TPG Letter to the Board of Sandridge Energy

I finally got around to reading the letter that TPG sent to Sandridge Energy (SD) regarding Tom Ward's mismanagement.  I believe they made an extremely compelling case and indeed the board and management have conducted themselves in an egregious, self-enriching manner.  I believe APA, DVN, and BP are more attractive at this point, but I do like SD over the long-term.  Investors need to feel comfortable that these practices will end and I believe that is impossible without real change occurring at the top.

http://www.scribd.com/doc/113491870/TPG-Letter-To-The-Board-of-Sandridge

Don Yacktman's Lecture at Texas Lutheran University-Gurufocus

Gurufocus had an excellent interview with famed value investor Donald Yacktman.  In the interview Yacktman shares some extremely valuable insight on characteristics that he looks for when buying businesses.  He also talks about how he sold put options on BP after the Macondo disaster like we did, and how his son uses stock options in a way similar to how we do at TTCM.  The problem with mutual funds is that it is very difficult to implement options strategy due to size and institutional constraints placed upon them by regulations.  Yacktman is one of the best value investors out there and I believe anybody can learn a lot from watching this video.

http://www.gurufocus.com/news/190790/don-yacktmans-lecture-at-texas-lutheran-university-discussing-his-investment-philosphy

TTCM Article on BP Written by Tim Travis

http://seekingalpha.com/article/766801-bp-unpopular-but-undervalued

Chesapeake Oil Well Is Biggest Gusher in Company History-Bloomberg

Chesapeake Energy (CHK) finally get's some good news as the company has hit a home run in the Andarko Basin, with a well in the Hogshooter formation which produced 5,400 barrels of crude a day during the first eight days of operation.  Anything that takes the focus off of the company's lack of corporate governance and cash flow shortfall is a positive.  This company needs to dispose of assets quickly or the more attractive solution would be to sell itself.  It would be a great acquisition for one of the larger integrated oil companies.  With BP's recent announcement that they are looking to sell their TNK-BP joint venture, Chesapeake would be a really nice fit to grow profits in a less risky political environment.

http://www.bloomberg.com/news/2012-06-01/chesapeake-makes-significant-discovery-in-anadarko-basin.html

BP Seeks TNK-BP Sale-WSJ

News has broken today that BP is pursuing the potential sale of its 50% stake in its Russian joint venture TNK-BP.  While this entity is one of the best cash flow producers for BP, problems have plagued the venture as the two sides cannot agree on strategy or governance.  Doing business in Russia is a tough deal for a foreign company and I think BP is making a tough but correct decision to exit.  I think they should have been looking more aggressively to dispose of this asset when oil prices were above $100 however.  I think it will be tougher for them to get good value right now with oil in a bear market.  If the company is patient and disciplined this sale could take a lot of risk off the table for BP, and then they must be smart on their capital allocation at that point.  BP is extremely cheap at these levels and this situation will have a significant impact on the intrinsic value of the business.

http://online.wsj.com/article/SB10001424052702303640104577439602676058744.html?mod=WSJ_hp_LEFTWhatsNewsCollection

BP Struggles to Plug the Valuation Gap-WSJ

BP's stock price has not fully recovered since the Macondo oil spill in 2010 despite rising oil prices.  In my opinion this is primarily a function of uncertainty pertaining the ultimate liabilities.  Once the final numbers are known I believe that it is very likely that BP will see an increase in price to trade more in line with its peers.  BP has taken the right steps through their asset disposition strategy, and while their recent earnings release wasn't very impressive, they are currently ramping up on some development projects which should boost production.  Of the major integrated oil companies I believe that BP offers by far and away the best opportunity for future returns.

http://online.wsj.com/article/SB10001424052702304868004577377843356600940.html?mod=markets_newsreel

Pressure on Oil Supply Eases-WSJ

It is very difficult to forecast the future outlook for oil prices.  In relation to other forms of energy such as natural gas it is obscenely expensive.  Supply isn't really constrained even with the difficulties in demand and production has been relatively solid.  Hundreds of billions of dollars are being spent to develop new deepwater and shale projects across the globe.  Conversely fiat currencies such as the U.S. dollar have proven to be horrendous stores of value with record deficits, so hard assets such as oil which is also so essential for everyday life, become that much more valuable.  Geopolitical risks such as Iran seem to add $10-20 to the price of oil, and most importantly growth in China and other emerging nations has offset slowness in Europe in particular.

