Do Not Fear What They Fear
April 7, 2016
On Tuesday, 4-5-16, I made a small trade in the Value Focus Portfolio. Here is a copy of the email (readers can sign up for free email alerts here) that went out shortly before the market close:
For the most part, what I am doing right now is simply waiting upon the Lord. I believe that I have done my best to follow his instructions. I have made mistakes along the way in regard to carrying out his instructions to me. But even when I did that, I tried my best to correct the mistakes. So, for the most part, I believe I have done my part on this journey of faith. Now, I am simply waiting on him to move. Furthermore, I really don't have very much room to maneuver in the portfolio with most everything being down so sharply.
However, today I saw a small opportunity, prayed about it, and felt like it was a good opportunity that the Lord was giving me. The situation at Ocean Rig is pretty interesting. The CEO and many of his decisions are not without controversy, especially in relation to another company he manages as CEO - DryShips, Inc. (DRYS).
However, when it comes to the decisions being made at ORIG, I see a lot of positives. The company has taken advantage of the downturn in oil prices in several ways. There are too many for me to list in an email notice. I will simply note that as I see it, all of the financial decisions made by the company have been positive thus far for ORIG shareholders.
Today, it was announced that the company has repurchased 56.079 million shares for $49.9 million. The shares are being held in a 100% owned ORIG subsidiary for now, as I understand the situation.
I reviewed the amount already invested in ORIG versus the risk limit (explained in a post from February 8th) that I use which is based on scripture. I had room to purchase roughly $450 worth of ORIG today. I was able to purchase 510 shares for that amount. In order to raise the cash, I unfortunately had to sell 15 shares of WFM, which was trading around 22% below my average purchase price.
I will try to post tomorrow with more detail and reasoning. I hope everyone has a wonderful afternoon!
In Christ's Name,
JOURNEY OF FAITH
Before we get into the situation at ORIG, I wanted to talk a bit about the journey of faith. As readers are aware, I have been trusting the Lord for a miracle. I have been asking many things. Here are some very high level descriptions of the main things I’ve been asking:
1) That Jesus Christ would be glorified through Value Focus and Wisdom’s Reward.
2) For a miracle of restoration, redemption, and provision for me and my family.
3) That he will build a ministry he has put into my heart and mind.
So far, I have not seen any miracles manifested in my investment activities. I almost hate to say this because of how it may come across, but here goes. So far, the only miracle I see is what God has done inside of me. When I really try to step outside of the situation and look back, I am a little bit shocked that I’m still on this path. I’m a little bit shocked that I still have faith that he is working in and through my life and my investing activities.
I have waited and watched and prayed and hoped and trusted the Lord to bless me and bless my work from the very beginning. I have faith that he is doing that. However, it’s really not based on what I can see. There are times when I can see what looks like the Lord acting on my behalf, and I believe he is. But then the full deliverance and blessing never seems to come to fruition, at least not yet. Instead, what I have been able to see is that the Lord has allowed me to be attacked, ruined, devastated, and humiliated over and over. He tells me something. I draw certain conclusions or develop certain expectations based on what he told me. Of course, I am expecting wonderful and amazing and good things. What I most often seem to get instead is pain, humiliation, and loss.
New readers might think I’m overstating what has happened, but I don’t think I am. It has been really tough.
At the same time, the Lord has held my hand through all of it. He has been so merciful and gracious to me. He stretches me so far that I feel like I’m going to break. Then he gives me what I need to keep going. He heals and restores me. He builds me up. Then he stretches me out again. I don’t know where or how it all ends!
God loves to leave us with a lot of mystery! I’ve tried all along the way to figure out what he is doing. I have to admit that I still do not know. Will he do something dramatic and amazing that everyone can clearly see is a miracle? Or, will he fulfill all of his promises through means that appear to be totally natural to those who are without faith? I strongly suspect the former based on what I see in scripture, but I have no way to be sure. I just try to hold on to the things he has told me, as I understand them.
Speaking of that, what I believe he has told me about the offshore oil and gas related stocks in the portfolio is that they will all survive and thrive. Some of the specific words he used (among others) were “live” and “bear fresh fruit”. He told me they would not fail. On coal stocks, he did not give me any guarantees. He just kept telling me to buy them (or pointing me toward them maybe is the right way to say it) and then he gave me peace about purchasing them. Of course, in my mind, I tied the purchase of coal stocks to other things he was telling me about restoration, blessing, and fulfilling his purposes for me. But that could have been just a connection I made in my own thoughts. I am still trusting the Lord and expecting miracles all over the place. I am just trying to be clear on what he has told me, without going into too much detail (which would require me to write a book).
