Moram portfolio management 2Q22
Investment decisions

MORAM – Portfolio update 3Q22

Introduction 

The year in the markets has been complicated so far. The Nasdaq has suffered a 33.5% decline and S&P has lost 25% of its value. And we have the feeling that there will be more pain ahead on the road. 

The outcome of a global recession is assumed by everyone at this point. However, the most relevant thing is to pay attention to the decision of central banks. They have to achieve a balance between stopping inflation and not blowing up the economy by raising the interest rates.

The key point is that the main countries are in very different situations, and the decision of their central banks may pursue different objectives. Specifically, the United States, which is in a privileged position by the fact that the USD is still the global currency. As a consequence, the FED started to raise interest rates well ahead of its peers and has maintained the pace since then.

In fact, last week, we witnessed that as soon as the FED raised its interest rates and gives a more hawkish vision (arrive at 5% interest rates), the rest of the currencies cratered against the USD. Moreover, the bond market is blowing up and the arrival of the new PM and its politics in the UK is making investors lose their Truss in the GBP.

ECB bankers have to take a difficult decision. If they follow the FED and continue rising interest rates, it will blow up the government bonds in the peripheric countries of the EU at least. If they do not continue rising interest rates and FED does not pivot. The € will continue falling and Europe will import inflation as we are very reliant on imports. The key question here is when the FED will pivot. Until that moment, markets will probably trend downside. (There are severe macroeconomic implications in the long term if the FED pivot soon. We will publish an extensive article in October about the current historic moment for Central Banks)

The portfolio has performed well in this environment. YTD is 40.3% up. Moreover, our liquidity position is way above normal (20%) and we also have some short positions plus all the liquidity in dollars. All of these aspects are balancing our portfolio and allowing us to take advantage of the current market valuations.

We plan to continue executing our strategy on the current market conditions and re-orientate our exposition when the pivot happens. We continue overweighting the energy market, especially the weakest link (natural gas), protecting the downsize and overweighting liquidity in dollars.

Portfolio rotation in 2Q22

The 3Q22 was a quiet quarter on the acquisition side until the last two weeks. We added Vermilion Energy and IOG at the very last moment. On the other side, we sold Vertex Energy on earnings day and Elecnor. Moreover, we also reduced the Italian Sea Group and increased our position in Jadestone and Kistos.

Following our reflection in the 2Q22 comments, we diminished (almost completely) our exposition to Europe and its industrial sector (the most affected by the energy crisis) and raised cash. In August we witnessed the worst possible result presentation ever and as a response, we sold our stake in Vertex Energy. Although we admit that we are re-analysing the sector as we feel it is going to be interesting for some time.

In the second part of August and September, we analysed several companies in the natural gas sector. We took advantage of the stock market crash to deploy some part of the cash into Vermilion, Jadestone, Kistos and IOG. The energy market is broken, and as we have said in the past, it is going to take several years to fix it. On top of that, Nordstream 1 and 2 are damaged and maybe there are not used again. We think that the HUGE importance of this fact is not well understood by European citizens and global investors yet. If we thought that high prices would last for 2-3 years. Now we are talking about the entire decade.

Consequently, taking into account the adjustments done in the quarter. The portfolio on 30th September (ordered by weight) was: Kistos, Golar LNG, Jadestone, Adriatic Metals, Vermilion Energy, Serica, IOG and The Italian Sea Group.

Moram 3Q22 Portfolio update
Moram - Porfolio positions 3Q22

Comments about the companies in the portfolio

Kistos

Kistos continues as the first position in the portfolio. Our conviction in this idea is absolute and the 1H22 results only strengthen it more. European energy mess was expected to last at least until 2025 (Qatar, West Africa,.. supplies increment), but after the recent Nordstream events, we believe that is it going to stretch further. 

TTF has averaged €200/MWh in the last 3 months, and it is expected to remain unusually high in the next 6 months. After that, we believe that until 2025 it could be 60-120 €/MWh and then sit around 25-40 as the “new normal”. NBP has lagged behind the TTF but we believe that due to the lack of storage in the UK, it will catch up with TTF during wintertime.

Netherlands assets are performing well, maintenance was done in July-August. An infill drilling campaign to add around 2000 boe/d for the first months will be carried out in October. They want to bring to 2022 the maximum production as in 2023 & 2024 taxes will be higher. UK assets (GLA) are also overperforming (6300 boe/d) and they will start the drilling campaign soon. 

