2017 was a crazy year. The S&P500 index has been on a tear the last 8 years. And 2017 wasn’t any different. The market ended the year up 19.41%. For the last 9 years, the index has been averaging 14.13% annual. Historically the index has returned approximately 10% annual since 1928 to 2014. So the last 9 years have been extremely bullish. We don’t expect the index to give this type of return going forward but with the low interest rates and herd mentality, I don’t expect things to correct anytime soon.
My portfolio returned 139.91% in 2017. The year was largely impacted by 5 very large returns. The knew these companies were cheap but we didn’t expect this type of return in a short time period. The big winners were HemaCare (215% return), Bewhere Holdings (300%), Petro River Oil (268%), Total Telcom (110%), and Valeura Energy (253%). Out of these 5 holdings, we sold out of all except Valeura.
We ended the year with 3 position on our portfolio. We sold out of all other positions as I believe these 3 positions have huge upside potential in 2017. It was hard selling some of our holdings (HemaCare and Schmitt) but I think the current positions have huge short-term catalyst.
Current holdings:
Valeura Energy (VLE): This is our biggest position. The company’s first test well with the Statoil partnership has been a success. The results from the well are much better than management had expected. The market rewarded the stock price by moving it up more than 7x in the last 2 months. But I think this is just the beginning. The main reason is institutions still haven’t started buying up the shares. Also even after the 7x run-up, the company is still valued very cheaply. The company will have a resource update in late January, which should be a major catalyst to get other aware of the company and the asset they own. I think the most likely outcome for this company is a buyout and it is likely to happen in 2018.
Unidentified company #1: This is a company that we became aware of by looking at insider buys. It is very rare that I see the type of buying from the CEO that I saw for this company. After digging around on the company, I initially didn’t find much that would shed a light on why the CEO is buying. But then following the press releases the company put out it started to become clear the company has some special assets that is making the insider buy. Digging around online it is easy to see which asset it is. This is a sub-$6M market cap company with an asset that is likely worth in the billions. From the press releases it seems clear the company is likely to sell these assets. Again we see this as a short-term catalyst that should have great rewards for shareholders.
Grande West Transportation (BUS): This company I’ve followed for the last 2 years. I knew the story but never got that excited by the valuation. But in late 2017, I noticed couple of things that lined up perfectly and made me build an initial position. The insider buying on this one is huge. Over a year ago, insiders had buying when it was selling at fraction of the current price. Even after going up multiples, insiders didn’t stop buying. The constant insider buying and that too multiple different directors, made it very appealing. The company also has been a huge success in Canada and has recently entered US market. The upside from the US market is huge and they have the right product to win this market. If successful, the company can easily be worth multiples. Also I expect the orders from US to start coming in early 2018. Finally, in late 2017 the stock dropped from $3.45 to $2. This created a great opportunity to start a position. (Recently I sold out of BUS. I wanted the capital to allocate to VLE due to the recent pull back in VLE).
Although I’m concentrated in 2 plays (VLE and Unidentified #1), I feel that the risk is extremely low that I can lose. I think both of these companies are extremely cheap and once the market becomes aware of what is happening, the stock will be worth multiples. Also, I think the catalyst is in place for the market to wake up in early 2018. I feel like the biggest risk is me doing something stupid, like selling too early. Although 2017 has been good, I think 2018 is likely to be even better.
12 responses to “2017 Performance”
Highly agree with your assessment of Valeura Energy. Like your fund, I have been overweighted for a couple of years, now with the price increase and even taking a small % out to cover my entry costs it is by far my largest holding. Hoping your wishes for a great 2018 come true
Is your undisclosed investment a Canadian or US company? Is it oil & gas sector similar to Valeura or more traditional resource sector being precious metals? Your Valeura investment turned out to be a major hit so I am trying to figure out what your other major hit is!
It is a Canadian listed company. Not oil and gas, it is a traditional resource/metals company.
Is the Company Orocco Resource?
Great blog! What do you think the intrinsic value of Valeura is at this point? It’s currently has a canadian market cap of 264. Falcon Oil, which is comparable, has a market cap of 288C. Is Valeura that much more valuable than Falcon?
