Rewind the clock almost two years…
Analyst: For fuk’s sake Kuppy. Stop buying more Shitridge.
Me: …but it’s sooo incredibly cheap.
Analyst: Who cares? You said that five dollars ago. It wrecked our 2019 and it’s already wrecking our 2020.
Me: Our only edge in this game, is to buy more when it transitions from cheap to downright stupid. It’s rare, but occasionally, something gets so stupid that there’s literally risk-free money on the screen. If you’re not willing to buy as much as you can at that moment of peak stupidity, what’s the point of investing?
Analyst: Sure, but no one cares about energy. Shitridge trades at half of cash because no one wants to go anywhere near this sector.
Me: That will change. I don’t know how or when, but it will. It always does. Until then, the cash will keep building up…
That was the spring of 2020, when they couldn’t give the thing away, yet I had a bullish view on natural gas. Today, Sandridge (SD – USA) has a respectable valuation. I clearly got the initial investment horribly wrong and completely bungled my thesis—but no one could have predicted that they’d light $200 million (or roughly $7 a share) on fire in Colorado. Even with them destroying more than half of the company’s value, there was enough residual value that it was hard to lose. Especially as I turned wildly bullish on natural gas and NGLs. Under new management, they stopped improperly drilling uneconomic wells, they cut costs to the bone and then capitalized on the first natural gas recovery in ages. In the low $1s, the shares were just stupid and I’m glad I positively maxed out the position. Here at around $10, I’m less sure of the correct valuation at Sandridge.
What are SD shares worth? To start with, there’s well over $100 million in net cash. In fact, net cash likely makes up almost half of the market cap. That offers a lot of downside protection. In terms of upside, I think there’s a reasonable case that the shares can be worth well north of $20 if gas prices stay elevated, but there’s also a reasonable case that the upside is far less should gas prices decline from here. I passionately hate resource extraction companies, especially ones with a bunch of cash, looking for something to spend it on. In my mind, there are two sorts of investment opportunities; compounders, where the value increases each year, and static valuation companies where the shares swing wildly around a valuation that rarely actually changes. Resource extraction companies are usually in the latter category. I like to buy them when absolutely hated, and sell too soon on the way back up towards fair value. I rarely hold when it gets near fair value.
As I looked at the Ponzi Sector detonating this month, I realized that in a sector dislocation, there are bound to be interesting opportunities as people get margin calls. I’ve always believed that holding excess liquidity is vital for when an interesting situation pops up. If nothing pops up, increased volatility ought to increase returns in the Event-Driven world. With that in mind, I decided to build up a bit more dry powder and booked all of my Sandridge. I think I sold it cheaply, but it’s hard to sit there with what’s seems like a potential double, when I think other opportunities are bound to be far more interesting in the near future. After nearly a ten-bagger from where I bought most of mine, a residual double just isn’t that interesting. The easy money here seems to have been made.
Returning to the narrative; Sandridge went against me and I averaged down a bit. When they were absolutely giving it away and the price seemed insane, I nearly bought a filing position. I had a decent win on SD, even though my initial thesis was wrong after Icahn made a rare unforced error in capital allocation. When he corrected the error and changed management, I was relentless in my buying.
In value investing, your strongest edge is never going to be analytical ability. Rather, it’s your ability and willingness to average down when the valuation makes no sense. Far too many investors get fearful and miss the bottom. Or worse, they panic and sell the lows because they assume that other investors know something that they don’t. As the Ponzi Sector collapses, it’s worth remembering this fact. I’m sure there will be some great opportunities coming up.
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