I know the commodity space is run by guys who care little for shareholder value. I guess holding down a job in a boom/bust industry is tough, so managers do what they need to do by smoothing it out at the expense of the shareholder. And yet, I still got taken.
Even at the current level of oil prices, Gear Energy (GXE) generates a good amount of cash flow from operations, with minimal capex requirements, such that it traded at a mid-single digit EV/FCF. They lose money on an income basis, but all of those investments were already made; adding back depreciation to earnings results in decent cash flow.
Moreover, management talked a good game about how it was able to maintain production at the current level of capex, and repaying debt with its cash flow. This is exactly the kind of situation I love: a down and out industry, a low multiple, and sustainable cash flow being applied to lower the multiple even more. I was ready to ride this company into better times, even if they were years away.
But management apparently doesn't want to shrink the business. The company decided to spend most of its operating cash flow in order to increase production 6%. Despite oil prices falling through the floor, they decided to embark on an expansion program! Who expands when they are losing money?! Also, who expands when the price of the stuff they are selling is falling through the floor? If everyone behaved like this, oil prices wouldn't be cyclical, they'd be zero. "Oil prices are falling you say? Let's double-down on production!!"
Well, good luck expanding though, right? Because who is going to finance this expansion? The bank wants to reduce its exposure, so it wants the company to keep paying down the loan, which is fine by me! Well, management decided to issue shares, diluting current shareholders, in a private placement at a discount to the market price! Of course, they could have offered rights to current shareholders to raise the equity, but decided to issue the shares to a single party instead, with management tagging along as well.
Needless to say, with these actions the share price took a ginormous tumble. I feel shame. I know this industry behaves like this, and I still fell for it. I'm a big believer in the adage that a fool never learns from his mistakes, an average person learns from his mistakes, and a wise man learns from the mistakes of others. I can do no better than average now in this situation. Now I have to improve my process such that I don't end up as a fool.
Does anyone who saw this coming know what I could have done better? I have some ideas but they are not foolproof, which is probably the minimum of what I require.