I sold my entire Air Canada position yesterday. Additionally I sold down Valaris heavily after it jumped 135%... Only last week it decided to postpone interest payments on two of its revolving credit facilities and the market was predicting bankruptcy filings before month end. The only reason to maintain the same position size is if there was good news on debt restructuring (debt rollover/conversion where current equity doesn't get wiped out) but no way of knowing. The most likely explanation is the extreme "Risk on" environment (Noble jumped 161%, Transocean jumped 50%). I haven't seen a sudden change in offshore capex, change in utilisation or dayrates which impacts their cash burn. The only positive perhaps has been Fed purchases of high yield corporate debt which is pushing up risk appetite. I think the market is seeing rising oil price, predicting a rapid oil demand recovery and then playing the most geared names to that theme. I'll take the opportunity to trim my exposure until I have a better idea of the names which will survive the next round of debt repayments.
Whilst I've been woefully wrong on my oil-rig investments so far, I have (and will continue) maintaining a 4% equity port position. I've moved down the risk curve where today most of my investments in this Idea are in COSL (has a CNOOC put) followed distantly by Transocean and then Valaris and Diamond Offshore. The thesis is still: Supply will be increasingly curtailed since no-one will build or finance an oil-rig in the foreseeable future and existing rigs are increasingly being scrapped. But long term offshore drilling Demand is stable due to the competitive cost structure therefore a reasonable return on capital should eventuate. The current covid-19 situation has accelerated the process so if one can find likely Survivors and pay an extremely low P/TNAV (e.g. most major oil-rig names today are still trading on single digit to teens heavily written down Price to Tangible Book Value). I believe patience will eventually reward this Idea with multi-bagger returns.
The pace, magnitude and quality aspects of this market recovery rally is worrying. Aside from Recovery Reversions, in many instances Investors are bidding up companies based on mere possibilities of growth and/or fair valuation decades out (looking at you Virgin Galactic and Beyond Meat). "Innovation" based investing is getting huge followings despite history telling us it's nearly impossible to predict variables such as competition, technology, consumer preferences for any extended time period. I'll get out of the way of Momentum but I know probability is on my side in expecting a fall when I see Dreams being valued by Votes and paid for in Gold. I may very well be wrong but without conviction and understanding, these were never my monies to make.
I'll continue adding portfolio protection, trimming systematic risk (e.g. big industry sector revaluations) and positions sizes where odds are no longer in my favor. Discipline and Planning are the best defense against the investment Unknowns.
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