Member Info for QuintusCurtius

Great object lesson on the importance of management having significant 'skin in the game' ... you're less likely to screw shareholders when you are a large one yourself.

All in my opinion only and do your own research

It should go without saying but my previous post was all in my opinion only and please everyone do your own research.

Dick and NewKOTB - Great posts. Always have appreciated the quality of your input on this board.

Thought I would add a few points:

1. We all owe a debt of gratitude to ACW for sourcing BKR and getting the deal done with all the US complexity however lets be honest that deal is a once in a lifetime opportunity that only came to SQZ because of ACW's BP connections. The deal itself was a 'no brainer' that did not require much sophisticated analysis to understand how significant the opportunity was. Post-BKR, SQZ has shown zero ability to close a deal in a competitive process. They had £100 mln cash in the depths of COVID when gas was 10-15 pence per therm and they still could not get a deal done. In my view this was down to unrealistic expectations, lack of financial market savvy and no coherent long-term strategy. Kiosk Kate and Richard Rose will not change that ...
2. Back to the cash. They need to begin to return a significant portion of it to shareholders in one form or another. The opportunity to do another transformational deal which I believe the company needs to do to survive as an independent is fading fast given the rebound in commodity prices
3. Bungled Columbus RNS. Our BoD clearly have a lot to learn when it comes to communicating with public markets. They needed to balance the news of the delay (which clearly was leaked prior to the RNS) with something more positive (I think NewKOTB suggested a comment about the cash build up to this point). This speaks to a larger problem with SQZ's communication as the company perpetually trades at a larger discount to its NAV relative to the majority of its peers as I think some of this discount is down to poor corporate communication.

Ultimately I think for the company to take the next step our current BoD will have to exit stage left. I hope I am wrong. With the company in the hands of a dynamic and savvy operator the company will perform closer to its potential and shareholder returns will be vastly better given the quality of the SQZ assets. Andrew I hope you are reading this ...

Got it - thanks NewKOTB

Curious as to why my post questioning the motivation of MrsPetra was removed …

I have to respectfully disagree, Dick. The only moral angle I see is if the custodian is not disclosing to the owners of the assets that the are undertaking securities lending. Often they do disclose it but its buried deep in the fine print of account opening docs.

Respectable banks and third party custodians have separate securities lending agreements that clients can opt into. The terms are clear and the bank/custodian splits the security lending revenues with the owner of the assets (the client). The pickup can be substantial - it can be 40-50%+ p.a. for unsecured securities lending for bonds/equities where there is a very large short interest and high realised volatility. Typical revenue sharing is 50/50 or 60/40 in favour of the bank so it's clear why institutional investors such as pension funds engage in securities lending as they are acting as fiduciaries and it can meaningfully add to their P&L with minimal risk.

There are plenty of legitimate reasons why institutions lend/borrow securities. Institutions of various types manage their balance sheets with an eye to capital requirements and repos are a key tool to do this.

Shorting can also be used to hedge long positions and given that there is no time decay as with options it can be a far better tool for doing so.

Just out of curiosity ... do you also believe that put options should be banned as well? What about the actions of the Reddit hoards who precipitated a short squeeze on Gamestop leading to huge losses for several hedge funds who were short GME - is that market manipulation or justice?

All in my opinion only and do your own research.

Dramatic moves like we have seen today are often the ‘blow off’ tops after which there is a large retracement to the downside. Will be very interesting to watch in the coming days

All in my opinion only and do your own research

I think the intuition behind SQZ and KIST’s share prices remaining static or slightly down over the last few trading sessions might be that the dramatic rises we have seen in natural gas over the last few days increases the probability of a windfall profitability tax.

All in my opinion only and do your own research

Sasa,
The vast majority of derivatives contracts are cash settled so in your example if the put you have bought is to hedge physical production then you would sell at spot as the price rose and either sell the put if it had any residual value and you believed spot was going to continue to rise or, more commonly, let it expire worthless.

