A painful personal lesson for me is grossly underestimating upward potential of a cyclical company near the bottom. PBF made an illy timed $1.2 billion acquisition of a refinery in Northern California just before the breakout of covid-19. Its stock price crashed from high 20s to ~$7 in January 2021. I noticed one of the biggest shareholders, Carlo Slim, Mexico's richest man, had been buying the share all the way from middle of $30s to ~$9. I spent a weekend to research it. The biggest concern I had was its debt, in particular, ~12% annual interest on a note issued a few months ago (when the fed fund is zero). I remembered that I told my wife in a Sunday evening walk that I wanted to buy a few hundred shares (the closing price was ~$7 on the previous Friday). Since there was some probability of big loss, we would only buy it outside of our retirement accounts. The next day, one of BoA's analyst down-graded PBF and drove the price down to a low of ~$6.3. I was kind of fearful and yet happy. I got a check from my wife and deposited it into our bank and transfer the money to Fidelity. The whole process took 3 days. By the time I could buy it, the price had moved ~$8.3. Because it had rallied over 30% then, I could not buy it. (A few days later, it moved to ~$14 because of short covering).
In retrospect, I made two mistakes. I grossly underestimated the upward potential. Even if I had bought it at $8.5, the recent high of $55 is still ~540% gain. Keep in mind that the $55 may not be the cyclical high for PBF. The second mistake was my anchor bias. I calculated the percentage of the gain from the low of ~$6.3. A 32% gain in 3 days was huge. The fear of buying high prevented me from taking a position. Had I calculated the gain from ~$7 (~18%,) at which I was willing to buy it, I probably would have pulled the trigger.
Thanks for sharing this tony. My biggest mistakes have come from not buying when something was at rock bottom. I missed things like Tourmaline Oil & Petrobras in 2020 because I saw them moving up and I was like who wants to pay 20% more then just a week prior. In hindsight i lost 100s of percent
you miss out on the inventory financing agreement, effectively those inventory wouldnt be used to offset debt as counterparty has these as collateral. So it is not as straightforward for the refinancing risk
The importance of the inventory is that they have prepaid for the inputs to the refining process (feedstocks etc). From a cash flow perspective that is significant in future quarters
I can be wrg as i glanced just quickly. But they prepaid using inventory financing, so those 2 appear n disappear together. Should be cash flow neutral, you cant look at fcf or cfo in this case as the cff is quite linked operationally
bad 'luck' happened , but nothing bad can happen again ?
"Management made some disastrous hedging trades that blew up their first quarter, and then failed to disclose those screw ups (maybe they didn’t even know) until earnings, despite reiterating prior guidance. Capex went over estimates. Things broke. RIN pricing (a critical profitability indicator for renewable diesel) collapsed. Historically high crack spreads (refining margins) came down. The company was forced to dilute shareholders at an inopportune time. Fully diluted share counts have doubled from 52M when the deal was first announced to ~100M at the last filing."
The company wasn’t forced to dilute. They did choose to convert convertible notes into shares. I did question the timing though as these notes were at 5% interest.
A painful personal lesson for me is grossly underestimating upward potential of a cyclical company near the bottom. PBF made an illy timed $1.2 billion acquisition of a refinery in Northern California just before the breakout of covid-19. Its stock price crashed from high 20s to ~$7 in January 2021. I noticed one of the biggest shareholders, Carlo Slim, Mexico's richest man, had been buying the share all the way from middle of $30s to ~$9. I spent a weekend to research it. The biggest concern I had was its debt, in particular, ~12% annual interest on a note issued a few months ago (when the fed fund is zero). I remembered that I told my wife in a Sunday evening walk that I wanted to buy a few hundred shares (the closing price was ~$7 on the previous Friday). Since there was some probability of big loss, we would only buy it outside of our retirement accounts. The next day, one of BoA's analyst down-graded PBF and drove the price down to a low of ~$6.3. I was kind of fearful and yet happy. I got a check from my wife and deposited it into our bank and transfer the money to Fidelity. The whole process took 3 days. By the time I could buy it, the price had moved ~$8.3. Because it had rallied over 30% then, I could not buy it. (A few days later, it moved to ~$14 because of short covering).
In retrospect, I made two mistakes. I grossly underestimated the upward potential. Even if I had bought it at $8.5, the recent high of $55 is still ~540% gain. Keep in mind that the $55 may not be the cyclical high for PBF. The second mistake was my anchor bias. I calculated the percentage of the gain from the low of ~$6.3. A 32% gain in 3 days was huge. The fear of buying high prevented me from taking a position. Had I calculated the gain from ~$7 (~18%,) at which I was willing to buy it, I probably would have pulled the trigger.
Thanks for sharing this tony. My biggest mistakes have come from not buying when something was at rock bottom. I missed things like Tourmaline Oil & Petrobras in 2020 because I saw them moving up and I was like who wants to pay 20% more then just a week prior. In hindsight i lost 100s of percent
you miss out on the inventory financing agreement, effectively those inventory wouldnt be used to offset debt as counterparty has these as collateral. So it is not as straightforward for the refinancing risk
The importance of the inventory is that they have prepaid for the inputs to the refining process (feedstocks etc). From a cash flow perspective that is significant in future quarters
I can be wrg as i glanced just quickly. But they prepaid using inventory financing, so those 2 appear n disappear together. Should be cash flow neutral, you cant look at fcf or cfo in this case as the cff is quite linked operationally
Interesting perspective, it’s on the watchlist very high.
Shouldnt be very confusing. I think you could get clear perspective once you read the term in inventory financing.
I will ! Thank you
Interesting 🧐. I saw managment talking about selling of inventory to address the balance sheet problem in their Q3 earnings call.
As a long time Vertex investor. Thank you for the article.
Your welcome buddy
Nice analysis, this seems like an interesting opportunity
👍
bad 'luck' happened , but nothing bad can happen again ?
"Management made some disastrous hedging trades that blew up their first quarter, and then failed to disclose those screw ups (maybe they didn’t even know) until earnings, despite reiterating prior guidance. Capex went over estimates. Things broke. RIN pricing (a critical profitability indicator for renewable diesel) collapsed. Historically high crack spreads (refining margins) came down. The company was forced to dilute shareholders at an inopportune time. Fully diluted share counts have doubled from 52M when the deal was first announced to ~100M at the last filing."
marhelm\cf
The company wasn’t forced to dilute. They did choose to convert convertible notes into shares. I did question the timing though as these notes were at 5% interest.
Yes. A lot has gone wrong them. It's a Story of how hated is it vs. whats really going on with the company. I have no position as off right now
I saw that to. It is an risky bet. They made mistakes, but it looks like they are on the right track to get out of this dilemma.