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Random Musings - The Gulf Contagion, Tree-Hugging Hippies & A Growing Watch List

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June 02, 2010 – Comments (37) | RELATED TICKERS: NOV , NE , PXP.DL2

I honestly can't think of enough names to give this recent sell-off of all oil drillers and service companies. They might have as little as a drill bit lying somewhere on some rig within 100 miles of the Gulf of Mexico and they're getting clobbered with the entire sector. So here's what I have so far and I promise I'll get into something more meaningful after some name calling...

The Crude Awakening

The Gulf Contagion

The Gulf, Where Time Passes Like Molasses

Oil, Black Gold, Texas Trouble

Oil Rigs, We Meant Raise Not Raze

Oil, Lotion and Transocean - Sounds Like A Kinky Party

The Drill Run'th O'er

The Gulf, Fish Straight Out Of The Ocean Into Your Frying Pan - No Oil Needed!

Deepwater Is Gonna Collapse (Day 43, Vol 1.)

BP Is Gonna Put A Cap In Dat Wells A$$

How To Lose A Well In 10 Days

BP's CEO Sports New Suit, Looking Slick

The Crude Reality

All Glory To British Petroleum

 

Ok, enough of that. The real reason for this blog is to both draw the realization that yes this is indeed a very sad environmental problem and it is brutally unimaginable that they didn't have a contingency plan in place in case of such an occurance but the beating the sector has taken has far and away been overdone. 

The ramifications here are relatively easy to figure out yet no one seems to be able to put a bead on where the scope of the liability could end. The main companies at fault here appear to directly be British Petroleum (BP), Transocean (RIG) who owned the rig, Halliburton (HAL) for supplying deep well parts, and Anadarko Petroleum (APC) for being a partial owner in the well. 

I find it highly unlikely that Transocean will face any repurcussions in this disaster at all outside of criminal investigations into it's actions and the safety record of its rig. I would say the overall damages that RIG can expect to pay given litigation fees to defend itself will be in the neighborhood of 450 million dollars when all is said and done and spread out over the next four years. 

Likewise, Halliburton may be found to have some fault in the legal preceedings, but outside of the general context of defending some of its members against lawsuits and legal proceedings from Washington it should have it's fees capped around 1.5 billion to 2 billion over the next three to four years. 

British Petroleum however is going to get a spanking when it comes to the cleanup bill. They are going to be found without a doubt to be directly at fault for this disaster and their malfeasance is going to cost them a dramatic amount of their cash flow. They will have to pay for cleanup efforts both on land and in the water, environmental fees, oil per barrel leakage fees, fees to those displaced from work due to the disaster, and the continued relief effort to plug the leaking well. Estimates for this have greatly ranged anywhere from 13 billion dollars up to as high as 22 billion dollars. I think the ultimate cost here will be towards the high end of this estimate and come in closer to 23-24 billion dollars. The scary thing here is that hardly puts a dent into BP which brings in over 30 billion dollars in free cash flow a year and could save billions of dollars a year simply by not paying out a hefty dividend if it wanted to.

Anadarko Petroleum will simply be guilty by association and will face something in the realm of 1-2 billion dollars in punitive damages from the amount of oil that will have leaked into the ocean by the time the well is plugged. Anadarko may actually suffer worse than BP largely because they don't have that same ridiculous amount of cash flow that BP has but APC should survive no problem. I don't suspect much of the pending litigation will be pointed at Anadarko.

So what does this all mean? It means that the general investor has brutally overreacted to the downside and crucified the entire sector for basically no reason. What I expect however is a continuation of this move to the downside as traders, or as I have liked to call them recently, tree-hugging hippies, drive the sector down on fears that we have seen the end to deepwater drilling. Deepwater drilling is without a doubt here to stay but you can rest assured that the government is going to impose new safety measures to ensure that drilling is done properly and contingency plans are in place in case of future incidents. Oil is just far too useful a power source to not drill, especially in the United States - you've heard the term necessary evil, well this is a perfect example. Hippie activists can cheer all the way about the six month moratorium on new deepwater permits but this is a temporary lapse til the government itself can figure out what's going on.

Are there values in the sector? Oh absolutely and I'm going to do some simple copying and pasting of a few oil drillers and service names that I currently have on my CAPS limit order buy list complete with today's closing price and the target limit buy price. Am I confident that all of these companies are going to hit my limit orders? No, not at all, in fact I think nearly every company I'm mentioning below is brutally undervalued, but that's what happens when tree-hugging activists trade on emotion and not on the common notion that drillers and oil service sector companies are literally the best cash cows in the market place. There are no toxic assets to hide, there is a limited supply, and an increasing demand for the product.

