I added a 5% position in SKUL for $12.83, taking my cash down to 20%.

Just a trade – I’m not taking losses greater than 10%

Positions: AEC, CLP, CCJ, BAS, SKUL, silver

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Seeing the stock rocket up 5% at the open has served to provoke me. After it gave the move back, I added to BAS for $12.05 a share – raising it to 10%.

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I originally ventured into the natural gas prodcution space looking for water company/field service plays that also provide water reclamation/purification. The oil and gas boom in this country is underway, and despite the looming slowdown, I don’t believe it is going to be stopped. For the moment, coal is dead. US power will continue to come from natural gas.

However, rather than jumping all over the well owners, which are experiencing a dangerous combination of (relatively) lower natural gas prices and intense environmental scritiny, it makes more sense to focus on this boom by looking at the groups which receive a fixed payment for their work.

BAS has a gross margin of 33%. After expenses (some of which are…stretching) that margin comes in around 6%. But the point is, they are making good money on this boom without any direct concerns about the price of natty (up until the point of jobs idling or contract renegotions).

Now, currently the management is expecting pricing contraction from competition good for about 10%. But, I think the company is pretty much pricing that in, after the last four months.

I’m putting BAS’ book value between $3-5 – leaving the company trading at a fairly conservative 2.5-4X.

As for earnings, the company is standing at less than 8X earnings; not risky at all unless you think the world is going to end (it might).

But let’s look a little closer at those earnings…

Go to the SEC page, type in “BAS” in the securities filings section, turn to the earnings page, and actually look at what they’re charging (those of you privileged members can just go into The PPT).

…

Raise your hand if you see it:

BAS charged off an amount greater than their entire operating earnings in depreciation alone this quarter.

In fact, BAS is carrying over half of their book value in property and equipment value (for the record, I impaired those estimates by an extra 10% when calculating my own intrinsic value for the company, just to be sure). Thats a lot of depreciation to be marking down; almost as much as an REIT.

So while the company is pulling about $1.50 in earnings every year, in terms of actual cash coming in the door, it’s more like $3 a share.

Why is this relevant?

Well, look at the DXY. If you’re estimating you have a piece of machinery worth $100,000 that you can make $15,000 annually with, and so every year for 10 years you write off $10,000 on it – putting your “earnings” at $5,000 for that piece of equipment – well that’s fine.

But at some point, if you can get on a plane and go to someplace like Italy or Spain, and purchase that same piece of equipment for $60,000, then tell me how are you not sandbagging on your earnings?

Currency relationships matter. Depreciation matters. It’s impossible to perfectly convert something like “tires” or “metal” into exact dollar terms – especially when the value of dollars are getting thrown in such an extreme move.

It’s like handing someone a ruler and asking them to measure the height of a wall, but then every third of the way up slapping the ruler out of their hands and handing them a different sized one with different markings.

So I’m guess that BAS here is just unbelievably undervalued. They’re a cash cow – not unlike my other two positions AEC and CLP. They have huge cash flows coming into the company. And the value of that cash is soaring.

Now, here’s the last thing I really like about BAS:

As of July 30, there was a just massive short interest in the company (the current pop began before those estimates, so I’m assuming they’re probably still valid).

A massive short interest in a company that’s conservatively valued and is taking in twice their stated earnings in cash. I’m sure this will end well for the shorts…

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I deployed 5% of my cash, purchasing BAS.

This goes along with my new “water services in application with natural gas drilling” line of thought.

I will detail my thoughts tomorrow; I’m too busy now.

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Today was characterised by “reversal”, and nowhere was the reversal more profound than in this oil company. The venerable Po Pimp and myself had a fine day, stacking our coins and counting them tenderly.

Anadarko is being sued for massive liabilities for the second time in three years. The first was for their non-operational interest in the Macondo well – which they could have easily gotten off on.

The second is for spinning off a company in 2001 called Tronox, which amongst other things, was responsible for cleaning up several thousand polluted sites, thanks to the nature of the business they are in (colorings, like paints).

Low and behold, eight years later during the worst economic crisis in almost 100 years, Tronox goes bankrupt. Imagine that. A company that went bankrupt in 2009?

So now their creditors, including the EPA, are trying to pin APC with spinning off a “shell corporation” that was intentionally strung with bad assets and excessive liabilities (naturally, Tronox is no longer responsible for anything, as they were relieved of those inconveniences in bankruptcy court). And the price they’re trying to hit APC with is $25 billion.

Hah! Might as well be $250 billion, for all the chances they have of winning, or collecting for that matter.

The piss head art majors in charge of the EPA seem to be figuring that out, as now APC is in settlement talks.

But APC’s management is pragmatic. They could have put a screw in BP when the Macondo well blew, but instead they agreed to settle for a few billion over a long haul. Whatever the reasoning, they seem to feel that settling on these environmental issues, even when they’re completely without blame, is better than…something.

Personally, I think it’s worse for their image to get caught settling, because then deranged environmentalists will hold it over their heads for the rest of their lives. I’d prefer they run the EPA into the cliff side, and watch them walk away from the suit with nothing.

But I’m not in charge here, am I?

So APC will probably agree to a public wrist slap and handing a small victory over to that pathetic excuse of an organization, in exchange for being left the hell alone, and maybe some goodwill on some practically inconceivable level.

Sadly, I only have about 5% of my assets in APC, having taken outsized gains on the other half of the shares I used to own, just last week.

Still, with the state of affairs, that’s more than enough oil company for me.

Also, yesterday, I added back on a 5% stake in ERY, leaving me a 25% cash position plus that aforementioned short interest.

Now, I’m off to enjoy some red meat. Enjoy your evening.

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I raised a little more cash today, selling half of my APC shares for a profit. My entry points were $61.60 and $64.06 each of equal batch size. So a nice 6-11% profit inside of a month.
My cash position stands north of 25%.

I’m going to be out most of this week, celebrating the birth of the greatest country on Earth with people I care about, and I want the peace of mind.

Now, I’m sick of you self-deprecating misanthropes treading on the US, just because She hasn’t always been perfectly straight and narrow. This is the 4th of July we’re talking about here, and I would appreciate it very much if you not muck it up for everyone around you.

Just remember in between one of your diatribes about the unjust warmongering ways of America, passionate defenses of the Iranians/Libyans/Iraqis/Afghanis/Whoever – “What would you do if someone was pushing into your business…?” – or enthralled critiques of the latest Nom Chomsky paper on sociological advantages that come with embracing cowardice in every tough situation you encounter in your life…nobody cares.

Even in decline, this country provides more opportunity for you pissants than anywhere else on Earth.

You think Europe is great with their precious social considerations and “feel-good” recreations?

You’re in the middle of watching their entire system implode.

You think China is going to overrun us?

The entire Chinese economy is built upon serving us.

You think this is the rise of South America?

Argentina. Venezuela. (I don’t even need to form sentences here)

Sure the US has its faults. We make mistakes. We get preoccupied and let the insane run the asylum, from time to time. We oversimplify complicated problems, first in negotiations and then by leveling entire countries.

But have a little faith that this country can revert to its former glory, this week, while you’re setting off micro explosives and chowing down some burgers.

Don’t sell us short. I may be down on markets and a few realities of the moment, but America Herself is the comeback king.

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