Wednesday, October 18, 2017

Bought Scorpio Tankers (STNG)

Scorpio Tankers owns a large fleet of product tankers.  They just completed a merger,  and management is aggressively betting that product rates will rise in the 4th quarter this year.  From their 2Q transcripts:

"we remain optimistic on the product tanker market outlook with fundamental drivers of our market that will remain largely unchanged. We expected demand growth actually to overtake supply growth in the second half of this year and this is happening with demand setting itself around the 4% mark supply being between 1% and 2% going forward....being already in positive territory makes us believe that it shouldn't take us too long."

At current rates, their operating cashflow is neutral to mildly-positive - rates need to raise in about 9-12 months, or else this company has to raise money from the market.  This stock is like a 1-year call option on product tanker rates.  It may go to zero, or go up several times if product tanker rates improve.

Bought STNG yesterday, 785 shares at USD 3.70, total cost USD 2901.29.  Its 0.5% of my portfolio.

Sunday, September 10, 2017

Offshore Support Vehicles

Owners of Offshore Support Vessels have have been hard by the oil price downturn.  Where are we in the price cycle?

What are OSVs?

Offshore Support Vessels (OSVs) are small vessels used to support both deepwater and shallow water rigs.  The main types are:
  • Anchor Handling Tug Supply (AHTS)
  • Platform Supply Vessel (PSV) 
  • Diving Support Vessel (DSV)
  • Construction Support Vessel (CSV)
  • Utility vessels.  Sometimes with Remote Operated Vehicle (ROV)
There seems to be a clear distinction between the first 2 types: AHTS (tug boats) and PSVs (supply boats).  There is a less clear distinction between the other types - an old AHTS may be converted into one of the 3 last types.

Different vessel types support different phases of a well's lifecycle:


Industry Overview

There are currently around 5000 to 5500 OSVs globally, with around 1500 to 2000 currently idle 1,2,3,4

The industry is highly fragmented.  The largest player, Tidewater, has a global fleet of 300 vessels, but they are so small that they are also a price taker:


Vessels operate in certain areas (e.g.: SEA, North Sea, Gulf of Mexico (GoM)).  They can move from one area to another to balance out supply & demand, but there are legal restrictions on some areas, for example:
  • Vessels in Indonesia have to satisfy ownership and crewing restrictions.
  • Vessels in US waters (GoM) need to comply with the Jones Act: the vessel must be owned, crewed and operated by Americans, and must never have been owned by a foreign company.

The Capital Cycle

New Supply

The OSV industry has followed the normal boom-bust capital cycle.  The most recent boom cycle started in 2006, and has seen over 400 vessels delivered till now.  Vessels from this boom are still being delivered, but drop off sharply in the coming years: 410 vessels are expected to be delivered the remainder of this year, 98 in 2018, and 5 in 2019:



Some vessels on order may be cancelled (e.g.: from speculative buyers) and some may never be put into operation.

Scrapping

Despite lease rates being below operating costs, only a negligible number vessels have been scrapped.  Since January 2015, only 2% of OSVs have been scrapped.  OSVs have low scrap value since they have little steel.  Delivering the vessels to be scrapped may cost more than the scrap price.

Unused vessels have been stacked instead.  Its possible they will never be reactivated, as this costs more the longer the vessels have been stacked (e.g.: required 5 year survey)5.  Due to safety concerns, charters may not lease ships that have been in lengthly layups.

The industry has been rife with bankruptcies:
  • The largest global player Tidewater (TDW), has just emerged from bankruptcy.
  • Gulfmark Offshore (GLF), with 70 vessels, has filed for bankruptcy several months ago.
  • In the Singapore market this year we've had Ezra and Swissco
These bankruptcies are not reducing industry capacity.  Vessels are simply sold off at fire sale prices, giving a low cost base to the buyer.  Or the company is resurrected with new shareholders, a new pile of cash, reduced debt and a lower cost base.

Demand

Quite a few reports predict increased OSV demand:
  • Pareto predicts a gradual recovery: If oil remains between $50 and $60, they predict an additional 130 rigs from 2018 to 2020, leading to additional work for around 390 to 520 OSVs.
  • Douglas-Westwood predicts OSV expenditure to grow at a 4% CAGR between 2017-2021: DSVs at a 6% CAGR, MSVs (consisting of CSVs and Utility Vessels with ROVs) at 7% CAGR, and pipelay expenditure at negative 4%.