Below are a few names I would consider buying on this absurd dip from the Gulf contagion...

Foster Wheeler (NASD: FWLT)
          • Closing Price $22.92 / Limit Buy @ $19.82

It's so incredibly retarded how we bid the crappy companies up and let good companies fall in tandem with the crappy ones when they finally deflate and come back to earth. Foster Wheeler provides construction and engineering services to the oil industry and they are looking dirt cheap based on my estimates. They maintain just shy of $6 in cash per share and are currently trading at 9 times 2011's figures. If we back out their cash pile that figure drops to just over 6 times earnings. Cash flow is strong, business demand is good with a long-term growth of 9%-10%... I mean really, what more could you ask for? I'm taking a stab that traders will be dumb enough to fill that gap around $19.82 and I'd love an entry there.

British Petroleum ADR (NYSE: BP)
          • Closing Price $36.52 / Limit Buy @ $33.42

Classic overreaction by the tree hugging hippie investors who would love to see British Petroleum wiped off the map! I'm not saying this isn't a macro catastrophe, but it is going to effect BP's day to day operations in such a small way that I'd call it rather negligible. Let's say that the worst case scenario plays out and the well leaks until it's plugged in August, by this case scenario analysts have thrown out cost figures for BP of anywhere from 14 billion to 22 billion dollars. I'm going to go ahead and blow those figures out of the water and assume punitive litigation fees on top of that and claim they'll net 27 billion dollars from this spill. Now get ready for this folks... BP brings in about 30 billion dollars in free cash flow a year, so even AFTER the spill, taking into account even the most dire estimates and making them more dire, BP should be cash flow positive. They still do have over 6B in cash (along with 32B in debts which is fine since they bring in nearly that much a year in free cash flow) and are trading below 1.2 times book value now. Forward earnings even with a lowered outlook are at near historic lows, about 5 to 5.5 times profit potential. I am going to go ahead and place a limit to buy order just above their book value and above their multi-year low, at $33.42. If that level hits I get BP basically at book value ($33.25), under 5 times 2011's profit potential and about 3.5 times cash flow which is incredibly reasonable. So feel free to keep taking it down hippies..

Diamond Offshore Inc. (NYSE: DO)
          • Closing Price $58.51 / Limit Buy @ $39.50

Attempting to do more falling knife catching here with Diamond Offshore as panic in the Gulf sets in. Diamond Offshore is already trading at a nice discount to competitors and if panic selling really sets in it could get even cheaper. I'm setting my limit buy order at $39.50. Let's keep in mind that Diamond Offshore is still cranking out 1.3-1.5 billion in free cash flow in a moderate growth year. They are well capitalized and even with a downturn in drilling, they should be able to produce $5 in yearly EPS placing this at 8 times 2011 figures if my target hits. So let the tree-hugging hippies keep taking down DO and I'll keep placing buy orders on these drillers.

Pride International (NYSE: PDE)
          • Closing Price $22.21 / Limit Buy @ $17.17

Pride International can join my merry list of drillers and drilling equipment service companies that have been beaten up due to Washington's six month drilling ban as the Gulf contagion spreads. If it's not one thing it's another for these cash cows in the drilling sector. PDE can produce somewhere in the neighborhood of 500M in free cash flow in a moderate growth year. They also are now trading below their book value and something like 6.7 times 2011's profit figures. Given a slowdown in revenue I'm going to place my limit buy at $17.17 which will get me Pride International at 0.7 times book and roughly 5-6 times 2011's figures. Let these tree-hugging hippies keep freaking out about big oil and let's get these wonderful names back down to some very inexpensive levels.

National Oilwell Varco Inc. (NYSE: NOV)
          • Closing Price $33.90 / Limit Buy @ $26.78

National Oilwell Varco is one of my favorite companies in the oil sector and the poor company has been beaten up as the gulf contagion spreads. NOV has an absurd amount of net cash, about $4.10 per share and is now trading below their book value. They bring in a boatload in cash each year and are currently trading at only 10 times 2011's profit figures. I'm not thrilled with their revenue downtick which could enter a 2nd and 3rd year, but they produce solid profits and should be trading higher than this. I'm placing a limit buy order at $26.78 to take advantage of these extremely inexpensive prices.

