Month: May 2017

Stock of the moment – Hurricane Energy (AIM:HUR) Buy a Barrel of Oil for $1.60

Stock of the moment – Hurricane Energy (AIM:HUR) Buy a Barrel of Oil for $1.60

Stock of the moment – Hurricane Energy

Hurricane Energy (AIM:HUR) current stock price: £0.54. Intrinsic value: £1.85. Margin of safety: 243%

Buy a barrel of oil for $1.60

If I told you that you could buy 1 barrel of oil for $1.60 would you snap my hand off? Of course you would given that a barrel of oil is worth $52.

What if I offered you 523 million barrels of oil for $1.60 each? or £650 million. The arithmetic is identical but the opportunity is far greater. Obviously, you will still need to raise a wad of cash to drill for the oil and maintain your profitability which is where Hurricane stands today.

Keep talking and take my money gif

What is Hurricane Energy?

Hurricane Energy is engaged in the exploration of oil and gas properties in the United Kingdom so this is one of my riskier and more speculative investment tips.

hurricane energy stock tips

Hurricane focuses on large geological fractures which would ordinarily be too deep to drill but there are some features which have risen to levels due to tectonic movements which allows exploration firms like Hurricane to tap into them.

The company currently holds licences over six fields. These include; Lancaster basement discovery, Whirlwind basement discovery, Lincoln basement, Typhoon basement, Warwick basement, and Strathmore sandstone discovery prospects located to the West of Shetland. Hurricane has drilled and confirmed the commercial viability of Lancaster which is the main prospect and preliminary assessments over the other prospects including the newly acquired Halifax licence are positive. In fact, Lancaster and Halifax might be a whole larger field which would unlock further value.

Exploration firms are highly risky and they are usually an all or nothing investment. It takes a lot for me to recommend such a stock but I think the fundamentals for Hurricane Energy are stronger than the typical exploration firm.

The fundamentals

Hurricane Energy’s greatest strength which sets it apart from other oil exploration firms is that it owns 100% interest in all its resources – no debt or other parties with their own interests. This gives Hurricane the upper hand as it looks for funding to develop an early production system (EPS) which will generate 62m barrels of oil flow and subsequently $192m cash flow from Lancaster from 2019.

The Competent Person’s Report which is written by an independent and competent person suggests a net present value (the value today discounted at 10%) of about $11 per barrel for the Lancaster reserves. A conservative 50% of the 523m barrels could be recovered (although the CPR states 22%), in which case we get a potential value of $2.9bn, or around £1.85 per share. This is subject to oil price fluctuations of course. Remember though, this is one field! The opportunity from the other fields or even a joint Halifax-Lancaster field could mean further upside.

Investors revere the management team highly which adds stability to the future share price. Dr Robert Trice is a strong and capable CEO. He has thus far delivered on his promises and made strong leadership decisions based on his knowledgeable conviction.

Interestingly 97% of the company is owned by ‘smart money’ such as Hedge Funds, VCs and PEs, institutional investors and insiders whilst the general public only owns 3%. It’s the general public who usually distorts these opportunities to extreme heights.

The speculation

Hurricane’s share price is currently being discounted due to the EPS fundraise. This will be to the tune of £394 million. The market is rightly thinking

1) if Hurricane doesn’t raise money then there is no opportunity

2) how will the structure of the EPS financing affect my holding?

The fundraise will most likely be funded through the issuance of new stocks, leverage (remember they currently have none) and/ or by Hurricane selling a share of their field to the likes of BP or some other oil major. I personally believe that it will be a combination of the above which will cause some dilution to existing shareholders. The dilution to shareholders will be offset by the value-added created by de-risking the financials.

Hurricane represents a position of less than 5% of my portfolio due to the speculative nature of the stock. Small speculations with strong convictions and under certain circumstances are fine and this is one of them. It will be a volatile and bumpy ride so hold on tight.

gamble gif

Oil Prices though?