The point today is that given the promise I just mentioned, you would think it would be a no brainer to purchase more of the offshore oil and gas stocks anytime I have an opportunity. However, it’s really not. I realize now that any “deadline” I think I can see is due to my limited human understanding. God is not bound by it. Also, I realize now that things can get so much worse before they get better, even after the natural mind decides that it can’t get any worse.
Just think about some of these stocks, for example. Could God let them go into bankruptcy before raising them back to life? Of course he could! In fact, he already pointed out to me that he could do that. But then my mind tells me, “Well, he can take it up to the point the stock gets cancelled by the judge, but then that’s it. There’s no more hope for that stock.” Says who? Says my feeble little human mind! That's just not how the Lord sees things.
It’s a good thing I don’t have the final say in any of these matters. I would have given up a long time ago.
Outside of a miracle, bankruptcy is normally the end of existence for the vast majority of stocks. There really is no human wisdom that would justify continuing at this point to hold stocks like Arch Coal and Alpha Natural Resources. But with God, all things are possible. I am not trying to make any claims about what God will or won’t do inside or outside of bankruptcy courts. I am simply noting that God is not bound by any limitations that I try to place on him. So again, I don’t know where this all ends! I don’t know when! I just have to keep walking the path he lays out for me. I have to persevere. I have to keep trusting him, loving him, and being devoted to him no matter what results I get! That is the only option for a child of the King! How can I do anything less for the one who gladly gave his son for me? How can I offer anything less than total devotion to the one who laid down his life for me?
It is not easy. I often struggle. I struggle tremendously. But in the end, he lives his life through me. Christ living in me stays on the path that the Father lays out. I can’t do it. Chris McKinney is weak! I would have given up a long time ago if Christ were not living his life through me! I only continue to have faith because he has put that faith inside of me and caused it to persevere. I cannot and would not and do not try to take credit for any of it. In fact, I often react the wrong way to things until I finally surrender to Christ and let him live his life through me. I know the part about Christ living his life through me may not make a lot of sense to some readers. But, that is exactly what happens, and I don’t know how else to describe it. He is bringing me through a process of learning to depend completely on him. As long as we are walking in a relationship with him, obeying him out of our love for him, there is much spiritual growth for us in the process. That really is the highest reward we can receive, experiencing more of Jesus! Having a closer walk with him is the ultimate reward!
Okay, so back to the ORIG purchase. I had to pray about it and seek the Lord for an answer. He gave me one. I said in the email that I “felt like” it was a good opportunity the Lord was giving me. That’s true. However, I should note that I felt that way because he spoke to me about the situation. The words he spoke to me indicated to me that yes, he is working on my behalf in this situation (ORIG). So, I then “felt like” it was good to add more as I had room to do so under the risk constraints God has placed on the portfolio. I hope all of that makes sense.
SOME HUMAN WISDOM
As for ORIG, I have to commend the sometimes controversial CEO, George Economou, as well as the Board of Directors. Here are the major financial decisions they have made thus far during the downturn in oil prices:
May 21st, 2015: Effectively repurchased 4.44 million shares at a price of $9 per share. This may not sound too great in hindsight, but the share price was fluctuating around $9 when the deal was made. Furthermore, the share price had fluctuated between $12 and $21 for most of the life of the company. The bottom line is that the company managed to repurchase shares after a huge drop in share price. That is the opposite of what most corporate managers do. Most corporate managers buy high and sell low. The other aspect of this deal is that the $9 purchase price is based on the face value of a loan amount that was exchanged for the shares. Investors can think of it like they owned bonds in DRYS and exchanged those bonds for ORIG shares that DRYS held. However, the loan to DRYS was probably not worth face value at the time of the trade. Last, I would note that the original loan agreement with DRYS gave ORIG the option to exchange the loan at a price of $13.50 per share. So, if ORIG’s Board were inclined to favor someone else at the expense of ORIG shareholders (as is often claimed by critics), it is conceivable they could have simply exercised that option even though it was out of the money, rather than negotiating a better deal for ORIG shareholders.
June 8th, 2015: Sold 28.57 million shares at $7 per share. Now, if we stopped here, it would simply look like the company did what I just mentioned above the most corporate managers do – buy high, sell low. But we have to keep going to see how this ended up being a good decision. One thing worth noting is that the CEO paid $10 million in cash to participate in this particular offering. So, he was buying for $7 per share less than a year ago. The cash inflow has ended up being very good for the company, as we are about to see.