Plains Exploration & Production Inc. (NYSE: PXP)
          • Closing Price $19.34 / Limit Buy @ $15.87

Plains Exploration & Production, another company that has been brutally beaten down by the Gulf crisis. PXP has had trouble with one of its deepwater projects and investors have shaved off almost half its value despite all of its other revenue streams. PXP is capable of producing well in excess of 600M in free cash flow and is trading at only 0.8 times its book value. Future profit forecasts have been timid and even so PXP is only at 9 times those forecasts. I am going to go ahead and try to snipe the falling knife at $15.87 which would place this at 2/3rd's of book value and roughly 7.5-8 times future earnings. Plenty of growth to be had here with the new Gulf drilling laws in place or not.

Hornbeck Offshore Services (NYSE: HOS)
          • Closing Price $13.64 / Limit Buy @ $9.66

Hornbeck Offshore Services is not a traditional recommendation of mine because it's probably one of the weaker buys currently sitting in my long limit buy queue, but the valuation here is getting very close to making sense. HOS supplies services to deepwater drillers, mainly supply vessels and obviously with some of those services up in the air right now HOS is taking a hit. Still, we need to remember Hornbeck has services near Puerto Rico and in the NorthEast as well so it's not like they have zero revenues coming in. They are trading well below half of book value and around 14 times it's profit guidance on the low end. I'm not a huge fan of the debt levels, but they are bringing in over 100M in free cash flow a year so I'm not too concerned. Looking for a limit buy order at $9.66 if panic selling continues.

Noble Corp. (NYSE: NE)
          • Closing Price $27.04 / Limit Buy @ $19.89

Crazy has hit the stock market and it has manifested itself in the form of a precipitous drop from Noble Corp. I just don't see Noble Corp. being completely incapacitated by this Gulf spill or new laws from Washington. Noble is one of those very few drillers who is actually net cash positive, with over 100M in net cash. They are growing a bit slower than most drillers, but I'd take 4-5% any day of the week. They are now trading below book value and just 5 times forward profits which is already inexpensive. Given some old school point and figure trendlines I'm placing my limit buy order at $19.89, but I think there would need to be some serious panic selling for that to hit. All in all Noble is about as stable as they come.

Anadarko Petroleum Inc. (NYSE: APC)
          • Closing Price $42.10 / Limit Buy @ $33.25

And now the great plague has caught up with Anadarko Petroleum as well! Anadarko may have partial ownership in that now sunk well but give me a break, have we completely forgotten about their other assets or should we just throw a blind eye at those! Anadarko is trading right at book value and could be poised to head lower as panic selling really sets in. APC default swaps are rising and really for no good reason as there is likely no litigation impact pending for them. Even with tempered profit expectations APC is trading at only 13 times forward earnings. I am placing a limit buy order right at their 20 year trendline around $33.25 hoping to snipe this falling knife. Very strongly cash flow positive company caught in a whirlwind of tree-hugging hippies.

Halliburton Inc. (NYSE: HAL)
          • Closing Price $21.15 / Limit Buy @ $14.88

Man, it's like one retarded concept after another! Now default swaps on Halliburton debt is rising with the possibility that Halliburton may default on one of their loans. I have a fancy word for this phenomenon - bullpucky! Halliburton is sound as a pound to quote my British bretheren! Halliburton is cranking out over 2B in cash flow each year and can maintain 1.2-1.5B even in a severely depressed gulf oil market. They're trading at roughly 2.2 times book and growing around 10% per year. Even with pending litigation, I'd cap Halliburton's exposure at 2-2.2 billion or roughly one years cash flow. Do they not think Halliburton has a line of credit. As I said, a conglomeration of tree-hugging hippies are trading these oil companies down to obscenely cheap levels. If my limit buy order at $14.88 hits I will get HAL at only 1.5 times book, and roughly 9 times 2011's profit potential with a 10% growth rate...a very reasonable expectation.

Atwood Oceanics (NYSE: ATW)
          • Closing Price $25.76 / Limit Buy @ $21.65

Oh my goodness, now we're beating down the good companies with the crappy ones. So Transocean made a whoopsie out in the Gulf of Mexico, it's not like this wasn't expected to happen at some point between now and let's say 2015. Accidents happen and they really shouldn't affect a company like Atwood Oceanics which is far and away the best company in the sector. A steady growth rate of 12%, trading at less than 6 times future earnings and generating over 300M dollars a year in cash flow. Their earnings momentum has then moving higher every quarter and the only thing working against them is pending litigation against other companies in their sector and a poor technical pattern. I'm going to bet that pattern could yield some panic selling in this sector and with that I'm putting in a limit order to buy for $21.65. If this level were to hit I'd nab Atwood Oceanics at less than 5 times forward earnings and hardly 1.1 times book with a PEG of something like 0.45....just sick!