Summary

There will be a recovery sometime.  We are waiting for laid-up ships to slowly rust, until it is uneconomical to put them back into service, while...hopefully...demand rises gradually at a single digit CAGR over the next few years.  

I have no idea when the turnaround will happen.  From the numbers above - especially if the 400+ expected new ships are delivered - no one can see it happening this year.  But these type of industry numbers won't tell us anything till after the turnaround.  Technicals will tell us, but will give a lot of false starts.  If I was going to buy, I would take very small positions, and spread out my buying over time.



1 Tradewinds article: Crisis batters OSV hub (19th/Apr/17): "We have around 5,000 OSVs in the market and about 3,000 are working." 
2 Tradewinds article: Rig's Inflection Point offers hope of gradual recovery (7th/Sep/17): "About 1500 to 1800 OSVs are sitting idle now." 
3 Clarksons Offshore Support Vessels front page: "OSVs in service: 5301" on 10/Sep/17." 
4 Offshore Support Journal: Greenshoots of Recovery in downbeat OSV market (6?Apr/17): "There were also around 1200 vessels laid up globally of a fleet of around 5,500 vessels
5 Some numbers here: "According to Clarksons Research records, just under 50% of laid-up OSVs no longer have an active class certificate as of February 2017. Two thirds of these out-of-class vessels are older units built prior to 1990....However, 856 of the laid-up OSVs appear to still have an active class certificate. These are skewed towards the younger end of the fleet...However, this number might decline in the future: 22% are scheduled to have their five year special survey in 2017 and a further 24% in 2018.....Financing special survey costs is also an issue for active OSVs, as well as those in lay-up. Considering the active fleet (3,688 units at start February 2017), 641 OSVs have their special survey due in 2017 and a further 721 vessels in 2018. The majority of these (over 80%) were not under long-term contract. " 

Wednesday, August 16, 2017

Sold Snap Options

Sold at $3.19.  Profit USD 2182.43.

Q2 earnings were bad and SNAP shares fell.  But they haven't been falling in the past few days: staff were allowed to sell on Monday, and even allowing a few days for the paperwork with brokerage accounts, they are not selling now.  Maybe the big drop is already priced in.  Since my short-term options are up 45% on volatility, and most options expire worthless, take the small profit now.

At what price would I turn around and buy Snap?  The app and the user-base has value.  But since the common shares have no voting rights, they're probably worth zero.


Tuesday, July 11, 2017

Snap

Snapchat is an app that lets you send doodley pictures your friends.  Widely used by teens/millennials.  Its different from Facebook in that its private - you only send to your close friends, and pictures are removed after viewing.  Its a way to talk with around 20 or so of your friends, rather than to show off to the whole world.  70% of Snapchat users are female.


The Numbers

Snap has never been profitable:


  • Revenue has been smaller than COGS for the last 2 years.  Let alone all the other costs.
  • I've excluded stock compensation costs here.  Lets optimistically consider them "non-cash" or "one-off".

Snap is burning cash:



With 3.2bn cash on their balance sheet from their IPO, they can last another 4 years at their 2016 "burn rate".  The only good thing we can say is that cash burn remained steady in 1Q17.

The key for a company like this is to either:
  • Increase its user base to gain critical mass by the network effect, so that they become attractive to advertisers.
  • Or else, they may already have gained critical mass in the teen/millennial market, and look for a way to monetize it.
For the first way: their Daily Active Users (DAU) has risen spectacularly since 2014, but levelled out in 1Q17, sending the stock down 25%.

For the second, they have several ways of monetizing their experience (1) (2) (3) which look interesting:
  • For their normal app: ads, lenses and geofilters.
  • Stories: photos or short videos, with annotations, doodles and music.  Post them in your Stories section and they can be seen by all your friends for 24 hours.
  • Spectacles: spectacles which can take 10s videos uploaded to snapchat.  They are pretty cool looking, not geeky like google glass.
We have not seen any meaningful increase in revenue in 1Q17 due to these.  Maybe we will later.