The vast majority of market participants seem to be bullish and while I'm not interested in being bearish the sector I am concerned and feel that a large margin of safety is required on any investment.  Most of the large oil companies are spending the majority of their operating cash flow on CAPEX to produce and develop new sources of energy.  If prices dip the economics of these projects could really imperil the balance sheets for some of these companies.  At T&T Capital Management our favorite names in the energy sector are Apache (APA) http://online.wsj.com/article/SB10001424052702304444604577339120918427212.html?grcc=cdbd15771cb08bf8d49c245ee6401799Z3ZhpgeZ0Z3573Z200Z120Z2&mod=WSJ_hps_sections_world and British Petroleum (BP).  Assuming oil stays where it is both stocks are extremely cheap and if natural gas prices increase that would be gravy for the investment thesis.  We also own some bonds in Exco Resources (XCO).  

http://online.wsj.com/article/SB10001424052702304444604577339120918427212.html?grcc=cdbd15771cb08bf8d49c245ee6401799Z3ZhpgeZ0Z3573Z200Z120Z2&mod=WSJ_hps_sections_world

Update from December 19th post: Some of the lowest valuations ever! Some data to prove it.

On December 19^th I sent out an email discussing the unbelievably cheap valuations that we were seeing, which you can see from the forwarded email below.  This is just a quick update on how they are faring.  The point is not to get overly excited, just as we don’t want to get overly pessimistic when stocks drop.  The key is to understand that you are buying businesses, and in our case we are buying businesses on a mass clearance sale!

It is our opinion that many of these stocks will be 2-3 times higher over the next 3-5 years, while others are likely to pay out prodigious dividends, and might have 50-75% upside potential.  It is a testament to the quality of the clients of TTCM, that we don’t receive panicked calls reacting to day by day stock fluctuations, as we firmly believe that by staying the course we can reach our financial goals.  Last year was one of the most frustrating years ever for hedge funds and money managers, but I honestly don’t recall one client panicking and making rash decisions due to the severe fluctuations that we saw.  Avoiding that behavior is like avoiding smoking cigarettes. Over time it is inevitably a bad idea to take a short term trader mentality, just like over time it is inevitable that cigarette smoking will negatively impact your health.  I’ll continue to provide updates on this list through good and bad as I think it represents a decent barometer for assessing equities held in many of our separately managed accounts.  If you held equal dollar amounts of each stock from December 19^th until today you would be up 24.46%.  Thank you very much and as always is you have any questions whatsoever please don’t hesitate to contact us!


1)      ABT- $54.33 Earnings Yield 10%, Dividend Yield 3.5%, likely to grow earnings by 8-10% a year Stock is at $57.39- up 5.6%
2)      AIG- $22.55 Forward P/E 8.7, P/B Ratio .5 Stock is at $29.80- up 32%
3)      AGO- $12.99 Forward P/E 4.3, P/B .5 Stock is at $17.33- up 33.4%
4)      BAC- $5.02, Forward P/E 5.1, P/B .2 Stock is at $8.13- up 62%
5)      C- $24.86, Forward P/E 5.7, P/B .4 Stock is at $34.10- up 37%
6)      CSCO- $17.77, Forward P/E 9.2, P/B 2, $6 of net cash on the balance sheet Stock is at $19.76- up 11.2%
7)      MSFT- $25.75, Forward P/E 8.4, P/B 3.6, Dividend Yield 3.08% Stock is at $32.07- up 24.5%
8)      MS- $14.25, Forward P/E 6.8, P/B .5 Stock is at $18.87- up 32.4%
9)      SHLD- $45.61, P/B .6 Stock is at $75.96- up 67%
10)   HPQ-  $25.36, Forward P/E 5.6, P/B 1.3 Stock is at $25.32- flat
11)   TEVA- $41.80, Forward P/E 10, P/B 1.7 Stock is at $45.25- up 8.3%
12)   TEF- $16.65, Forward P/E 7.6, Dividend Yield 10.14 Stock is at $17.04- up 4%
13)   BP-  $40.78, P/E 5.6, Dividend Yield 4.06%, P/B 1.2 Stock is at $47.50- up 16.5%
14)   RIG- $39.54, Forward P/E 11.7, P/B .6, Dividend Yield 7.93% Stock is at $54.19- up 37%
15)   NVS- $56.35, Forward P/E 10, P/B 2.1, Dividend Yield 3.61%.Stock is at $54.02- down 4%