ATP Oil & Gas Inc. (NASD: ATPG)
          • Closing Price $8.72 / Limit Buy @ $7.86

ATP Oil & Gas is finally coming back down to a reasonable valuation and although it is nowhere near my favorite company in the sector I'm angling this as a limit order which might catch ATPG as a falling knife. ATP Oil & Gas has seen solid profits in the past but has been experiencing higher than normal disappointments in production and expensing. I think they could be trading at approximately 6-7 times 2011 figures at the moment which is just slightly undervalued. Revenues are scheduled to rise like a rocket again but I think it'll be a while before they re-visit those 2007-2008 figures. I'm not a huge fan of the 1.15B in net debt but on the all it makes for an intriguing play if it drops below book and can maintain a 25% growth rate. I'm placing my limit buy order at $7.86.

Transocean Inc. (NYSE: RIG)
          • Closing Price $50.04 / Limit Buy @ $42.10

You know that game you used to play as a kid with a knife in one hand and your hand on the table as you try to stab the table in between your fingers without stabbing your fingers, well that pretty much sums up this limit order. I'm attempting to do more knife catching here with Transocean and am putting in a limit buy at $42.10. RIG is already trading below book value and with reason at the moment. They are facing considerable litigation and revenues have been dropping for three consecutive years. Despite this cash flow remains incredibly strong and their oil rig presence is basically unsurpassed. If I can get my limit order hit they will be trading at roughly 5 times 2010 figures and perhaps less than 4.5 times 2011 and they should see a return to revenue growth in 2011 as well. Although largely indebted, cash flow remains very strong regardless of the price of oil. It remains one of my favorite long-term holds and I'm eager to see if it will trade as low as $42.10! I have updated my limit buy in price from $48.55.

Oil Service Holders Index (AMEX: OIH)
          • Closing Price $89.48 / Limit Buy @ $72.18

I'm trying to do a little knife catching as I expect more panic selling in the oil service sector as the Gulf contagion spreads. This is merely a sector-wide play on numerous companies which I've already selected to the long side. I'm placing a limit buy order at $72.18 which is approximately 20% below where it currently trades at and is not surprisingly around a level that would correlate with plenty of my current buy limits on other companies in the sector.

This is a partial list of some of my favorites in the oil drilling and service sector... this list could continue to grow!

UltraLong

37 Comments – Post Your Own

#1) On June 02, 2010 at 4:46 AM, ralphmachio (24.89) wrote:

No mention of BEXP? This is one of my favorites to trade, and sometimes moves too fast for me. If you bought in the beginning of the rally, it would have cost 1.75 or less per share. It recently touched 20, and now trades in the 16 dollar range. I like it because it is nowhere near a coastline, and will be a safe domestic energy source should any mid east strife take place.

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#2) On June 02, 2010 at 5:45 AM, MGDG (34.84) wrote:

Hey Ultra, I'm an old Hippie, but I'm not a Tree Hugger. I've been known to cut a tree down from time to time in the past when it suited my needs, but more recently I've been taking a bath in Oil. Anyways, great info in your blog and I appreciate the time you put into it.

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#3) On June 02, 2010 at 6:09 AM, mhy729 (31.61) wrote:

Wow...great write-up!

Totally unrelated, but what is that avatar pic of yours supposed to be?  Kind of looks like those impact barrels you see protecting the ends of concrete dividers on expressways...I'm sure it's something else though.

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#4) On June 02, 2010 at 7:04 AM, VExplorer (29.71) wrote:

Loaded NE yesterday. I have not seen chance your limit will executed, but if I will load much more. Actualy, long NE & short DRN is a my best choice for pair to have.

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#5) On June 02, 2010 at 8:44 AM, ElCid16 (95.70) wrote:

Another company to add to your list of culprits is the maker of the blowout preventer (CAM).  It's share price dropped ~10% yesterday.

http://news.bbc.co.uk/2/hi/8679090.stm

In regards to Transocean, while they have sought out the Limitation of Liability Act, the public outcry of this has become so immense that the DOJ has specifically targeted Transocean and will fight their move in court.

http://www.nytimes.com/2010/06/02/us/02liability.html?hp

I also read somewhere that Transocean took out 2x the insurance that the actual rig was worth.  I'm not sure if that is a Transocean company-wide policy or not, but if that was a site specific event, it looks pretty suspicious.

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#6) On June 02, 2010 at 8:45 AM, whereaminow (20.95) wrote:

Ultra,

I couldn't agree more, and thanks for this blog.  I'm going to bookmark this list because in my humble opinion the best time to buy up these shares (or call options) will be exactly one month after the leak stops (arbitrary, i know. But a month seems to be the attention span of the public.)