Competitors

Snap's competitor is Facebook, who tried to buy the company for 3bn in 2013 but was rejected.  Since then FB has directly competed with them by trying to make Snapchat clones (which failed) and outright copying their Stories functionality into Instagram.  This succeeded: Instagram Stories now has 200m users, more than Snapchat's 166m.


(Source: Business Insider)

FB wants to continue to dominate social media, and prevent (or buy out) any startup taking off.  SnapChat has an entrenched position in the highly desired teen market, which FB can't attack - no matter what new functionality FB comes up with, people will stick with an existing social network because their friends are on it.  But FB is preventing Snap from expanding.  So Snap either needs to monetize its existing user base before it bleeds to death, or find some way to completely re-invent the market - something completely different, like what the iPhone did to the mobile phone market.

My Short Bet

The story is put very simply here: 80% of Snap's free float has been locked up, but becomes tradable at the end of July till end August:

I'm short: bought 22 SNAP Put options last night @ 2.18 each.  Strike $15, 19th Jan 2018 expiry.  Breakeven if Snap goes down to $12.82.  Total cost USD 4,815.75.  This trade has 100% downside (for me) and roughly 120% upside (if SNAP goes to $10).

Risks:
  • The Q2 earnings release is due between the end July lockup expiry and end August one.  Snap may pull a rabbit out of their hat, e.g.: make more advertising deals, recount DAUs, or recognise some revenue.  Its possible that, since they know about the lockup time, they planned this and put all their bad news in the previous 1Q results (kitchen sink).
  • This is a consensus trade - every man and his dog is short SNAP.  Any good news will cause a short squeeze.
This is a speculative trade, using 1% of my capital.  Might go to zero.

Overall, the best you could say about SNAP as a company is that its overvalued and theres a lot of growth built into the price.

References

Good look at Snap's strategy from Stratechery:

Sold UUP

Sold all my UUP at 24.875 for a total of USD 19890.29.  The trade wasn't working, and since currencies don't move much, its pointless to keep so much capital tied up in it. Total loss was USD 891.30.

Currently I have:



Some of my positions are included as 'Speculative Positions".  They are risky 1% positions that may go to zero, but have a potential 3X payoff.  Most of them are from newsletters paid for and are not described in blog posts.  So are any unnamed stocks.

Saturday, July 1, 2017

Bits and Pieces

US natural gas prices to fall


  • due to increased production (link 1) (link 2)
  • associated with oil production, and new pipelines from Marcellus/Utica around 2017/18.
I like TimeOnTarget's comments on SA for following the US Natural gas market.  A good place to start for anyone looking to learn about it.  Have to look at demand, supply and pipelines.  US gas prices are cheap due past discoveries in the Marcellus/Utica, which was already served by pipelines.  At some point it may reach the stage where every producer is losing money, and things can only get better. COG seems the cheapest producer, but pipelines are the key.  Prices vary greatly across the country depending on that.  Not sure if I'll ever make a bet on this industry, but its useful to have a view on US Natural gas for anything related, such as chemicals, fertilizers, solar/nuclear, and so on.

         

North Korea

Has been out of the news for a while.  GeopoliticalFutures thinks that:
I don't know how a war would affect the markets:
  • The war would be very bad for South Korea, due to Seoul being within range of North Korean artillery, which cannot be easily neutralized
  • I believe the markets are not expecting a war now, but I think the war would be short, maybe 1-6 months.  No telling what the markets would do if they expect that.  They may even go up a few days after the war starts.
  • Long term, reunification would be costly - in economic terms - worse than the German reunification in 1989.
  • I don't know any way for retail investors to buy Korean stocks anyway.

         

Trump


Although ZH is unreliable, its worth keeping in mind the risks to the market if Trump changes back to his old election self again. USD up if it happens.

Friday, June 30, 2017

Bought Mongolia Mining Corporation (HK:0975)

Bought 227000 shares on Wed 28th July, at HKD 0.169.  Total cost around USD 4875.

This is from the Capitalist Exploits blog in Sept.  The story is about the resurrection of a Mongolian coal mine, which together with a proposed railroad to China, can provide coking coal cheaper than Australian producers.  The risks are political and in execution.  This is a 1% position and the stock may go to zero.  A crash in HK small caps last week gave an opportunity to buy.