Monthly Archives: July 2015

Northern Offshore merger arbitrage

Northern Offshore (NOF, NFSHF) is a marine drilling company that managed to attract the attention of several value investors in 2014 (a good write-up can be found here). Even when oil prices were high it was a somewhat speculative investment, and when oil prices crashed at the end of 2014 the stock followed. In the past year, the stock moved from a high of NOK12.55/share to a low of NOK1.75/share. In hindsight, the selling panic in the stock proved to be an excellent buying point since Shandong Offshore International announced that they reached a deal to acquire the company at NOK7.59/share two weeks ago. While the big money has now been made I think that playing the merger arbitrage is also attractive. The stock is currently trading at NOK7.20/share which implies a possible 5.4% absolute return.

I think that is a big spread for a deal that should be pretty low risk. There is no regulatory risk, the deal will be financed from the purchaser’s existing cash resources and 65% of NOF shareholders have already indicated that they will vote in favor for the acquisition. In addition to this there is a US$12.5 million break-up fee payable by the purchaser if they fail to complete the acquisition. That’s a large fee since the total deal value is just US$160 million. I’m guessing that the spread is relatively large because it’s a transaction in a small cap stock on a foreign exchange (for most investors), and the fact that the acquirer is a Chinese company is probably also not helping. If this is indeed a real risk I think you are getting paid enough to take it.

Northern Producer


Long Northern Offshore

Half-year portfolio review, 2015 edition

With June behind us it is once again time for the obligatory performance review. The first half of 2015 delivered a solid double-digit return and thanks to Greece’s troubles earlier this week I actually managed to beat the benchmark once again. At one point this year I was underperforming the benchmark by ~10%, mainly because the MSCI ACWI has a huge allocation to US stocks and as results profits more than my portfolio when the euro weakens. Foreign FX gains accounted in the first half of 2015 for approximately 33% of my return while it accounted for roughly 63% of ACWI’s return. This is after the EUR/USD moving back from ~1.05 to ~1.11.

Year Return* Benchmark** Difference
2012 18.53% 14.34% 4.19%
2013 53.04% 17.49% 35.55%
2014 27.71% 18.61% 9.10%
2015-H1 13.17% 11.49% 1.68%
Cumulative 162.19% 77.65% 84.55%
CAGR 31.71% 17.84% 13.86%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

The MSCI ACWI isn’t really a good benchmark for my portfolio, but I don’t think there is a better alternative since the majority of my portfolio consists of securities that aren’t part of any index, or if they are they don’t share that index with the other constituents of my portfolio. Because of that the MSCI ACWI should be viewed more as a reference point instead of a true benchmark. The reason that I use it is the fact that it is well-known, globally diversified and I aim to take roughly the same amount of risk as a diversified 100% equities portfolio

Performance attribution H1 2015

In the first half of 2015 special situations generated a large part of my profits, and I expect that this trend will continue in the second half of 2015 since I’m currently invested in a large number of special situations. MCGC is, of course, one of these and I’ll expect to write-up another idea later this week since I Invested in a Chinese merger arb once again. Currently, 28% of my portfolio is allocated to special situations as can be seen in the graph below:

Portfolio overview 2015 H1

The 28% allocation to special situations is a new all-time high, simply driven by the lucky circumstance that I’m finding a lot of interesting situations this year while I’m at the same time not finding many attractive long-term value stocks. Short positions that (partly) hedge my exposure in various special situations are however not visible in this diagram. My portfolio is currently 97.2% long and 13.5% short for a net long exposure of just 83.8%: pretty conservative. I actually target a higher net long exposure, but when you enter a long/short trade where both the long and short leg consists of non-marginable securities there is not a lot you can do.


Long everything in the portfolio overview