Again, thank you for sharing your research.  I had been thinking about this very idea for the last week but didn't know which companies I could safely target.

David in Qatar

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#7) On June 02, 2010 at 10:20 AM, JaysRage (89.07) wrote:

I think it's premature to attempt to assign a dollar value to this until we know whether it will hit Florida.   If this hits the Florida beaches, I think the damages will be in the 100s of billions.   If it goes up the East Coast, several hundreds.   I think your 10s of billions is a low-end estimate.....based on the damage already done.  

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#8) On June 02, 2010 at 11:37 AM, portefeuille (99.60) wrote:

ATP Oil & Gas Inc. (NASD: ATPG)
          • Closing Price $8.72 / Limit Buy @ $7.86

That would give you a better buying price than I currently have (around $10.50, see here). You are so mean!

 

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#9) On June 02, 2010 at 11:39 AM, portefeuille (99.60) wrote:

My next non-ATPG buy might be BP shares.

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#10) On June 02, 2010 at 12:42 PM, dragonLZ (99.59) wrote:

I don't know about you guys, but to me, buying BP this year is a perfect example of trying to catch a a falling knife (with a blade 10 inches long, and a 2-inch long handle).

I don't know what is it what drives you people toward these "problem" stocks? Is it the money you think you could make or the "need" to be smarter than the crowd?

To me, buying BP this year is like rushing to buy a house in 2008: "Let's buy a house now when everybody is selling, and the prices are low..." 

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#11) On June 02, 2010 at 12:48 PM, Turfscape (44.53) wrote:

Hmmm....I would think that the financial turmoil will not be in the penalties assessed to companies/people at fault for this spill. It will be in the regulatory reaction to this disaster. There will be new regulation. There will be new limits on drilling. There will be new requirements of all oil producers. And all of it will impact profitability over the long term for these companies.

Are the current prices an over-reaction? Probably. But there is real concern for the future returns on oil-based stocks given this very strong potential for heavy increases to regulation.

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#12) On June 02, 2010 at 12:48 PM, TMFBabo (100.00) wrote:

@dragonLZ: Dude, a 2 inch handle wouldn't make the knife very safe to handle.

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#13) On June 02, 2010 at 1:01 PM, TMFBabo (100.00) wrote:

@dragonLZ: Holy cow, that's what you meant.  -1 for bullishbabo

@UltraLong: Thanks for the list.  I was contemplating doing this myself, but you did it better than I would have.

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#14) On June 02, 2010 at 1:01 PM, portefeuille (99.60) wrote:

#10 Yes, I think it is a good idea to try to "catch falling knifes" (or to "throw good money after bad"). That is the little value investor inside, I can't help it ...

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here are two pieces of advice you may not want to follow:

i) "never catch a falling knife"

ii) "never throw good money after bad"

...

I guess the more important point is the first: DO CATCH FALLING KNIFES!

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(from here)

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#15) On June 02, 2010 at 1:05 PM, portefeuille (99.60) wrote:

#14 That is how Ackman and checklist34 had a return of "a few thousand per cent" with GGP shares by the way.

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#16) On June 02, 2010 at 2:01 PM, JaysRage (89.07) wrote:

I agree with DLZ.   I think the contrarian play is too early here.   The scope of the damage so far has been fairly contained, so the numbers are necessarily comparitively low on the project damage from litigation.    If the worst case scenario presents itself and this follows the gulf current into lower Florida, BP could reach the teens, IMO.  

I think there is a lot of potential downside, particularly for BP.   It's difficult to determine the fallout and liability of the rest of the band of brothers grimm.  

I have now agreed with DLZ and Griffin in the same day.   I think the end is near.  

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#17) On June 02, 2010 at 2:29 PM, TMFUltraLong (99.95) wrote:

DLZ and JaysRage,

I've actually taken a worst case scenario approach and my loss estimates have gone about 20% beyond the most dire predictions by analysts and even then BP should be able to keep its dividend in tact and continue to run operations without dipping into their revolving credit line. The widening in CDS spreads of BP and RIG makes me laugh because those buyers are going to absolutely get burned... they are not going to default on any of their loans.

UltraLong

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#18) On June 02, 2010 at 2:45 PM, JaysRage (89.07) wrote:

There is a big difference between the actual cost impact and how much this is going to cost BP.  

Altogether, the impact on tourism, fishing, property values and other damages could reach $10 billion to $15 billion, said Ahmad Ijaz, an economist for the center for business and economic research at the University of Alabama.