Uncertainty is surrounding Kistos as we are waiting for the new Netherlands taxes (higher than the current ones aligned with the EU vision of disincentive new supply and pillaging energy producers… Consequently, the management is working on different options (developing Orion (oil) in the Netherlands, buying assets in new Northern Sea jurisdictions, launching a Tender offer if there are no attractive M&A opportunities,…). The presumably good news is that this Friday the UE published its new energy taxes and it gives countries the option to choose if start applying them in 2022 or 2023. This is a crucial point as the Netherland already said that it will start in 2023. Consequently, that for Kistos means that the huge amount of money made in 2022, remains in Kistos.

Golar LNG

Golar, as an LNG infrastructure provider, is one of the main winners of the current natural gas crisis. This quarter, it has entered into a swap arrangement to fix the TTF bonus for the 50% of 4Q22, 100% of FY23 and 50% of FY24 at >$70/MMBtu (4Q22) and > $50/MMBtu (2023 & 2024). These prices were absolutely unthinkable in normal conditions (10 years average was $5-6/mmBtu). To put that in context, extra EBITDA for the TTF bonus will be $150MM. Furthermore, they will also receive the bonus for Brent and normal operations for Hilli and Gimi ($151MM/year starting in 4Q23).

As a consequence of the last hedges and corporate operations, Golar has almost de-risked. Currently, It is in a net cash position. The icing on the cake will be the announcement of new FLNG projects. We expect 1 before the end of the year.

In August, we published our analysis of Golar LNG with much more details

Jadestone

It has not been a good quarter for Jadestone. The oil spill in its main asset (Montara) plus the detection of another problem as soon as they resumed production has made them cut its guidance for 2022. Nevertheless, the decline of the GBP and the fact that all their business (including almost $200MM cash) is in $, makes their current market cap look ridiculous. We believe that Montara production will resume in 2-4 months. They will continue with M&A activity and maybe they expand a little its current buyback program. We took advantage of the share prices in the 70s to double our position. We wrote about the current Jadestone situation after presenting 1H22 results in this article

Serica Energy

Serica has been our best performing company this quarter. It received a takeover offer from Kistos in July but it was rejected. We see Serica as a different way to add exposition to European natural gas (NBP in this case). Serica is a much bigger, more mature and liquid company than Kistos (and IOG). We cannot see Serica’s share price increasing 500% in the next years as we see Kistos. However, the risk is much more limited and it has considerable upside potential. Serica is producing around 26000 boe/d and has £500MM in cash. Recently, in its 1H22 results, it announced that it was doubling its dividend. Furthermore, they will announce the results of their current exploration well (North Eigg) that if positive has the potential to transform the company landscape.

Vermilion Energy

Vermilion is a Canadian energy company that has considerable exposition to European gas. It is well diversified by product (oil & gas) and geographically (North America, Europe and Australia). The management is reducing debt, buying back shares aggressively and doing M&A. We published an extended analysis 15 days ago where we went through its assets, risk, valuation…

Adriatic Metals

Our mining company in the Adriatic continues working to start production in 2Q23. It is already fully funded and the Vares project advances in time. Furthermore, they are managing well the inflation pressures and the budget has not augmented significantly. It is also noteworthy to highlight that the price of silver and other materials has declined considerably from the spot prices used in their internal calculations to project the IRR. Nevertheless, this is one of the best projects out there and the economics are impressive even at current spot prices. Management is fully aligned with investors and has been buying shares when $ADT share price was <£1.

We will post the Adriatic analysis soon in the analysis of companies section

IOG

IOG is a £100MM market cap, natural gas producer in the North Sea. It follows a quite different strategy than Kistos, as, since its beginning in 2013, it has been developing its assets. Last March, its first two fields entered production (Blythe & Elgood). However, they have had a lot of problems and the production is around 30mmscf/d instead of 60mmscf (expected). This company has many catalysts in the short them (solve the problem in the current fields, start the operation in Southwark, take FID of new fields…) and as we believe that natural gas prices will remain high for several years, the current decline in its share price represents a good entry point for us.

The Italian Sea Group

Our only non-energy company in Europe. $TISG is one of the leading luxury yacht builders in the world. It made its IPO in June 2021 and this year acquired the legendary brand Perini Navi (Sailing yachts). The company has grown at a double-digit for the last 3 years. It is expanding into the Middle East and North America. Both its EBITDA and backlog have increased in the 1H22.

