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Circle Of Competence Issue #23

Quote of the week: "Don't judge each day by the harvest you reap, but by the seeds that you plant." - Robert Louis Stevenson

Food for Thought

Activism and reaction

A few weeks ago John Goff, a Texas billionaire, bought a large stake in Contango Oil (disclosure: long MCF). Since then, MCF's price action has bounced around from about $4.40 to almost $7 per share before sliding back to the current $5 per share. I scan most 13-D filings to look for large activist purchases that I can research and potentially invest alongside, and Goff's 13-D filing caught my eye given that he had experience with purchasing large portions of small oil companies previously.

Contango Oil is an independent oil and natural gas co that has 189.3 billion cubic feet of proven reserves and as the article above reasons, the property in the Permian basin could prove to be immensely valuable to the right buyer. Though MCF is a money losing entity, it is trading at a depressed 60% of book value with modest debt and some desirable acreage in the Permian Basin. There are also structural reasons that lead several investors to believe that oil prices have nowhere to go but up. Thus, I began purchasing shares in MCF since I believed it traded below intrinsic value, it possesses desirable hard assets in the Permian, a knowledgeable energy investor purchased a large stake, it has modest debt, and there is a solid bull case for oil.

And then this happened: Contango adopts tax benefit preservation plan to preserve net operating losses. As explained in more detail in the 8-K filing associated with press release, Contango plans to 'protect' its net operating losses to protect future income which would be substantially limited should an 'ownership change' occur per the IRS. To protect their NOL tax asset, the company adopted a rights plan in which they offered 1 'right' per common share owned to purchase 1 share of common stock at a 50% discount IF the rights plan is triggered. And how is the rights plan triggered? Only if a purchaser acquires over 5% of the company's shares or if someone who owns over 5% currently (John Goff!) continues purchasing shares. What's more, the party who triggers the rights plan will cause their own rights to become null and void - essentially diluting their share in the company by half! To protect their NOL asset, they essentially adopted a massively diluting poison pill for any potential acquirers. Not surprisingly, the stock has traded down by 5-10% on the news.

So here are my concluding questions (I'd love to hear from readers on what they think!):

- Is management truly trying to protect their valuable NOL asset or using cloaking their real intentions of protecting their jobs and preventing a takeover?

- Is this the ONLY way to protect the NOL asset by preventing a takeover or ownership change? (I am not a CPA and would love someone to fill me in here!) It seems the market did not react kindly to the poison pill because in the short term it precludes realizing the value of the company's assets in a buyout.

- The only way the NOL asset gets used in the future is if the company is profitable. The only way the company is profitable is if natural gas and oil prices continue to rise. Are they bullish on O&G prices and thus signaling what they believe to be around the corner?

- What sorts of legal reactions have poison pills such as this drawn historically?

Plastic potential

To clear my capitalist conscience, in addition to investing in an Oil & Gas co, this week I decided to do a little research into the plastic and recycling market. I remember reading last fall how the price of recycled plastic had plummeted after China banned U.S. scrap plastic and paper and wanted to learn more. While digging, I stumbled upon this dandy about what really happens to a plastic bottle when you recycle it. This immediately got me thinking: why can't we melt plastic bottles down in our own homes and reuse it in, for example, a 3-D printer? Turns out, it is the dangerous toxins that can be released based on what the type of plastic is and the resin identification code. I've been pushing myself to learn more about environmentally friendly technology and what I have come up with so far if you must use plastic: either buy a filabot extruder for your 3-D printer at home to recycle your bottles, buy this $10,000 machine that turns plastic bags back into crude oil for heating and cooling your home, or just recycle. Pretty simple. I'm not saying we all have to be Jenna Jambeck, I just think we should be more conscious of the plastics we use (and misuse!). I'd love to hear or read more interesting research on what innovation is happening in the plastic industry if anyone has any recommendations!


- According to Ryan Krueger, e-sports are the next great generational sport.

- John Hempton (Bronte Capital) believes Xero, an accounting software firm, can grow to $100B.

- Aswath Damodaran on the real effect of share count dilution on valuations from issuing shares, share based compensation, and multiple share classes

- Warren Buffett and Charlie Munger on what constitutes a truly great business from the 2003 Berksire Hathaway annual meeting

- Lebron James is as much a winner for Charter communications as he is for the LA Lakers.

- Andrew Walker’s (Rangeley Capital) Charter Cable (CHTR) investment thesis, Atlanta Braves investment thesis (disclosure: long BATRA a small amount), and monthly article recap with a lot of good content

- Businesses are investing more in 2018, but it's no boom

- Private equity firms are not only selling businesses to other firms, but are also selling businesses from one of its own funds to another one of its funds and taking transaction fees

- Everything about private equity seems to be frothy and reek of a bubble

- The Canadian King of New York: inside the rise of Brookfield


- How e-commerce ( is transforming rural China

- New York is fighting its neighbors for offshore windmills as the economics of wind improve

- Bezos' parents may be worth billions


- Autonomous aviation startup

Xwing raises $4M in funding

- Blueprint Power raises $3.5M to help buildings sell their excess electricity back to the grid

- 3-D printing startup Formlabs achieves unicorn status with latest $15M raise

- Olive, an artificial intelligence healthcare company that automates repetitive tasks in hospitals raises $32.8M

- DNA sequencing platform Omniome raised $60M

- Telehealth company MDLive raises $50M

- InVia Robotics raises $20M to expand subscription based warehouse automation platform


- The Investor's Podcast w/ Michael Batnick on big mistakes investors make

- BiggerPockets & Matt Faircloth on how to raise outside capital for real estate investments

- Chris Dixon, Ali Yahya, Devon Zuegel on the building blocks of cryptonetworks

- Tim Ferriss with Ann Miura-Ko (entrepreneur, investor, professor at Stanford)


- Greenlight Capital (David Einhorn) Q2 Letter

- Third Avenue Value Fund Q2 Letter

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