That is the actual projected cost, which in my opinion is low.   When you tack on fines and punative damages (yes, they will get nailed with punative damages),  you could easily be looking at much much higher.   In normal court situations, punative damages exceed actual damages by a factor of 10.   Will this be a "normal" court situation.....I'm not sure......but why wouldn't you expect it to be?    Will the government step in and protect them?   Possibly, but it would certainly be an unpopular move. 

My estimate of worst case scenario....150-300 billion.   Liklihood of this happening....10-15%.      

That still might not put mighty BP out of business, but it would put a serious crimp in their leisure suit.  

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#19) On June 02, 2010 at 2:48 PM, dragonLZ (99.59) wrote:

#14

Porte, I don't disagree with your two rules, but in my opinion, there are falling knives and there are falling knives.

If a stock goes down because it's just correcting from its recent highs, or because the whole market is correcting, I think it's perfectly fine to throw good money after the bad.

But, if the stock (company) is going down because it's having serious problems, then I think it's a bad idea.

p.s. Didn't Ackman and checklist pick up GGP-knife off the floor, not while it was falling? There is a big difference between the two.

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#20) On June 02, 2010 at 3:13 PM, portefeuille (99.60) wrote:

Didn't Ackman and checklist pick up GGP-knife off the floor, not while it was falling?

No, not really.

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Ackman May Make $170 Million on ‘Grand Slam’ General Growth Bet

...

Ackman, who runs New York-based Pershing Square Capital Management LP, bought General Growth shares in November 2008, five months before the bankruptcy filing. He paid $9.3 million for 20.1 million shares, an average of 46 cents each, according to a regulatory filing at the time of his purchase.

“He made an investment where the reward was very large, but the downside risk was very large as well,” said Jim Sullivan, an analyst with real estate research firm Green Street Advisors in Newport Beach, California. “His vision has played out as he expected and as he hoped. He took a big swing and he hit a grand-slam homerun.”

...

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Bill Ackman Explains His Big Bet On Citigroup (C)

...

General Growth Properties Inc. (NYSE: GGP) and the future IPO of General Motors Co. are other investment opportunities that Ackman believes will benefit his firm. The firm's investment in General Growth has grown 50 times since Pershing made a bet on the company.

...

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GGP.



enlarge

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#21) On June 02, 2010 at 3:18 PM, portefeuille (99.60) wrote:

an article from that time.

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General Growth Falls on Talk of Bankruptcy Protection

Nov. 11 (Bloomberg) -- General Growth Properties Inc., the second-largest U.S. shopping mall owner, fell the most ever in New York trading after saying it may seek bankruptcy protection if plans to refinance $958 million in debt do not succeed.

General Growth slumped 88 cents, or 64 percent, to 49 cents in New York Stock Exchange composite trading. Today's decline was the biggest for the Chicago-based company since its April 1993 initial public offering of shares, and cost the company its place in the Standard & Poor's 500 stock index.

Investors have been dumping General Growth shares on concern the company won't be able to refinance its debt. It has lost more than 98 percent of its market value this year. The company's problems stem from its $11.3 billion purchase of Rouse Co. in 2004. Financed almost completely with debt, it left the company highly leveraged ever since, said Rich Moore, managing director at RBC Capital Markets in Cleveland.

``They took a big, big gamble, and it did not pay off,'' Moore said in an interview.

General Growth may not be able to refinance or reschedule the loans, due Dec. 1, because of the crisis in the credit markets, according to a filing the company made after the close of regular trading yesterday. It may also fail to rearrange $3.07 billion in debt maturing next year, General Growth said in the Securities and Exchange Commission filing.

CEO Replaced

Chief Executive Officer John Bucksbaum was replaced last month with interim CEO Adam Metz, and Chief Financial Officer Bernard Freibaum was fired after he sold 2.95 million shares to meet margin calls. Bucksbaum remains chairman.

...

Standard & Poor's today said it's removing General Growth from the S&P 500 after the close of trading tomorrow, saying the mall owner's stock-market value of about $128 million ranks it last in the index. General Growth will be replaced by drug developer Cephalon Inc., New York-based S&P said.

Telephone messages left today for Metz and Tim Goebel, investor relations director at General Growth, weren't returned.

``Our potential inability to address our 2008 or 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a going concern,'' General Growth said in yesterday's filing. The steps it may take include ``seeking legal protection from our creditors,'' the company said.

`Against a Wall'

While General Growth's statement that it may seek protection from creditors ``has been an obvious one to the market for some time, it is the first time that we can recall the company has put it in print,'' J.P. Morgan Securities Inc. analysts led by Michael W. Mueller said today in a note to investors. The company ``continues to have its back against a wall with massive near-term maturities in a credit crunch. We continue to recommend that investors not step in at current levels.''