So, why have we reduced our exposition to $TISG? Well, its electricity bills are doubled and we believe that they are going to suffer to reach its targeted margins at the end of the year. We believe they are doing a great job, but we do not see enough catalyst in the short term. It is also important the fact that the market is penalising these industries which are heavy energy consumers. We will add shares again when we feel that the market situation improves for TISG.

Derivatives / Options

Golar LNG – We see Golar as the infrastructure business that has become. It has a very predictable income for the next 2 years (thanks to hedging TTF exposure). Consequently, we sold puts and calls and then buy them based on volatility. This strategy has reported almost 2% of the YTD this year. At this moment, we have sold puts at $20 and $22.5 expiring in Dec. (We have just bought the $30 sold calls that we sold when it was trading around $29)

TELL – Calls at $6 Jan 24 (Honestly, our faith in Tellurian is very limited. They are legacy calls from the starting of the war that we feel it makes no sense to sell for 2 pennies)

Vertex Energy – Calls $10, $17.5 & $20 expiring Jan 23. We will update you about the Vertex saga soon as we are looking at some of its peers. In the meanwhile, you can read our best-selling terror article

Global Ship Lease – Exposure with sold puts at $15 and $20 Dec-22. (The idea is to keep rolling. We see $GSL terribly undervalued (cash flows secured,..)

NMM – Residual exposure with sold puts at $25 & $30 Dec-22 (same than GSL, companies in the watchlist, terribly undervalue, keep rolling)

New Fortress Energy – We recognise that this is our favourite company. However, we are short on it. We opened a short position when traded at $60 and it is paying off. The volume is also considerable. We use it as a hedge for Golar exposition. Moreover, it has a bigger correlation with indexes than other of our shares, and we were/are quite bearish with the market in general. Bought puts at $40 expiring Dec-22 (We are publishing an analysis of New Fortress Energy next 15th October)

Baozum – The majority of our portfolio is energy-oriented at the moment. But, as soon as monetary policies change, we think that tech stocks will perform well. We do not know when it will be, so we are not buying equities. However, we think that buying calls OTM in stocks like Baozum is a good way of playing that possibility. Bought calls at $10 and $12.5 expiring Jan-24

Comments about crypto portfolio

We continue with the same strategy that we had last quarter. We have all our crypto exposition in Bitcoin. Bitcoin is holding quite impressively the $18000 support despite the Nasdaq decline. We believe that until the FED pivot does not arrive, Bitcoin & crypto are going to continue suffering. Consequently, we have increased minimally our exposition as we do not want to rush it before time (opportunity cost). We continue thinking that Bitcoin/Crypto will be much more prominent in the future, and we will focus again on it as soon as market conditions are favourable.

Comments about positions in ETFs / Index Funds

Our approach to ETFs/ Index Funds is to get exposure to regions or sectors we do not know as well as the ones we invest in the managed portfolio. Specifically, Southern Asia and Tech.

  • Ishares Developed Real Estate Index (25%)
  • MyInvestor Nasdaq100 (30%)
  • Vanguard Emerging Markets Stock Index (25%)
  • Ishares MSCI India (20%)

Our position in Index Funds is quite small compared to the managed portfolio.

Final thoughts

So far, the year for the portfolio has been good. We made some mistakes in the second quarter, but we are happy enough with our performance in the 3Q22. We believe that the months ahead are going to be tough, especially in Europe. Energy security has become the first priority for western countries. Europe has adopted politics to subsidise demand, instead of investing in supply. Consequently, we think that energy is going to be expensive for a foreseeable future. Moreover, China is going to full reopen soon and OPEC+ is going to tighten the market as much as possible.

Hence, we also expect inflation to continue higher than usual. At this point, it is crucial the decision of central banks regarding interest rates and monetary policy. It would be difficult to argue that at >10% CPI, the ECB stops rising rates. Nevertheless, the European economy is so weak that the debt of some countries would start to break if they rise rates with determination. Otherwise, Europe will import inflation because of a weak Euro.

We continue with the bet of the year, Short Euro, Long European natural gas. As we think that it is going to be quite profitable in the near future. We feel comfortable investing in energy which has been the main sector in our portfolio since 9th November 2020 (vaccine announcement day). We have analysed a huge number of companies and industries within the universe of the Energy sector to play in this market circumstances. But now, we are starting to analyse different types of companies for whenever the Pivot comes to be ready. As we see that prices are getting interesting in other sectors affected by the crisis. It can be in several weeks, months,… who knows. However, as we said in a recent interview, we cannot know how will be the situation we face in the future. Nonetheless, we need to have a plan for it, and we are working on it.

Thank you for reading,

Carlos

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