" of approximately $411.042M. All loans were floating rate with the largest being $30M. Crystal had net income of $21.133M for the nine month period ending 9/30/14. Form 10-Q)

Company Website: SOLAR CAPITAL

Solar Capital Filings with the SEC

Solar Capital Page at Bloomberg (ex dividend date 12/16/14)

Net Asset Value History: Sourced from 10-Q Filings

9/30/14: $22.34
9/30/13: $22.25
9/30/12: $22.7
9/30/11: $21.2
3/31/2010: $22.18 (first 10-Q)
Initial Public Offering February 2010:  Prospectus (priced at $18.5 to the public and $17.205 to the underwriters)

2013 Annual Report: Form 10-K

The last public offering of common stock was made in January 2013 and priced to the public at $24.4 per share: Prospectus Supplement

In 2012, Solar sold $100M in 6.75% senior unsecured notes maturing in 2042: Prospectus SupplementSolar Capital Ltd. 6.75% Sr. Notes due 2042 (SLRA) This is an exchange traded baby bond with a $25 par value which hit a low slightly below $20 last December: SLRA Interactive Stock Chart

In September, Solar announced a joint venture with a fund managed by PIMCO to co-invest in senior "secured unitranche loans originated by Solar Capital". The joint venture, referred to by Solar with the acronym SSLP, will initially consist of $300M provided by Solar and $47M by the PIMCO affiliate, with PIMCO committing to an additional $257 million in a sidecar vehicle to co-invest with the SSLP".  Page 1 Q3 2014-Earnings Call Transcript | Seeking Alpha

Dividend: The quarterly dividend was cut from $.6 to $.4 per share in 2013. This occurred after received $237M in proceeds after monetizing three investments. News Release The company subsequently announced in July 2013 that the Board had approved up to $100M in stock repurchases. Press Release July 2013 After purchasing approximately $17.5M in stock, the stock repurchase program was extended in December 2013. The share repurchase program expired in July 2014 with approximately $56.6M in shares repurchased out of the $100M authorized by the Board.

The dividend yield at a total cost of $18.38 per share is about 8.7%.

Unless there is an improvement relatively soon in the quarterly net investment income per share, I would view a dividend cut as a possibility. Possibly, the new joint venture with PIMCO will increase the NII per share some.

Chart: SLRC's share price is near the 52 week low set in mid-October, and is trading under its 50 and 200 day SMA lines: SLRC Interactive Stock Chart The 200 day line was at $20.57 according to Yahoo Finance's chart as of last Friday. The historical high prices were hit slightly over $25 in March 2011 and again in January 2013.

Last Earnings Report: For the 2014 third quarter, Solar reported net investment income of $16.4M or $.39 per share. SEC Filed Press Release

Net asset value per share was reported at $22.24 as of 9/30/14. Prospectus Supplement The $18.38 purchase price was a 17.8% discount to that last reported NAV per share.

The fair value weighted average yield of Solar's income producing investments was 10.3% at the quarter's end. This number has been trending down, as noted above.

The company had 67.2M in cash and $490M in unused credit capacity as of 9/30/14.

Q3 2014 Results-Earnings Call Transcript-Seeking Alpha (one position on non-accrual representing 1/2 of 1% of portfolio, at page 2; roughly 80% of investments are in senior secured and floating rate investments, pp. 3-4)

Rational: The primary reason for investing in a BDC will be to harvest the dividend and to hopefully escape with a profit on the shares. The general hoped for goal is an annualized total return of 10%+.

The company has not been a serial issue of stock so far, one of the common complaints that I have about several other BDCs. I was looking at one last night that has had four stock offerings in the past 12 months.

I also like this statement made by the COO during the last conference call: "We think many of our peers are taking inordinate risk, taking on structure with no covenants and much higher leverage capital structure", making clear that Solar was not going to follow their competitors down that path. Q3 2014 Results - Earnings Call Transcript | Seeking Alpha


1. Company Discussion of Risks: I would recommend that anyone investing in a BDC read the summary of risks found in an SEC filed Annual Report. Solar discusses risks incident to its operations starting at page 23 of its last SEC filed Annual Report: Form 10-K Among those risks, Solar states that there "are significant potential conflicts of interest which could impact our investment returns" (page 44).

