BreitBurn Energy: Playing the Commodities Crash
And the blogging returns. Thanks all for your patience. It has been a wild few months, between market crashes and rebounds, a business "split" so that my partner and I could each focus on our core competencies (yes, it was friendly; and, no, there's no juicy back story), and so much more.
Late in December, SeekingAlpha asked me to do an interview about my "highest conviction pick" in our portfolios. Surprisingly, it was a tough interview because I felt good about all of our positions. (The only position that had me biting my nails was Jackson Hewitt, which we ended up dumping around $4 when it seemed clear that they would not get RAL funding. A discussion for another day.)
In any event, the interview was just published today. The summary:
When natural gas prices plunged to $3 in September, RIA Joe Ponzio looked for a producer with "strong enough management, economics, and liquidity to survive a deep, prolonged downturn in the underlying commodity." He found this mid-cap company fit the bill, and while the stock has run up some since then, it remains his highest conviction holding...
For further reading on BreitBurn, you can download these two pages (PDF, 190kb) from my quarterly letter to clients of Ponzio Capital.
Due to the number of sites that reprint my articles, I typically only respond to comments on F Wall Street. For this particular article, I'll also be responding to comments on SeekingAlpha; so, feel free to chime in on either site.
Click here to read the SeekingAlpha interview.
Also Filed Under "Companies Analyzed (Generals)"
Joe Ponzio's F Wall Street
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Sun @ 9:46AM | View comment
trading for a living said,
I really like this blog post, it has some great info. Thank you and keep up good work.
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Thu @ 3:33PM | View comment
MinorityStakes said,
A couple comments regarding BBEP's latest communication with shareholders:* 2009 production just about equaled 2008 production even though capex was...
BreitBurn Energy: Playing the Commodities Crash
Sun @ 11:09AM | View comment
Eric T said,
Instead of inventory turnover, I use the cash conversion cycle, or CCC.It is more accurate for companies that manufacture and...
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Sun @ 5:48AM | View comment
Diversification said,
well it all depends on the correlation between the stocks you have choosen many big mutual funds are having the...
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Sun @ 4:46AM | View comment
sandesh trivedi said,
Very well explained joe. i believe one must also take into account the nature of the product being manufactured while...
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Sat @ 10:19AM | View comment
Ron said,
Hi Joe,Is there a rule of thumb of percentage of net shares sold by insiders where we should start to...
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Eric T
Feb 2nd, 2010
Glad to see you back.
( REPLY | PERMALINK )
Joe Ponzio replied,
Thanks!
( REPLY | PERMALINK )
3/5/10
Cale Smith
Feb 4th, 2010
2 comments
New Ponzio Capital site looks great, Joe, and good to see you back posting!
( REPLY | PERMALINK )
g
Feb 8th, 2010
2 comments
good timing!
( REPLY | PERMALINK )
Adam Gaglio
Feb 11th, 2010
4 comments
Hey Joe,
Excellent analysis of Breitburn, although I don't understand the balance sheet well enough to invest.
Just a slight nitpick I have with your valuation technique: I've noticed that in all of your spreadsheets, you add owner's equity to the discounted cash flows to arrive at the total intrinsic value. I believe this is wrong. The original owner's equity should be added to the cash flow of the last year, and then the entire amount should be discounted back to present value.
Your valuation method produces strange results. For instance, a business with $1 million dollars in equity, earning a 1% rate of return is worth more than $1 million dollars. In reality, $1 million dollars worth of equity earning a below market rate of return is worth less than $1 million dollars. Similarly, a bond earning 1% on principle is going to decrease in value when interest rates rise to 5%.
-Adam Gaglio
reasoninvestor.wordpress.com
( REPLY | PERMALINK )
Joe Ponzio replied,
Adam,
The valuation method assumes that you are buying a good business and that you would skip the above business altogether.
The equity is added as a "terminal value" instead of projecting cash flows out to infinity, and assumes that the equity would grow at a satisfactory rate over time.
If the business has bad economics, the F Wall Street method of buying good businesses at cheap prices won't work.
( REPLY | PERMALINK )
3/5/10
Mark
Feb 15th, 2010
15 comments
Hey Joe
Where can I look up historical charts for gas prices and other commodities? Thank you in advance.
( REPLY | PERMALINK )
Joe Ponzio replied,
If you don't have the CRB Commodities Index book and software (issued each year for a few hundred bucks), your best friend will likely be Google.
( REPLY | PERMALINK )
3/5/10
jan
Mar 6th, 2010
joe, any thoughts on jackson hewitt? what were the risks that played out in your mind when you decided to dump the shares? thanks.
( REPLY | PERMALINK )
MinorityStakes
Mar 11th, 2010
A couple comments regarding BBEP's latest communication with shareholders:
* 2009 production just about equaled 2008 production even though capex was drastically cut in 09
* PV10 of reserves with conservative energy price estimates is $760m
* $195m in "adjusted ebitda" for 2009 -> ~$160m after adding back interest and taxes
* Resuming maintenance and growth capex.
So long as natural gas prices recover in the next few years, BBEP is still undervalued.
( REPLY | PERMALINK )
Your Name
Mar 14th, 2010