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One Man's Leverage Problem

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October 14, 2008 – Comments (4)

Leverage has been featured in my posts more then once.  I put days upon days into writing "Six Degrees of Leverage."

Well, today I saw a story about one man's leverage problem, notably a "Margin Call."  This oil executive had to sell many shares in two companies, CONNACHER OIL AND GAS LIMITED, CLL:TSX and PETROLIFERA PETROLEUM LTD, PDP:TSX.

One ended up 64% down, the other 86% down.  

Read between the lines on this article and it looks like this guy was force to sell on margin shares purchased for $9 for about $2.50. 

Quite potentially he still owes money...

Connacher is a stock that has been on my watch list for two years now.  I couldn't figure out how it makes money, so I didn't buy it.  I didn't say it never makes money, but rather I couldn't figure out how it makes money.  I learned about various stocks and industries by putting hours upon hours of research.  I have never committed the time to oil and gas stocks so I've just watched.

This is not a buy recommendation, but these two stocks now definitely have a story that interests me.  They are down massively.  They have a hard luck story about massive sales driving the price down.  They are in an industry that although I think will be battered some due to demand destruction from people having to cut back, longer term it is a good industry.

Where I see real caution is when I look at the 5 year graphs.  The 5 year graphs suggest these stocks may have been highly bubbled.  The current prices, or lower, have been seen in the last 5 years.  The article mentions "new issue" so that means there are more shares then there used to be.

I am still watching the market and I feel too lazy to do actual research here, but if I was serious about buying right now these would be on my research list, which is not necessarily the same as a buy list.

4 Comments – Post Your Own

#1) On October 15, 2008 at 12:17 AM, UltraContrarian (31.88) wrote:

Did you also read about the Chesapeake CEO's margin call?  While forced selling has helped make these stocks pretty cheap, I think the overaggressive style these managers displayed is a huge negative.

My favorite oil company value is also up north: PetroCanada, PCZ. They are integrated between E&P, refining, and marketing which helps hedge against oil price swings.  Also they seem to have a good mix between cheaper and more expensive oil reserves.

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#2) On October 15, 2008 at 12:31 AM, dwot (45.78) wrote:

Yeah, I read about that margin call as well...

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#3) On October 15, 2008 at 12:51 AM, UltraContrarian (31.88) wrote:

Did you also read about the Chesapeake CEO's margin call?  While forced selling has helped make these stocks pretty cheap, I think the overaggressive style these managers displayed is a huge negative.

My favorite oil company value is also up north: PetroCanada, PCZ. They are integrated between E&P, refining, and marketing which helps hedge against oil price swings.  Also they seem to have a good mix between cheaper and more expensive oil reserves.

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#4) On October 15, 2008 at 12:51 AM, UltraContrarian (31.88) wrote:

Oops.

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