July 30th, 2015: Effectively repurchased 17.78 million shares for $4.50 per share. The company exchanged the remaining $80 million face amount of the loan to DRYS for the 17.78 million shares. So now, the company has repurchased 22.2 million shares for an average purchase price of $5.40 per share, and sold 28.57 million shares for $7 per share, all within a two month period. However, that does not include the effect of any interest payments that might have been made to ORIG by DRYS (I am not sure if there were any). After this transaction closed, DRYS still owned 40.4% (56.079 million shares) of ORIG.
December 8th, 2015: It was announced that as of the previous day, the company had repurchased $424.4 million face amount of its own notes at a very large discount to par (I believe the discount was around 38%). In other words, they effectively paid off debt for 38% less than what they actually owed, also saving on interest expenses going forward.
March 9th, 2016: It was announced that more debt was repurchased at a discount. Total debt repurchased as of that date was $709.3 million, for a total aggregate purchase price of $395 million. So on average, the company had repurchased debt at a 44.3% discount as of this date.
April 5th, 2016: It was announced that ORIG has repurchased all of the remaining shares (56.079 million) held by DRYS for $49.4 million in cash. So effectively, ORIG repurchased 40.4% of its outstanding shares at a price ($.88 per share) that is very close to the all-time low (around $.72 per share).
At the end of 2015, ORIG had approximately $735 million in cash. They have a lot of things up in the air, such as very large monetary settlements with customers who have cancelled contracts. However, the best I can tell, this company is still generating positive cash flow from operations, and maybe even positive free cash flow (depending on how you treat the cancellation fees). I believe the reason the share price is so low is that investors are incredibly bearish on the offshore drilling industry as a whole. So, the highly indebted ones (this still includes ORIG) are trading as distressed securities.
Personally, I don’t view ORIG as being nearly as distressed as many of the indebted E&Ps. But, even for people who view ORIG as an “option on the price of oil”, surely they will have to agree that the option just got much more valuable. I wouldn’t think of the share repurchase as the strike price or expiration of the option having been changed. Rather, I think you could liken repurchasing the shares to having your options levered up at no extra cost to you (or at very little cost). In other words, instead of getting 1x exposure to an underlying variable, you now effectively have 2x exposure (compared to the exposure you had 1 year ago at this time). Another way to look at it is to say that you got twice as many “options” in your account at no extra cost to you. The debt reduction could be seen as effectively lowering the strike price, or extending the expiration, or both. The option analogy is one way to look at the situation I guess, using human wisdom. So for me, the human wisdom makes this situation very interesting.
But also for me, it went beyond human wisdom the moment I prayed about it and heard back from the Lord.
Okay, so everything above was written yesterday, on 4-6-16. For whatever reason, probably fatigue, I didn’t feel too great about posting it yesterday. I wanted to review it when I felt that I had more mental clarity. Also yesterday after writing the initial draft, I was able to catch up on the chatter going around about this latest move by ORIG.
Regarding that, I want to first acknowledge the Seeking Alpha author, Fun Trading, who does an excellent job of keeping readers updated on the offshore drilling industry. His frequent updates have been extremely helpful to me over the last couple of years or so. He seems to see these moves by ORIG as being highly positive for shareholders, as do I and several others. However, there are also people who somehow see these moves as negative. In order to see these things as negative, one would have to believe that the CEO and managers of the company are highly unethical, and intent on benefiting only themselves at the expense of pretty much everyone else.
Anything is possible, of course. My personal view and opinion (which is often not worth very much in this realm) is that there are some legitimate concerns about potentially negative but unlikely events that could take place with all the financial maneuvering. However, some of these ideas really seem to me to be a stretch. They pretty much sound like conspiracy theories. I don’t use that term to indicate disrespect to these ideas. Sometimes conspiracy theories are true, after all. Sometimes it is only the most perceptive, wise, and discerning people who can see them clearly. These theories certainly could be true. Apart from the Lord, I have no way to personally discern with certainty the intent and plans of the ORIG managers and BOD going forward. So, all I can say is that the Lord gave me two scriptures this morning that I found to be highly relevant and encouraging:
“If you are not firm in faith, you will not be firm at all.” – Isaiah 7:9b, ESV
“Do not call conspiracy all that this people calls conspiracy, and do not fear what they fear, nor be in dread. But the Lord of hosts, him you shall honor as holy. Let him be your fear, and let him be your dread.” – Isaiah 8:12-13, ESV
By the way, the entire passage of Isaiah 8:11-22 should be of interest to other believers who are reading this post.
May the Lord bestow wisdom, blessings, and peace upon everyone reading!
In Christ’s Name,