Another risk for General Growth, the company said in yesterday's filing, is its low stock price. Should the company's shares remain below $1 each for 30 consecutive days, they could be delisted from the New York Stock Exchange. A delisting or threat of delisting could result in a default under certain debt facilities, General Growth said.

...

General Growth is the largest U.S. shopping-mall owner after Indianapolis-based Simon Property Group Inc. General Growth said last week that its third-quarter net loss widened to $15.4 million, or 6 cents a share, from $9.4 million, or 4 cents, a year earlier.

...

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#22) On June 02, 2010 at 3:21 PM, portefeuille (99.60) wrote:

So I think I will continue my "knife catching". My portfolio has really become too boring as of late (see here) ...

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#23) On June 02, 2010 at 3:27 PM, JaysRage (89.07) wrote:

portefeuille -- Again, I enjoy seeing your thought patterns on various plays.   I don't think anyone will every accuse you of making an uninformed decision.   You and UL are two of CAPS best and brightest.   I still disagree with the risk/reward play for a real life move, but I certainly understand the reasoning.  

 

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#24) On June 02, 2010 at 3:45 PM, portefeuille (99.60) wrote:

I don't think anyone will every accuse you of making an uninformed decision.

At least when women or alcohol are not involved, hehe ...

I have never bought any GGP shares though. Big mistake! At least I have given appropriate guidance ...

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#531) On June 16, 2009 at 12:57 PM, portefeuille (99.97) wrote: GGWPQ.PK - 2.30 - outperform

#906) On December 10, 2009 at 12:02 PM, portefeuille (99.97) wrote: GGWPQ.PK - end outperform - 11.45 - new rating: market perform

#915) On December 16, 2009 at 12:31 PM, portefeuille8 (98.54) wrote: GGWPQ.PK - end market perform - 8.25 - new rating: outperform

#926) On December 28, 2009 at 11:34 PM, portefeuille (99.97) wrote: GGWPQ.PK - end outperform - 13.00 - new rating: market perform

#1035) On February 21, 2010 at 10:52 PM, portefeuille (99.97) wrote: GGWPQ.PK - 12.74 - outperform

#1065) On March 17, 2010 at 12:52 PM, portefeuille (99.97) wrote: GGP - end outperform - 15.88 - new rating: market perform

1097) On May 08, 2010 at 2:12 AM, portefeuille (99.97) wrote: GGP - end market perform - 14.07 - new rating: outperform

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(from here)

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#25) On June 02, 2010 at 10:09 PM, portefeuille (99.60) wrote:

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March 3, 2010, Pershing Square's Economic Exposure to General Growth Properties

Due to activity on February 24th, 2010, Bill Ackman's hedge fund firm Pershing Square Capital Management has updated us on the size of their General Growth Properties (GGWPQ) stake. In an amended 13D filed with the SEC, Pershing has disclosed a 7.5% ownership stake with 23,953,782 shares. (This total is based off of 317,304,759 common shares outstanding). However, if you dig into the fine print you see that Pershing also has economic exposure to 54,907,669 shares via total return swaps. As such, their total exposure is 78,861,451 shares. This brings their total aggregate economic exposure in General Growth Properties to 24.9% of outstanding common shares. While it is just speculation on our part, we'd estimate that Ackman has made easily over $700 million on this investment. Not to mention, the scenario is still playing out with further possible upside.

...

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#26) On June 02, 2010 at 10:11 PM, portefeuille (99.60) wrote:

Ackman has made easily over $700 million on this investment.

I love those knifes ...

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#27) On June 02, 2010 at 10:12 PM, portefeuille (99.60) wrote:

good old Ackman.

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#28) On June 03, 2010 at 1:32 AM, TSIF (99.96) wrote:

The new regulations and the delay in allowing offshore drilling to resume will affect some of these companies more than others.  One of the most likely resolutions to opening up drilling with more regulations will be a requirement for TWO Drill holes for each location.  The releif well being always on standby.  I belirve the Canadians require this as do some other countries in South America, etc.

The requirement for TWO drill holes will be net positive for the drillers and support companies.  

The question, however is when do you pick up OR catch that knife?  How do you know when it's safe?  Some of will take our chances and reach for the knife in an attempt to time the bottom as close as possible without getting cut.  I don't think UL's limit orders will be reached on some of these. 