We could sit here and speculate about the price of oil until our nose bleeds. We could also look at the average 30-year inflation adjusted oil price which is $57. The margin between the cost to produce and the price of oil is currently large enough to add value to shareholders.

Whilst oil prices are looking sick at the moment they also offer us contrarian investors an opportunity. Oil prices will be weighing on investors minds so get off the fence and invest whilst prices are relatively low. According to HSBC, the lack of CAPEX and investment in oil will bite us in the ass in the long-term and I agree. If Hurricane can raise cash in a benign oil environment like today then it bodes well for its future.

Time to add Hurricane Energy (AIM:HUR) to your ISA and check back on it in a couple of years!  Disclosure: Long Hurricane Energy.

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Are you an investor or a speculator?

Are you an investor or a speculator?

If Buffett is the father of value investing then Benjamin Graham was the Godfather but what is the composite of a true investor? Graham wrote Security Analysis, the old testament of value investing along with Intelligent Investor.

Find out how the Godfather fared in the stock market crash of 1929, here.

According to Graham there are two types of investors and spotting your principles early will save you a lot of money in the long run.

Investing vs speculating

The two types of people Graham noticed in the market were investors and speculators. What’s the difference between the two? An investor sees the stock for what it is: ownership of a business which they believe will give them a return in the future. An investor will decide to invest only after performing a fundamental analysis of the intrinsic value of the business. The speculator looks at the price of a stock and decides to invest based on the assumption that someone will be crazy enough to pay more in the future.

How to spot if you are a speculator

Here are some of the traits of a speculator:

  • Speculators only invest in hot new issues or business trends. Snapchat and Tesla spring to mind.
  • A Speculator doesn’t analyse the businesses at all.
  • They do not consider risk or loss of their principle and instead focus on their potential return.
  • And they don’t look at financial reports. If they do, they don’t look at the financial sections in the annual reports and they’ll sell if it sounds like bad news.
  • All speculators focus on the next day, week or month.
  • Most speculators are nervous about their decision and they look to the market for validation. “My stock has gone down 10%, I was wrong, I need to sell ASAP.”
  • They buy and sell based on no new information.
  • Some Speculators try to time the market and are obsessed with what the finance media says.
  • Most speculators have massive FOMO (fear of missing out) and jump in at the wrong time.

There are many people who make a career out of the above but they are usually very skilled traders with a unique set of abilities. The intelligent speculators usually profit from the stupid money though.

How to spot if you are an investor

  • Investors have no problem with being a contrarian and will happily invest in unloved businesses/ industries.
  • True investors can’t analyse a business enough, furthermore they are looking for hidden assets and liabilities and evaluating the fair value.
  • They are seeking opportunities to buy high quality shares with strong historical earnings growth and good future potential at undervalued prices relative to long-term fundamentals.
  • Most investors put quarterly and annual report dates into their calendar and enjoy reading them – regardless of the content.
  • You won’t sell based on one, two or even four bad quarters but you will reassess the fair value of the stock and only act after thought, analysis and careful consideration.
  • They look to hold a stock for more than 5 years.
  • Investors are calm about their decisions because they are based on sound fundamental analysis. They are willing to be patient and wait for the price to reflect the businesses intrinsic value.
  • Investors avoid investments that do not offer an acceptable risk-adjusted return and may risk the principle.
  • They continue to buy when their stock choice has fallen by 10%, 20% or even 50%.
  • Investors consider market gyrations and are ready to poise if the market is out of kilter and speculators are panic selling. They will consider the market and economy but it will have little effect on their investing decisions.
  • Investors observe financial ratios such as price/earnings, price/book, ROE, EV and dividend yields.

Price is what you pay - investor warren Buffet

Next time we will look at whether you are an active investor or a passive investor. If you scored highly on the speculator front then this blog will certainly aim to guide you away from such behaviour. It’s so important to take advantage of this advice now whilst time and compounding is on your side.

