Pain in the Portfolio

Several weeks into the April options period there are points of pain in the portfolio. Much of this pain is from the moderate sell off going on in the market right now.  We are slightly under water in JNK, BCE, and DUK. Each of these are solid blue chip companies with bounce back potential when the market recovers.  We are down less than $1.00 per share in each and expect it would take a serious downturn in the market to make these stocks sell off seriously. This is the very reason we selected these securities as well as many of the ones where we are still in the money.   AGNC, CTL, LO, NNN, O, and T are all still safely in the black currently.  FTR where we have two long term options is higher since we sold both option positions at almost the perfect price. 

The pain in the portfolio comes from two stocks where we sold positions and we are currently down over $1 per share

We are down just over $1 per share in GG. But since the underlying asset for Goldcorp is gold and they are the best of breed we still feel good about this position. Unless the federal reserve stops printing money and Obama stops his spending spree we believe gold still is a solid future for investors and traders.  Besides $2 per share in GG is a day's movement sometimes in the security. Nevertheless the fact that gold prices can be quite volatile we are keeping a close watch on GG.   

The stock where we find ourselves down significantly is ERF.  We have likely made more money in ERF than any other trading stock in the history of the fund.  The current position was taken right after a stock offering where ERF sold stock to gain capital to pursue additional opportunities and considered the buy position a good entry point.  However since then ERF delivered their annual report and the cash flow presented a picture of a company that might not be able to continue to pay the current dividend without incurring debt. The CEO has said that the dividend is safe and that the recent capital raise gives the company adequate cash flow to continue the dividend while spending on projects. Examination of the current budget makes it clear he is technically correct. But others look at the capital raise and see that being used for dividend payments. Highly regarded analyst Kurt Wulff agrees with the CEO. So take your pick here.  Our opinion on the situation is that with the current capital raise the cash flow is there for the time being. It there is a need for additional capital and share dilution then the current dividend payout is suspect.  Simply put the projected 2012 cash flow is $849 million and distributions are $423 million of that. There is around $300 million available for capital projects out of cash flow.  ERF is spending more than the $800 million in capital projects during 2012 aided by the stock sale earlier this year, but less than that going forward. 

The stock is being driven down by relentless short selling who believe this scenario makes it clear the dividend must be lowered. We are down over $4 in the stock with a large 4800 share position.  Several stock brokerages now believe ERF has entered bargain territory and even if the dividend is cut the stock price compensates for the reduction. 

We have reached the point where we will begin selling option positions going forward in the money on ERF if we remain this deep in the money by April options expiration.   The idea for the fund will be to continue to produce the maximum cash flow and accept any loss we have in ERF to open this trading position going forward.  If we do sell out of the position at that point we would reevaluate our consideration of ERF for continued inclusion in the portfolio this year.  ERF is an excellent Canadian oil producer, but the weakness in the shares makes us wonder about ERF as a trading vehicle in this environment.  Fighting the shorts long term can be a tough job.