Lots of differences between Falcon’s Australian asset and VLE’s Turkish asset. But here are couple of reasons why I think VLE is worth lot more than Falcon:
– Falcon owns 30% WI whereas VLE has 50%
– Falcon needs to complete a 50 km pipeline to connect to existing infrastructure. VLE owns the infrastructure and they are already planning on putting the first test well into production. Clearly a huge advantage as no delay and you can sell the production right away.
– Australia natgas prices are lower than Turkey. So the gas goes thru conversion to LNG and then shipped to Japan. Japan has better prices than Turkey (although you have to account for cost to ship and conversion to LNG)
– VLE had a really good condensate find. If you read Hydra Capital blog, they believe the condensate value is likely worth the same as the natgas find.
– I think the flow rates for VLE was much better than Falcon
I really don’t know what the value of VLE is. It is really hard to come up with any good estimate until we have a resource estimate. Based on my buying you can tell I think it is worth multiples of current market price of VLE stock.
Thanks for you response! I agree that VLE is way different from Falcon. I hope the market agrees with us. I actually own VLE, but I do like to understand the risks in an investment because I think protecting the downside is way more important than looking at the upside.
Whenever I invested in companies previously which were just pure asset plays they have not worked out too well for me. I invested in HNR before and I got out before it went boom. I invested in SHLD temporarily hoping that the market would realize the incredible real estate assets it had under the company, but the company died a slow death as Eddie Lampert tried to turn the company around instead of monetizing the assets. It was a complete disaster. In this situation, management holds the key. If they issue shares or load up the company with debt, they could severely hamper the realization of the value of the company by the market. In your thesis, you indicate that you expect management to look for a buyout. Is there anything in the company’s history or the management’s past dealings giving you hope they make the right decision for shareholders?
VLE mgmt has a superb track record w/ VLE. First off the cap structure is very clean. 77M shares O/S and i think 2-3M in warrants. That is superb for an exploration company. Secondly, the decision w/ the shallow drilling shows mgmt is not wasting capital. They could have kept drilling shallow wells and increase rev and make themselves look good. But instead they accepted the results haven’t been great and admitted it and then stopped drilling. Third, they were very smart in buying the infrastructure to take the gas into production. This is a very smart move, thinking ahead about the potential production coming out of the deep drilling. Also, it makes them that much more attractive to an acquirer. Lastly, the decision to farm out the deep drilling was superb. Mgmt got reimbursed for the expenses they had w/ deep drilling and then got Statoil to take on all the drilling expenses. Plus they got the 3D siesmic done by Statoil, which have a positive impact on the shallow drilling (which mgmt has said they will resume).
I think all you can do is look at the prior decision this mgmt has made. They have done a really good job in executing on the deep drilling without dilution shareholders or screwing up the cap structure. Also you can look up Jim’s prior track record. He has done a great job for shareholders and created lot of value for them. So I feel fairly confident they won’t do anything to screw up minority shareholders.
The RA on this came out and it was awesome!!! What is your estimation now that you have the RA to look at? Do you still have this as your largest position? Sold any? The RA says the chance of commerciality is 50 percent. They basically think it’s a coin flip, but I’m sure you’ve analyzed the downsides. Do you see any downside risks here at all? What do you think the chances of success here are?
This resource assessment is based on 1 test well, so you have to realize the limitations that it causes on the RA. The company doing the assessment has to be conservative on the assessment as you only have 1 well to look at. On the upside, the RA will get better as you have more data points.
So my read on the RA is it is much better than what I had expected. It clearly shows that there is a massive deposit and VLE is positioned to reap huge benefits from it. Although I think the RA might be conservative and we could see huge upside as we get a few more test wells drilled.
Plus, the RA doesn’t account for all the other elements: the need for gas in Turkey, the price of gas in Turkey, the infrastructure that VLE already owns. So when valuing VLE you have to account for this.
I don’t see much risk here. Especially now you have had $60M of capital raised. The biggest risk is political. If something happens in Turkey that could cause capital to leave the country. But that risk is minimal based on how the current President has been consolidating power.
Any updates??
VLE is working out as planned. Next catalyst is putting the test well into production and drilling the 2nd well. I expect no real news until Q3.