Introduction
What a quarter and first part of the year… S&P500 had its worst performance since 1970 and the Nasdaq100 lost more than 30% in this 1H22. The main drivers behind the numbers are the data about inflation released in the last months across the world and the generalised feeling that after this summer, the economies of a significant part of the world, mainly European countries (emerging countries are already there), are going to suffer a lot.
So far, we have navigated decently this first half of the year, achieving a YTD >25%. However, we think that the second part of the year is going to be challenging. We believe that because at this moment there are two narratives in the market. Both of them make sense, but cannot provide good results at the same time.
On one hand, in recent weeks, the market is starting to believe that the FED can beat inflation (since the last 75 bp hike). The direct implication of this is to fall into a recession. Typically, growth stocks perform better in this environment.
On the other hand, there is a huge Energy crisis across the world due to the lack of supply because of the underinvestment in the sector in the last years. And we believe that due to the enormous imbalance between supply and demand (increased due to sanctions over Russia), it will take several years for this market to balance (even taking into account the incoming recession)
Our take on facing this situation is to play the Energy crisis narrative but focus (as we have been doing the last 2 years) on the weakest link, the natural gas. It means that we are not going to overweight the oil sector. At the same time, we want to have an exposition on growth stocks. Instead of buying equities, we are taking advantage of volatile days to buy calls with low strikes and long-term maturity. Probably we will use a similar strategy with upstream oil players.
Portfolio rotation in the 2Q22
This 2Q22 has been a quarter with a lot of rotation in the portfolio. We added 4 new companies: Vertex Energy, Serica, Italian Sea Group and Elecnor. We exited Power Reit, GSL and Greenalia. Increased Kistos & Adriatic Metals and diminished Golar.
Following our reflection in the 1Q21 comments, our first move to sell Power REIT was because of its last movements (resignation of a board member, new deals at much lower IRR than in the past, stranger things with the other CEO’s company,…). We also took advantage of Golar prices to continue reducing our position. In May, we received the takeover bid for Greenalia at €17.5. Lastly, in June we sold our entire GSL position as it was not performing as we expected and we had more conviction in other ideas.
We deployed the proceeds to buy Vertex Energy quite aggressively (stocks and call options way out of money with dates after the release of its first earnings with the new acquisition). We used part of the money obtained from Greenalia to buy Elecnor and maintain the exposure to the Renewable sector. Later in the quarter, we bought The Italian Sea Group, a luxury brand quite penalised due to Russian sanctions (as everything in the luxury sector). Our last acquisition was Serica Energy, another natural gas producer in the North Sea, to take advantage of the natural gas prices and on the expected NBP rally later this year(specifically).
Consequently, taking into account the adjustments done in the quarter, the portfolio on 30th June (Ordered by weight) was: Kistos, Golar LNG, Vertex Energy, Adriatic Metals, Italian Sea Group, Jadestone, Elecnor and Serica.
Comments about the companies in the portfolio
Kistos
Kistos has become our first position in the portfolio. The share price has been trading in the same range during all the 1H22 in spite of making 35% of its market cap in net earnings in this period (yes… numbers are correct in the last sentence).
TTF is around €150/MWh in July (ten times the historic average) and it seems that it is not going to change soon (we think that the problem will persist -at least- until 2024). We expect Kistos to close the deal with Total in the next 2 weeks and 1 more deal to be announced in 2H22.
Kistos approved in the AGM the option to buyback 25% of the shares. The first option is to find some new deals, but they leave some space to increase the share price in the meanwhile. These buybacks would start in 4Q22 as they need to have enough cash to fulfil the bond covenants. However, we prefer them to make a new deal as we believe it would be much more accretive for shareholders, leaving a bit of space for the buyback option.
It is noteworthily to highlight that the UK increased from 40% to 65% its taxes to the benefits of oil & gas companies from 26th May 22. At the same time, it increased the tax relief to 91p per 100p invested in CAPEX. The main consequence of the increment is that Kistos will be more interested in buying some assets (operating) with some CAPEX to spend. And also, that the price of the assets should be cheaper (taking into account the effect of gas prices)
Golar
Golar LNG is not our first position for the first time in the last 18 months. We have continued trimming our position in the $25-26 range. That is because we see in Kistos and Vertex a bigger opportunity than in Golar. Nothing more and nothing less.
We think they will announce Perenco’s T3 utilisation increase in the next few days (before 31st July – as it is the deadline). IF there is not a utilisation increase (which would be terribly profitable with these TTF prices) we would reduce considerably our position.
The announcement of the BP FLNG looks like it is going to be delayed until 1Q23. There is another integrated project that is expected to be announced in the next months.