With a swap you have monthly cash settlement in which you square up with your counterparty however you also have the mark-to-market on the swap contract itself. The MTM on the swap contract reflects the net present value of the anticipated future cash flows of the swap so the issue that we would face in unwinding some or all of our swaps is that doing so would be incredibly expensive. Volatility and interest rates also factor into the MTM of the swap contract but the primary driver is the spot price. When you unwind a swap the investment bank also takes their pound of flesh in fees/commissions. Whether you unwind or continue to hold is going to be a function of the remaining tenor of the swap and your view of where the spot price is going during that time. As an example, if you believe spot will appreciate strongly then you might want to unwind the swap or overlay a call option which would help to staunch the bleeding.

NewKOTB is right, if SQZ ramp up production the swaps will have less of an impact relatively speaking assuming of course the production is unhedged.

Interesting discussion around SQZ's historical lack of a 'proper' CFO.

A thought is that over the last couple of years this could have contributed to the 'hedging' debacle we find ourselves in currently. It was a huge blunder to opt for swaps vs. puts.

A 'hedge' is an instrument that mitigates part or all of the financial risk associated with a financial or operational exposure. Swaps cannot fit that definition as they create larger potential risk as the upside to any price is theoretically unlimited. What our BoD have effectively done is not to just give away all the upside (which one would do via a forward sale) but also to create a significant negative cash flow event as the upside now becomes a financial liability. Now I am just speculating but often swaps appeal when they are marketed as 'zero upfront cost' vs. the upfront premium paid for a put however no swap is ever truly 'zero cost upfront' given that the IB that is either providing or arranging said swap is taking an inbuilt spread. Yes one does lose the entire premium paid when a put expires out of the money however much like an insurance policy, the protection you are seeking is only for low probability events that have an outsized impact. Frustratingly, via an options structure you could create the same economic outcome as a swap without giving away all of the upside (collar with a 'knock out' to the upside or something similar is one idea).

I am concerned that the negative P&L on these swaps will have blown out dramatically since the end of June. From the interim report:

"The derivative financial liability of £9.7 million at year end 2020 had increased significantly to £40.0 million at 30 June 2021. This represents the valuation of gas price hedges in place at the respective period ends and the consequent amounts projected to be payable based upon futures pricing prevailing at those points. Period end June 2021 reflected very strong futures pricing which, should this be realised, would deliver greatly increased gas sales revenues during 2H 2021, 2022 and 1H 2023" (p. 13).

Yes SQZ will benefit from higher gas prices on the unhedged portion of their production but based on back of the napkin calculations these hedging losses for H2 could be ~ 75-100 mln which is a huge number and all the more disappointing as it could have been avoided through a better conceived and executed hedging strategy. I missed the analyst call and shareholder Q&A last week. Did anyone drill down on this topic?

All in my opinion only and do your on research.

Agreed … it’s all about the guidance and any significant additional hedging

Share price begs to differ gotabesirius. The Twitterati also think it is a great set of results but they fail to grasp the past and ongoing negative P&L impact of the swaps amongst other things.

I have been a LTH for more than three years and find the investment case for SQZ compelling but the conclusion when rationally assessing these results cannot be positive.

Let’s see what comes out in the analyst call

All in my opinion only and do your own research

*puts

Interesting piece in the report … SQZ was margin called in June due to a collateral shortfall with their on the swaps. I presume there were similar margin calls recently.

New swaps entered into totaling 87,500 therms per day. 12.5K for 2H 2021, 50K for 2022 and 25K for 2023 at 94, 66 and 51.

Stop with the swaps!! Buy outs for God’s sake.

Agreed. Fingers crossed they deliver for us

Re: acquisition that was considered.

Yawn. Same messaging as the last few years.

Not a great set of results operationally:

- Production dropped to lower than the caisson impacted 2020.
- 30 mln of mark to market hedging losses. This will only increase in 2H. This is why I hate swaps vs. puts.
- Very modest profit after strong rebound in gas price in 1H.

In my view the share sells off initially.

Do your own research and in my opinion only

Great research NewKOTB.

So many catalysts for this one over the short and medium term.

Am interested to hear on the 28th if SQZ have added any hedges. The disappointment with KIST's interims last week was largely down to hedging ~38% of production at EUR 25/MWh when market is currently ~EUR 65. Hope our BoD have not done something similar!

All in my opinion and do your own research

I mean obvious to the FCA ; )

Dick - agree with you in principle but the FCA did fine ARCM ~875K for non-disclosure of a large short position on PMO equity. Apparently this was a hedge on their long credit position but still should have been disclosed. That was a obvious one to catch.