2. Risky Portfolio: This risk is common to BDCs. These companies are basically lending money to mostly private firms that would find it difficult to obtain needed capital from banks. Some of the borrowers may be relatively new with little or no track record, heavily indebted companies that have gone private after a leveraged buyout, or older companies that have fallen on hard times. The loans will generally carry high interest rates and will sometimes have an equity kicker such as a stock warrant. One does not need to be a professional loan officer to recognize the risks.

The risk is mitigated somewhat by focusing more on first lien loans. When reading the transcript for the previous quarter, I noted that Solar and Crystal both had investments in a company called Quantum Foods which was being liquidated apparently in a BK. Of the $75M investment, Solar has received liquidation proceeds of $60M and was pursuing a recovery of more, as of the date of that call which was 8/5/14: Q2 2014 Results -Earnings Call Transcript | Seeking Alpha

3. Always a Potential for a Dividend Cut:  The main reason for buying this security is the dividend. If the portfolio suffers losses and defaults, a dividend cut is certainly a possibility. A recession would increase the odds of a dividend cut. I am concerned about another dividend cut unless Solar can increase its NII per share. The last quarter had a NII of $.39 and a quarterly dividend of $.4.

4. Unfavorable Chart: The chart indicates some dissatisfaction with Solar. Perceptions are sometimes hard to change. Perhaps, the only way for Solar to return to good graces is by posting both increases in NII and net asset value per share. BDCs are dependent on securing and maintaining favor with individual investors, many of whom pay no attention to net asset value per share numbers and focus solely on dividends.

Solar has a relatively low dividend yield compared to other BDCs, partly due to its decision to hold cash after several investments were redeemed, as noted above, and to use some of that cash surplus to buy back stock.

In an exchange with an analyst from Wells Fargo, Gregory Nelson, who inquired why Solar had not invested the surplus cash, the Chairman and CEO Michael Gross made an interesting comment. The external managers had not received an incentive fee in 2014. If they invested the cash in "liquid loans", then the "incremental investment income will effectively flow to our benefit as the investment manager", apparently due to clearing the hurdle for triggering payment of the incentive fees, Q3 2014 Results - Earnings Call Transcript | Seeking Alpha.

Future Buys: I am not likely to buy more. I will consider selling when and if I can harvest a 10% annualized return or there is a material adverse change in Solar's operations.

Closing Price 11/24/14: SLRC: $18.47 0.00 (0.00%)

3. Bought 50 ENY at $13.55 (see Disclaimer): I am not classifying this purchase as part of the Flyer's Basket strategy. Instead, I am just being very cautious with my entry points with this ETF having sold 155+ shares at $17.55. Sold 155+ ENY at $17.55 (7/5/14 Post) I realized a $293.37 gain plus the dividends. If I still owned those shares, I would not have a profit but a loss.

By eliminating the position at $17.55, I now have the luxury of buying shares back at a lower price, a typical small ball approach to investing.

Given the uncertainty about what OPEC might do later this week, I decided that caution was prudent. Investors perceive many Canadian oil sands producers as unprofitable or barely profitable at today's crude prices. If the per barrel prices for WTI and Brent continue to slide down into the 60s, the Canadian energy stocks will continue to suffer.

I sold out of ENY on 6/23/14. This ETF had declined $4 per share since then or 22.79%. That is bear market territory and pretty severe for an ETF in 5 months.

So far, as shown by snapshots in the preceding linked post, I now have realized gains of $617.03 after nibbling at this ETF, sometimes flipping 50 or even 30 shares.  

Snapshot of Trade-Satellite Taxable Account:

2014 Bought 50 ENY at $13.55
Security Description: The Guggenheim Canadian Energy Income ETF (ENY) is an ETF that owns Canadian energy companies.

Sponsor's Website: ETF (net expense ratio for an ETF is high at .71%)
ENY Page at Morningstar (rated 2 stars)

The fund has changed its stripes some since I first bought shares several years ago. The fund now has a significant weighting in storage and transportation stocks at 27.42% as of 9/30/14.  Those stocks would include TransCanada, Enbridge, Pembina, and Inter Pipeline.

ENY Holdings
Holdings With Over a 1% Weighting as of 11/21/14
I have occasionally owned one or more of those infrastructure companies (e.g.:  Bought 100 PBA at $29.21 February 2013)

I am going to wait until OPEC acts to decide whether to average up or down or do nothing. 

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