Thinking and Praying, Wishing and Hoping.

Thinking and Praying, wishing and hoping will not make it go away.  If you are old enough to remember where that line came from you know what it really means is that you got to make a move to get the action started.  The move for us is to bite the bullet and make a play to sell the darn mistake. The mistake this time is big as noted in a post of couple weeks ago and that is ridding ourselves of ERF.   This is hard to do since ERF has been one of our largest cash flow generators for many years, but you date stocks never marrying them if you are a smart trader or investor.  This date is over. 

We really believed that CEO Gord Kerr could make the turnaround happen after the huge drop in natural gas prices. The North American continent is swimming in natural gas, more than it can use and ERF was at one time a major player in this field. Unfortunately with the huge supply comes a huge drop in well head prices now approaching $1 per unit.  Frankly that price is at virtual cost and ERF was not making the cash flow it was in earlier months. The CEO has been trying with good results to move ERF to more oil related assets where prices are still solid and profits sound. Of course if Obama would get off the stupid green energy trip and let oil producers start doing their thing we would have similar issues with oil, but that is not going to happen. 

Anyway the efforts at moving ERF more towards oil has not come fast enough to make up for the collapse of natural gas prices. The result is a cash flow burdened by higher than can be sustained dividend once one adds in the capital expenditures and regular expenses. Mr. Kerr has been using the retained tax pools from ERF being a trust earlier and natural gas asset sales to cushion the changeover from natural gas to oil.  Short sellers and now I believe he will lose his race sometime in 2013.  Frankly ERF is likely fairly valued currently in the high teens and after sometime we might even dive back into the shares, but for now it is time to move on and quit wishing and hoping the price will return to our entry point.  For now there are better opportunities with less risk.

Years ago I had a supervisor, who happened to be the VP of the large company I was working with, take me to the back of the office and pass on to me a little gem of advice I never forgot. The gem has served me well over the years in my investing and selling work. The advice was this, if you have a customer who owes you hundreds from some transaction you and they disagree on such as a billing error or mistake in the product sold, do not allow hundreds of dollars to stand in the way of a future of thousands of dollars of business.  Simply accept the mistake to be yours, write it off as loss, and move forward for future business with your customer. Trust us this is usually very hard for salespeople or anyone who is a competitor to do, but it is the smarter action long term. 

Thus it is with ERF, we will accept our significant loss in order to free up the asset and have opportunities for future profits.  The technical way we do this in the fund is to sell tight call options for maximum profits until the asset is assigned away from us, which could take one month or several months.  Either way you continue to max the cash flow once you make a decision to sell. Once sold the net loss is registered and this one will be our second largest ever as a trader.  Reminding those who have read this blog from the start this action comes under the ability to "take a loss".