In the meanwhile, Golar continues to receive 100% of the Brent bonus and around $20MM from the
Vertex Energy
Vertex Energy has become one of the main positions in the portfolio. We recently published an analysis of the company and the huge opportunity we see in it. In a nutshell, Vertex was a microcap which managed to acquire a 75.000boepd refinery from Shell at a bargain price. On top of that, because of the gigantic supply-demand imbalance in the refining industry and the consequent high prices, Vertex has paid for the acquisition only in a quarter (2Q22).
Furthermore, they are working to add 14kboepd of renewable diesel from 2023 which will increase considerably its already high profits. Here we are talking about a stock trading <2 EV/EBITDA23 in the middle of a major refining crisis that we expect to last several years.
Adriatic Metal
Adriatic Metal’s share price has suffered considerably this quarter. Commodity prices have declined in this period and the market sentiment is just horrible. However, Vares continue on track to start producing in the 2Q23 and its CEO has taken advantage of the lower share price to continue buying shares.
Jadestone
Jadestone has had a discreet quarter despite being very profitable due to the oil prices. Moreover, its Montara field suffered a minor oil spill and was closed for 2 weeks. Fortunately, Jadestone managed this incident well and the field was only closed for 2 weeks.
Jadestone is pilling cash, it should have close to $200MM. It has recently approved a buybacks programme and its CEO has said that he expects 4 M&A before the end of the year. We believe that this is quite unprovable, but we think that there will be some movements. On top of that, Maari’s resolution is still expected in the next months… IF/When this happens, it would be a huge catalyst for the share price. In the meanwhile, Jadestone is producing around 16000boepd and obtaining Brent Premiums on top of the high oil price.
The Italian Sea Group
Italian Sea Group is a company which builds luxury yachts and sailing boats. It made its IPO last summer and the sanctions over Russia have impacted the entire sector (Russians are wealthy enough to impact the luxury market). It took advantage of the IPO proceeds to buy a competitor and double its expected EBITDA from 2022.
Serica Energy
Serica Energy produces natural gas in the North Sea (Around 28000 boepd). Its gas is priced at NBP. We believe that it is an interesting company as due to the limited storage capacity in the UK, NBP prices are going to converge with TTF prices in Q4 due to the tightness of the market (Russia diminishing the exports and Freeport stopped for 3 months).
Moreover, Serica has around 60% of its EV in cash. It is looking for some M&A and starting exploration of a medium risk-high reward area next to current producing wells in this 3Q22.
Elecnor
Elecnor has been the natural substitute for the Greenalia investment (but in a significant minor %). Its business consists of two parts, one mainly focused on maintenance which has small margins and the renewable energy company. We believe that this last part is not reflected in the valuation. They are looking for a partner to sell 49% of the stake and be able to finance its expansion (they already have 1300 MW producing). We expect a re-rating happening with this news soon.
Derivatives / Options
Penn Virginia / Ranger Oil – After the elevated exposition to the derivatives of this company in the last quarters, we have not had any new activity in the 2Q22. The remaining sold puts for July are about to expire out of the money (strike $22.5)
Golar LNG – We had some legacy puts with strike at $10, which expired way out of money in Jun 22. We also took advantage of the volatility to sell some puts strike $20 and $22.5 expiring in July and Sep
ZIM – Some puts strike $40 which expired Apr22.
TELL – Calls at $6 Jan 24 Apr22
Vertex Energy – Bought calls $17.5 & $20 expiring Jan 23
Global Ship Lease – Residual exposure with sold puts at $25 Sep-22.
NMM – Residual exposure with sold puts at $30 Sep-22
Baozun -Bought Calls strike $12.5 – Jan24
Comments about the Crypto portfolio
This quarter has been hell for Crypto, we converted all our positions into Bitcoin, and we sit there for the Crypto winter. We will continue adding some exposition if, as we think, we have opportunities to buy lower and increase our exposition to cryptos. The plan remains the same, Crypto exposition to be around 10% of the total portfolio
Comments about positions in ETFs/Index Funds
We maintain our position in all the three funds we had at the beginning of the quarter
- Ishares Developed Real Estate Index (40%)
- MyInvestor Nasdaq100 (35%)
- Vanguard Emerging Markets Stock Index (25%)
We have increased our position in the Nasdaq 100 following the strong declines in May-June
Final thoughts
It is a challenging year to be managing stocks. So many different narratives and the stock market
We think that the world and mainly Europe is going into a recession. And we also think that the unfortunate decisions that have been taken related to the Energy sector in the last years are going to entail a global energy crisis (next level from where we are now).
Consequently, we are positioning ourselves in critical parts of the energy sector which we believe are going to remain stressed for several years. This will make the companies of these industries to be cash machines for a considerable period.
In aggregate, our bet is mainly concentrated in three positions, Kistos (Natural gas in Europe), Golar (LNG infrastructure) and Vertex (Refining). We believe that the current situation is very profitable for the three of them and it can allow us to obtain a much higher return than the S&P500. But proper management requires being open-minded, and if we see that the environment changes, we will rotate our portfolio accordingly.
Thank you for reading
Best,
Carlos
