Thursday, May 10, 2012

Clubbing With Energy

I know at least some of you have an interest in joining the Value Investors Club, because readers have periodically asked for my advice on how to join. I'm not a member, nor have I ever applied, but that doesn't mean I can't help!

Frequent commenter "aagold" informed me that he was accepted into the club yesterday, thanks to this write-up. Potential candidates should check it out (apply online)! Even for those not interested in joining the club, however, the write-up may still offer you a potential buying opportunity for your own portfolio.

Myself, I don't love this particular idea. Frequenters of this blog know that I don't love valuations that rely heavily on commodity price assumptions (which aagold calls an irrational position). Price assumptions aside, I have even less confidence in the liquidation value estimate of the company considering some of the cost of liquidation assumptions.

But, who am I to judge? Only you can judge what makes sense for your portfolio, and obviously the idea is well-liked by the people at VIC (no surprise there, as the grass is always Greenblatt on the other side). So check it out for yourself.

Disclosure: No position


Chasing Bruce said...

coincidentally VIC sent an email to members yesterday that had some details on the selection process. Less than 7% of submissions are accepted for membership, so the ideas are legitimately high quality for the most part.

Anonymous said...

Thanks for the post, Saj.

I want to be sure I understand what you meant by "Price assumptions aside, I have even less confidence in the liquidation value estimate of the company considering some of the cost of liquidation assumptions".

What cost of liquidation assumptions are you referring to? One thing I know we talked about in our email discussion is capex and opex cash outlays required to run an oil/gas asset for cashflow and just let it deplete. In our discussion you asked what my capex assumptions were, and I answered $0, while acknowledging that there would be at least minimal capex required for things like major well workovers and maintenance capex for processing facilities. But my understanding is that those "maintenance" capex outlays are generally assumed to be very small in the O&G industry, and that's why they're approximated as $0 by the 3rd party evaluators when they compute the PV10 of the Proved Producing reserves. In other words, it's not like I chose to make that assumption myself - that's the industry-standard assumption.

Is this issue what you were referring to?


Anonymous said...

VIC is as tough to stay in as get in. Not only do you need to get accepted with a high quality write-up, but you need to have enough other members vote for your idea to count it towards your 2 ideas per year. My first entry was accepted, but few members cared about it (micro-cap liquidation story), so it doesn't count! So I still need to write up 2 new ideas this year that will get some votes, which means I can't just identify good micro-cap values, I need to come up with something that others will be interested in.

Anonymous said...


I didn't realize that was the rule. I know you have to have at least 4 (or maybe 5) people rank your idea in order for a ranking to show up next to your idea, but are you sure your idea must be ranked in order for it to be counted towards the two-idea minimum? Because as of right now, only 3 people have ranked by idea.

- aagold

Saj Karsan said...

Hi aagold,

Yeah that's right, combined with the fact that the company is unable to keep it going without substantial capex.

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