BP and RIG will certainly be two of the more dangerous ones to reach for.  If there are plumes below the surface that reach other parts of our country, or the spill itself engulfs parts of Florida, then I agree, barring a cap on liability, this will be a tough pill for BP/RIG to handle. At a minimum I would expect BP's dividend to be cut.  Realistically, if the share price remains depressed it will be cut regardless of cash flow since it will be out of scale (percent wise), with the base equity. 

I've never needed to count to ten and if I do then implanted fingers should work just fine, so I expect I'll make a few reaches for some of the knifes on UL's list that look less sharp....but then again, would catching a sharp knife be better than catching a dull one?  

Good luck.

TSIF  

 

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#29) On June 04, 2010 at 2:49 PM, dandles2020 (47.60) wrote:

Ultralong:

Just curious what you think of Transatlantic Petroleum, TAT.  I'm new to investing, but it seems promising to me.  Strong insider ownership by Malone Mitchell, who holds 50 percent of the stock.  Now he's drilling oil in Turkey.

Thanks!

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#30) On June 09, 2010 at 12:22 AM, falcon2382 (29.52) wrote:

is it not possible that they (BP) try to dodge part of their responsibility (cough, cough) liability, by filing for bankruptcy, turning the company over to debt holders (who happen to be their biggest equity investors too) and then rekindle the company a fresh? I'm not even sure if this is possible given the environment we are in, or the rules of the industry. From what I'm hearing though, the numbers that have been reported by BP thus far have been very skewed. If they are double what BP is reporting we are talking about 60 million gallons of oil in the ocean. What's more of a concern for me as I, too, consider investing at around 32/share, is how much of a game changer it is if the oil reaches the Atlantic current. Under such circumstances, it would be impossible to effectively clean this spill up. Thanks for the post, very insightful. I'm just not sure I buy this as just another oil spill. Its getting more and more ugly by the day.

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#31) On June 09, 2010 at 4:12 PM, Formula51 (< 20) wrote:

Any re-assesment based on the GS downgrades and potential of an extended moritorium on drilling?  How about the possibility og BP's dividend being cut?

 Of your list I like RIG, NE and NOV the best as long term plays.  BP is still a wildcard, but I think it could go on a nice sale if/when the dividend gets cut for those who are willing to hold it long term and wait for the dividend to come back and rebuild itself.  Think of the cost basis in 10 years.....

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#32) On June 09, 2010 at 4:48 PM, MyDonkey (< 20) wrote:

Did anyone catch the falling BP knife today? It closed at $29.20.

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#33) On June 09, 2010 at 4:59 PM, JaysRage (89.07) wrote:

BP is already below the limit order suggested here.    The worst case scenario is looking more and more likely, and I continue to believe that it would drive BP into the teens.    The risk part of the risk/reward is rearing its ugly head.   

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#34) On June 09, 2010 at 11:19 PM, TMFUltraLong (99.95) wrote:

As long as BP has 30 billion in free cash flow, I'm not worried. There aren't any real facts driving this down, just tree-hugging hippies and limit sell orders.

UltraLong

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#35) On June 10, 2010 at 3:59 PM, MyDonkey (< 20) wrote:

A recent study (completed before the Gulf oil spill) estimates the economic value of the Mississippi River Delta at $330 billion to $1.3 trillion.

http://www.prnewswire.com/news-releases/bp-oil-disaster-threatens-mississippi-delta-goods-and-services-worth-far-more-than-bps-value-96046614.html

The value of the entire Gulf Coast is much greater, of course. If the spill ends up ruining much of the Gulf's economy, and BP is held responsible for the damage, the compensation costs could run into the hundreds of billions of dollars. It's too early to say at this point, but those numbers are not out of the question.

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#36) On June 11, 2010 at 4:11 PM, TigerPack1 (97.20) wrote:

Seems like a fair list.  Lately, I have purchased ATPG as a call option on crude oil prices the next few years.

I would add COP, Conoco-Phillips, to the list of cheap oil and gas plays... They have a large dividend easily covered, low mutliples of earnings and sales, etc... They are selling off non-core overseas assets to pay down debt this year and next, are North American centered in their assets, and have high natural gas exposure (likely the future of energy and electricity production in this nation the next 10-20 years).

It is my favorite, large cap, integrated play right now for safer oil and gas exposure.  I own plenty and I would like to own more.

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#37) On July 06, 2010 at 5:04 PM, USNHR (31.86) wrote:

natural gas exposure (likely the future of energy and electricity production in this nation the next 10-20 years).

I think coal will maintain its dominance of electricity production. Nat gas could go as a replacement for gas in cars, however I don't think their is enough support for that yet.

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