Portfolio Update

I sold out of GSL and HNR recently. My thoughts …

GSL has been a great ride. It was a 80% return in less than 3 months of holding. The position to begin with was a small position, so even with it up 80% it wasn’t a huge size. More importantly, GSL is a distressed situation opportunity. The price we bought it was very cheap compared to the long-term contracts and potential of restarting dividends in 12-24 months. Anyways, the main reason for selling was in this market there are many opportunities to buy great businesses that can provide very good long-term results. GSL is a distressed situation with a business model that is not that great. I would rather be owning a good business.

A few weeks ago, HNR announced they were filing for potential dilution of upto $75M. More importantly this is a clear sign that their sale of Venezuela assets is unlikely to get approval from government. After this announcement, I decided to sell out of the investment.

The investment thesis was dependent on monetization of assets or production from prospects outside Venezuela. The lack of dividend and what looks to me like a potential difficulty getting the VZ gov’t to approve the sale of assets has put the company in a cash hungry position. As for production from prospects, it is likely to happen but the cash required will mean much dilution.

In the end, the HNR investment was a 32% loss. Although this doesn’t represent the whole picture. HNR was a much bigger mistake and a huge loss. I held the shares for about 4 years. In the past 4 years, I have nothing to show but a loss. Also, in these 4 years I had plenty of amazing investment opportunities. I invested in many and the portfolio benefited from it. Although having capital invested in HNR meant I had less capital to invest in these ideas. So the opportunity lost by being invested in HNR will show how much bigger the loss was.

Hugh Henry said one of the biggest mistakes investors make is procrastination. HNR was a definite mistake from this laziness. There were many signs in the past few years that HNR was a bad investment. Although I gave management too much credit to stick with this investment. In 2011 when HNR sold its US assets, my gut feeling was to get out of the investment. Although I gave the management credit of doubt and stuck with the investment. In hindsight it was a sign that the company was stuck in a situation where it had to sell valuable assets to turn prospective assets into something worthwhile.

Berkowitz mentioned one of his checklist items is whether the company depends on the kindness of others. HNR is clearly dependent on the kindness of a government that most individuals wouldn’t want to be associated with. When a company can’t have access to its own cash flow, it is best to not count on the cash. It is like a guy who is behind bar for life but is married to the most beautiful woman in the world. You might have the best assets in the world but in a situation where you can’t enjoy it.


2 responses to “Portfolio Update”

  1. I’m surprised you sold out of HNR due to your perception of the shelf. As was made clear by management, the shelf CANNOT be accessed as long as the company is in possesion of confidential information relating to a potential sale of its’ assets. Hence it cannot be used currently. Furthermore, management has made clear that the filing was in no way affected by the quality of its ongoing talks to sell its stake in PetroDelta as is merely an additional tool to raise capital should the sale fall thru and PetroDelta continues to not pay out its stated and declared dividends.

    I’ve been investing in numerous special situations over many years but HNR is by far the most controversial name I’ve covered. Please take a look at my research on the name (available on littlebear.us) as we recently took a large position in it and have publically put out our thesis on Harvest.

    -Zachary Prensky

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