Introduction / summary
This 3Q21 has been quite volatile. After having a great first part of the year, we saw significant declines in July. However, our companies have performed well since the end of August and the managed-portfolio moved 12% up in these three months, extending the gains of the year.
The best performers of this quarter have been Power REIT, Kistos, Adriatic and Greenvolt.
After the worst months of Covid, where the lockdowns and other restrictions caused that industries were not operating at the run rate, the economy has reactivated again in the last months. And it has done it faster
We have witnessed major problems with containers and other shipping industries throughout the year. And now we witnessing the problem related to energy.
The Energy industry was heavily disrupted last year because of Covid. Oil (WTI) prices went negative and the companies suffered a major shock. Contingency plans were laid out around resiliency. This means stopping CAPEX and reducing any type of exploration. This fact along with some years of ESG enhancing, have brought us to the point where we are now. There is not enough supply for the higher than expected demand. And it can take time to be fixed.
Consequently, we are very bullish on the energy sector which is overweight in our portfolio and to the shipping industry, where we have exposition through derivatives in a more conservative way. Apart from these two sectors, we maintain some good companies which we believe will continue compounding the coming years.
Our portfolio is not very correlated with the main indexes, as we concentrate it in small companies and mainly energy sector, due to the current macroeconomic environment.
Portfolio rotation in the 3Q21
During the period, we added five new positions, Greenvolt (IPO), Kistos, Tellurian, New Fortress and Penn Virginia. On the other side, we exited Bonanza Creek, Repsol and Facebook.
Facebook was the last “pandemic” trade that we had. Large company in the tech sector, with moat and growing aggressively. However, as we explained in previous letters, we believe that in this scenario, small companies in other sectors can have a better performance.
We also closed our position in Bonanza Creek after it more than double its value in 7 months. It is a fantastic company which closed 3 acquisitions in the last year and it needs time to adapt to its new reality. Apart from that, the production decline and the hedges it had diminished its potential.
Last, we closed our position in Repsol but we sold puts in the €8.5-€9 range. We did this as we believe that Repsol is hugely undervalued, but we prefer to have the money in other players which have more potential to play in the current energy market.
Our exposition in Italian Wine Brands was halved due to the combination of two factors, the increase in utility costs in Europe which will diminish its margins and the fact that the stock increased more than 80% since we bought it. We decided to hold some shares as we believe that it is a fantastic company which will continue outperforming the market in the long run. However, if the energy situation continues more than expected, we will assess the situation again.
We were lucky and expanded our position (again) in Golar at $10.6 and in Greenalia (several times) in the 12-13€ range. In Greenalia we sold a small part of our position after going up 50% in a week without any news at the beginning of September.
Portfolio as of 30th September: Golar LNG, Greenalia, Power REIT, Kistos, Greenvolt, Adriatic Metals, New Fortress Energy, Penn Virginia, Tellurian, Italian Wine Brands.
Comments about the companies in the portfolio
Golar LNG continues as the main position of the portfolio. Moreover, we took advantage of the slump in the shares in July to sell a significant amount of puts with strike in $7.5 and $10 for October, January and March.
We feel quite optimistic with Golar in the current environment. It is obtaining a significant Brent bonus ($2.7MM for every $ Brent is higher than $60) and it is set to start getting the TTF bonus from January-22 (3.2MM for each MMBtu). Moreover, Perenco is drilling 4 wells, instead of the 2 initially planned, so maybe Golar gets more utilisation of Hilli T3 even in 2022.
Furthermore, shipping rates are improving and in 2022 it will start to take advantage of vessels on spot. In parallel, they are finishing the arrangements with banks and a Norwegian company to sell the shipping segment. Having these LNG shipping rates and the perspective of 2022 being a good year, they can make some money with this trade.
Gimi date is getting closer, and there will be a new FLNG with BP at some point in the future.
We see a significant upside in Golar shares from here based on commodity prices, shipping rates/negotiation and Gimi getting closer. Anything on top of these 3 things will be welcome (Even NFE shares coming back to ’40s)
Greenalia is having quite a bad performance this year. The next 6th October they present results of 1H21 and they should be much better than the guideline due to high power prices. This quarter they have also announced that they are entering the US next year.
We expect the release of the new strategic plan 2022-2026 in the coming weeks. It should give more colour to the listing in the secondary market (still a bit sceptical on how they will do it at this market cap) expected for 2022, talk about its plans in the US and show more advance of the current projects as the slow pace that Greenalia is having to finish new projects is testing the patience of shareholders.
After the 1H21 conference call and the Spanish auction of 16th October, we will publish our takeaways and update our thesis.
Power REIT has performed quite well this quarter. This company is taking advantage of the cannabis situation in the US. As cannabis is not legalised at the federal level, financial companies have so many restrictions to finance projects in this sector. Power REIT is signing almost a deal per month (>19% IRR), and taking advantage of the situation. Recently, it signed its biggest acquisition in Michigan ($21MM), increasing its FFO to $3.6/share. The company is very small (€160MM) and has the potential to be a multi-bagger in the coming years. We plan to close monitoring the company and the sector as the growth story can change rapidly if cannabis is legalised at the federal level and more financial institutions can compete against PW in the deals they are obtaining.
