As we are in the thick of wedding season, I think it is appropriate to quote the lecherous duo of John and Jeremy from Wedding Crashers when describing my portfolio today: We lost a lotta good men out there. It is with great sadness that I checked accounts for my Portfolio Guru clients and my own this morning and saw chunks of cash where one of my favorite securities used to live.
Callon Petroleum (CPE) announced on June 18th that it was calling its 10.00% Series A Cumulative Preferred Stock (CPE-A) for yesterday, so today we have received the cash. I have waxed poetic on the Callon preferreds in prior RM columns, and getting 10% - it was more than 11% when I recharged the position in the throes of December's selloff - is an amazing feat in the current interest rate environment. Also, those December trades lowered our basis well below the $50 face value of the Callon prefs, so we recorded a capital gain on that position yesterday in addition to receiving the accrued interest (the actual call price was $50.24 to reflect that accrued interest.)
I have been writing about my new venture, Excelsior Capital Partners in my RM column of late, but my tried-and-true Portfolio Guru strategy - which I developed many years before I started contributing to RM - is still in full effect. I was checking yesterday on a portfolio I initiated on December 18th, a portfolio that included a full-size portion (10% of the equally-weighted portfolio of 10 securities) of the Callon prefs at a basis of about $47. That portfolio has risen 14.63% in 2019 on a "flat" basis - solely capital appreciation - plus it has the nice little bonus of an 8.6% annualized yield. Factoring that in, my client's portfolio value has risen about 19% this year on a cash basis.
That's amazing to me, but it shows that a) the fixed income markets were just as oversold, if not more, than the equity markets in December, and b) bond traders love The Fed as much as stock traders do.
Callon's yield and my opportunistic purchase certainly contributed to that 19% year-to-date gain, and now the question is: how do I replace that contribution? It's probably not shocking that there aren't many 10%-yielding preferreds left in existence. Much like Callon's management team, others have chosen to replace high-coupon fixed income securities with funds from other sources.
Through my due diligence and attending more energy conferences than any sane man should, I have met with Callon's CEO, Joe Gatto, formerly the company's CFO, and I know what makes this company tick. So, in addition to the Callon preferreds in the portfolio I referenced earlier, I also own Callon's 10/24 senior notes, which carry a 6.125% coupon. I bought those at 92 cents on the dollar in December and now they are trading just a couple ticks below par value.
I would only do that for a management team I trusted, but there is a limit to my generosity. I do not own Callon common stock, as I have learned from bitter experience to only buy fixed-income securities in the E&P sector. Long-term holdings in integrateds such Exxon (XOM) and Chevron (CVX) are OK, and I have them, but anything smaller needs to be bonds-only.
Callon is a great example of this truism, as its common shares have been absolutely eviscerated this week, falling to a 52-week low on the back of the company's announcement of the takeover of Carrizo Oil & Gas (CRZO) . CPE's purchase of CRZO is an all-stock deal, and CRZO's relatively strong balance sheet leads me to believe the combination - set to close in the fourth quarter - will actually produce a new company that is more creditworthy than Callon is on its own.
But sentiment is important. I believe Carrizo's core acreage in South Texas is a perfect complement to Callon's position in the Permian. That said, the stock market is indicating in its valuation of CPE that E&P stocks are so undesirable that combining two of them makes the new entity even less desirable than the old one.
So I will stay in the fixed-income bracket as I search for a way to reinvest the proceeds from CPE-A. Cash is a lazy asset and I hold as little as possible for clients. Jeremy from Wedding Crashers might say, "I love your enthusiasm" but my clients are much more focused on real cash-based returns than just portfolio manager (i.e., me) sentiment.