Speculating £1,000 today and losing it all is costing you £117,000 if you had placed it into a low-cost index fund which tracked the market at 10% with reinvested dividends for 50 years…

Not a difficult decision when you look at it like that.

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Undervalued stocks can still lose 70%

Undervalued stocks can still lose 70%

My portfolio consists of many undervalued stocks which I could argue were worth at least double their current prices. Despite this, I always wondered how they might fare in a 1929 type crash.

If you hadn’t guessed by now, I’m a value investor. Why? It’s a time-tested strategy and it has made people from Graham and Doddsville an awful lot of money. Its methodology is intelligent and based on fundamental business analysis. I urge all Money Generation XYZ readers to follow this system of investing and ignore everything else. Forget binary trading, overlook Fibonacci retracements and don’t time the market. Just focus on companies with fortress-like balance sheets, strong historical earnings and a durable economic moat trading at a discount to fair value.

Discover whether you are an investor or a speculator, here.

Undervalued stocks during a crash

To see how value investing performed during 1929 I had to turn to the old testament of value investing: Benjamin Graham’s and David Dodd’s Security Analysis. Here’s a window into the life of a value investor in 1929.

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Graham was convinced that, because his stocks were worth less than the cash on the companies’ balance sheets, he couldn’t be harmed by the impending crash which he foresaw. So much so, that he used leverage to amplify his potential returns. In 1929 Graham lost 20% of his partnership’s capital – pretty impressive all things considered – another 50% in 1930, 16% in 1931 and 3% in 1932. A cumulative loss of roughly 70%.

“I blamed myself not so much for my failure to protect myself against the disaster I had been predicting, as for having slipped into an extravagant way of life which I hadn’t the temperament or capacity to enjoy. I quickly convinced myself that the true key to material happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions.”

– Benjamin Graham.

There are tons of lessons here. It certainly shows that a large margin of safety cannot protect against a crash. Here are a few tips to counter the mistakes that Benjamin made back in 1929.

 Live within your means

Ask yourself, if my portfolio dropped by 70% tomorrow then I would I care? I wouldn’t. I’m still entitled to the same earnings as before and my ownership of the company hasn’t changed. I am mentally and financially well placed to cope with such market extremities but they will certainly be testing times if you aren’t.

Before you invest, set aside capital to cover between 3-6 months of bills in the event that you lose your job. For me, this buffer is £3,600. This sounds like a lot now but as you grow your net worth it’ll be a smaller proportion. Save like a pro and you’ll have that money in no time. Try not to buy a car on finance either, it’s a sure-fire way to erode your potential savings and adds an extra layer of risk to your situation.

 Never use leverage

Leverage no doubt amplified Graham’s losses. Debt masquerades itself as the answer to bountiful returns when times are good and reveals itself as the devil in disguise when times turn bad. Times will always turn bad. Investing on a margin will drive you to make really irrational investment decisions. See what Warren Buffett says about leverage here. If you want no assets, then leverage up baby!

Warren Buffett leverage quote

Materialism isn’t the answer to happiness

Buying that car on finance, that expensive watch or that big house with a 5% deposit is fine but it will offer very little satisfaction in the long run. When things go belly up they will cause a strain on the important things in life such as your relationships and mental well-being.

Money can certainly play a role in happiness and stop a poor standard of living but there is a threshold according to behavioral economists. Focus on living comfortably and drawing happiness from the people and the world around you.

Collect moments not things - materialism

Don’t time the market, position yourself

Look, what’s the point in standing on the side-lines of the market in the case of a crash? One day you will be right but you would have been wrong every day for the last 10 years. Graham predicted a market crash but he did not protect his portfolio or his personal finances. That’s where he went wrong. A crash may destroy the value of your portfolio regardless of whether it’s undervalued or not.

To be fair to Graham, he didn’t know that his undervalued stocks would crash just as hard as everything else. He had an excuse – we don’t…

Ned stark meme "brace yourself"

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