Adriatic Metals is a mining company in Bosnia, which has an incredible deposit, starting its operations next year. We liked Adriatic for several reasons such as the legislation in Bosnia, the quality of its mines, the discount it had. Overall, the asymmetric opportunity that gave as the trade. We increased our position this quarter. They are developing its plan and the stock is performing accordingly. We believe that at some point, they will be acquired by a bigger company at a premium.
Italian Wine Brands was the star of the 2Q21 and it has had a very quiet performance in the 3Q21. We suspect that it is going to be impacted because of the increase in the utility bills in the next months. And after its huge revalorization, we decided to reduce our exposition, looking to allocate that money in the energy sector.
We continue believing that the company has a fantastic management team, it is well-positioned to continue growing (organically or inorganically) in the long term, and we believe that the synergies with EnoItalia are significant. These reasons make us hold some shares and we will reassess our exposition to this company in the coming months.
New Fortress Energy was our best position last year and we held it until the 1Q21 this year. We decided to buy it again when we saw it at $30 as we believe they have an extraordinary project. Fast LNG is a game-changer in the industry. However, high gas prices are affecting its share price considerably. We have decided to hedge it for the next 6 months. Brazilian projects should come online next year, and starting in 2023, they have big contracts in Brazil which will make them obtain amounts close to $1000MM EBITDA in 2023.
Tellurian is a bet on the gas prices and the ability of Suoki of building the Driftwood project. It is the smallest position in the portfolio, We believe that after securing 9 MTPA out of the 11 that they need to build phase 1, they will do the FID in the coming months. The current gas prices will help them to bring onboard new potential clients and make some money in the short term. However, they need to buy some peers in Haynesville and this is going to be expensive in the current environment. Lottery tickets in a sector we know well.
Penn Virginia has also been incorporated in the portfolio at the beginning of September. We had analysed this company previously in February and we had sold some puts during this year. It is a company backed by an Energy PE that has recently acquired Lonestar Resources. We like the hedging criteria they have, and their balance sheet as it is levered enough to play in this market but without huge debt to get into trouble if there is a small reversal in the WTI(LLS) price. We will hold the security as long as we see that the oil market is strong enough.
Analysis of all the companies in the portfolio here
Derivatives / Options
Penn Virginia – Sold puts $10/12.5, expiration Dec/Mar)
Golar LNG – Leveraging… (Sold puts $7.5, $10, $12.5 expiration Oct/Dec/Mar)
NFE – Bought puts at $25 expiration in March
NMM – Sold puts at $17.5, $20 and $22.5 expiration in December
ZIM – Sold puts at $30 and $35 expiration in December
TELL – Sold covered calls at $6 and sold puts at $2 expiration January 22
REP – Sold puts in 8.5 and 9€ expiring in June 22
Comments about the Crypto portfolio
This quarter we have continued increasing our exposition to cryptos. The weight of crypto in the total portfolio went from 4% at the end of June to 7% as of 30th September. We increased our position in BTC and ETH, and we also added Matic- Polygon, which is a layer 2 to escalate Ethereum. Matic is growing exponentially and each day they are announcing brands to join them to launch NFTs or use its network. We also have a non-significant position in Solana and Polkadot.
We like asymmetric bets, and we are following carefully the advance in the crypto universe. However, we are not looking at prices. We are focus on how the number of apps and developers are growing exponentially in the last months almost in any main project.
Dolce Gabanna, Visa, Vogue, Coca Cola, Asics, Tokio Olympics, EY, Suisse Postal Service, NBA… the list is of big brands going into NFTs or other forms of crypto is endless. We believe that we are in a similar situation as the internet was in the mid 90’s. The main difference is that now you can invest in the technology and not only in the companies.
Apart from the hype around cryptos, we believe that it can be one of the biggest asymmetric opportunities in a lifetime. We continue studying crypto and trying to gain a better understanding of it.
Comments about positions in ETFs/Index Funds
We maintain our position in two out of the four Index funds we had at the beginning of the quarter. We decided to sell Ishares Pacific ex-Japan Equity Index and allocate this money in crypto. We also decided to diminish our exposition to small caps and allocate that money to the Nasdaq 100 (Due to the concentration of small caps in the managed portfolio and the bigger size of the managed portfolio compared to the Index funds)
- Ishares Developed Real Estate Index (45%)
- Myinvestor Nasdaq 100 (27.5%)
- Vanguard Emerging Markets Stock Index (27.5%)
Funds have performed well this quarter with the exception of Emerging markets due to its exposition to China.
So far, it has been a very good year for our portfolio, and we believe that in the current circumstances, we can beat the market again in the 4Q21. However, it is a little scary the approach to rule the economy that central banks are taking. Inflation in real assets is skyrocketing (Commodities, Real Estate…), and as we stated in the introduction, there is a potential energy shortage due to the lack of investment in the previous years plus the return to previous demand levels due to the reopening of economies. We do not know how “transitory” it will be. Fiat currencies are losing all their value. There is a huge structural problem related to the debt that countries cannot pay if interest rates go up, but they need inflation to receive higher taxes from citizens. And as the technology is making the world deflationary as well as the ageing population, the system needs some money printing to continue working…