Oil: The bottom of the barrel?

Panic has run rampant through Wall Street and we believe oil is oversold. Today, the spot price on Brent is 85.04 while WTI is running 82.27 a barrel.

There are many many possible theories as to why the bottom fell out of oil in the last two weeks, the most likely are:

1) Slowdowns in China, Europe and the rest of the world.
2) The Saudis are nervous that the USA has overtaken them in oil production and they are trying to weed out some of the more expensive plays in the US Shale (most US Shale plays need >$60 a barrel to be profitable) by flooding the market (The Saudis admitted over production in September) and selling oil below market price (currently selling a dollar below Brent Spot).
3) A combination of the two.

Since panicking is not a sanctioned strategy here at the BHS, we need to look at the most likely scenario and calculate our next move from there.

We do not believe that the Saudis can keep this up for too much longer. According to the Yemen Times, the Saudis kicked up their social spending budget last year by 36 billion dollars. The IMF the Saudis are going to run a several billion dollar deficit this year and they must keep spending money on social programs or they will run the risk of revolution that we have seen in Libya, Syria, and Iraq. According to the IMF, in 2013, the Saudis needed a Brent price of $89 a barrel to break even, up $13 a barrel from 2012 and the spending must continue to keep the people in line.

We argue that oil is oversold due to the panic and the reliability of Wall Street to overreact. However, the Saudis can keep this up for only the short term. By November, at the OPEC meeting, we may see some fireworks and reluctant production cuts to elevate the price…along with that, a recovery in the US shale stocks such as EOG.

Liars Poker

The other day, I was writing about GPRO and what a wonderful stock it was. Never underestimate the power of the IBs to try to screw the retail investor.

GoPro: GPRO

We try to base our stock buying and selling on known quantities. When these quantities change, it can have devastating results. Just like today.

Nicholas and Jill Woodman gave nearly 6 million shares to their newly started foundation and JP Morgan waived the lockup for the foundation so that they can sell those shares on the open market as early as tomorrow (Oct 3). For holders of GPRO stock, this means that instead of waiting the 180 days (Dec 26th) for insider shares to be sold, we get to see an unexpected and quite possible 25% increase in the share count in one day. Thanks JPM, way to dilute a good thing. The market hates the unknown. We would have been better off if JT Marlin was the underwriter (fictional brokerage house from the movie: Boiler Room) for GPRO. At least we would know that we were going to get screwed.

OK, since I am out on GPRO anyway, no loss. The way I see it, if these shares hit the market. They owe me a 25% drop to account for the dilution and we only got 7% today…I wouldn’t touch this until we pull back to $60. Even then, you might want to dump it before the lockup expires on Dec 26th…assuming there will still be shares locked up by then.

is Celgene backing a winning horse?

Agios Pharmaceuticals: AGIO

Agios might have a blockbuster drug in AG-221. While only in Phase 1 trials with a long way to go, the initial results seem remarkable and provide some hope for the fifty thousand people a year diagnosed and suffering from acute myelogenous leukemia, or AML. Fewer than a quarter of people that have AML survive longer than five years.

There are about thirty gene mutations that correlate with blood cancers such as AML. One of those mutations produces an enzyme known as IDH-2. When IDH-2 mutates, it creates a molecule that alters the genetic code in a cell causing them to multiply and cause devastating problems.

Enter AG-221. Designed to target a mutated IDH-2 that occurs in about fifteen percent of people diagnosed with AML.

Phase 1 trials are usually meant to evaluate the safety of a possible drug. There are so many drugs that never make it past Phase 1 trials, making AGIO’s AG-221 a risky spec, but there have been some rather remarkable results.

AG-221 was set to be tested on ten people suffering from AML. Unfortunately, three people died before they could participate in the test. Of the seven remaining, most had either substantial chemotherapy or even had bone marrow transplants with very poor results. Of the seven patients in the study, five had gone into complete remission and one went into partial remission. The remaining patient showed no improvement. The only reported side-effect of taking AG-221 has been mild nausea and loss of appetite.

The results of this study were presented in April. A very small test group was used. However, in June, St├ęphane de Botton, a hematologist at the Institut Gustave Roussy, near Paris also presented interesting results at the European Hematology Association conference. de Botton’s findings showed in a study of thirty-five patients, most of them with AML, ten had died at the beginning of the trial from AML complications. Fourteen patients improved on AG-221 and nine went into complete remission with five that became stable but showed no significant change. Only six showed no improvement and this group of patients reported only minor side effects.

Agios has announced that it will present Phase 1 data on its followup drug in development, AG-120 that targets IDH-1 at the Symposium on Molecular Targets and Cancer Therapeutics on Nov. 18-21 in Spain. I suspect the results will be as impressive as AG-221 since it is almost unheard of for a company to present results from a phase 1 study in front of such a distinguished group of physicians.

Agios might be onto a whole different way of looking at cancer. Instead of targeting the cancer by killing the cell, target the enzyme and try to turn those cancer cells back into productive cells.

The icing on the cake is that Celgene (CELG), a fantastic biotech Juggernaut and BHS fave, owns a 17% stake and is footing the bill for AG-221 in exchange for royalties. Celgene and Agios agreed to extend the discovery phase of their strategic collaboration targeting cancer metabolism, extending the initial period of exclusivity to October 2015 which I expect to be renewed or CELG will make an offer for the remaining Agios stock in a takeover bid at some point (can you say “premium?”).

Celgene: CELG

AGIO is a great spec with a lower risk (made possible due to the backing by CELG) and higher reward potential but it is not for the faint of heart. If you are risk adverse, pick up some CELG at $94, trading at a redonc low of 10x 2015 earnings. CELG has been on sale since the hedge fund wankers have decided to cash out for the year. When they get back in next year, CELG will be on the move to $200. AGIO was down today 7%. I am in.

More info: http://www.newyorker.com/magazine/2014/09/15/transformation-3