CIM divident cut - Ouch

Chimera [CIM] announced a lower dividend of 14 cents for Q1 2011, down from the previous several quarters at 17 cents. Yield is now just about 13%, instead of the previous 16%.  Ouch, because this was exactly a day after I bought at 4.20, and the price dropped to 4.12 on the news. That's a 2% drop in price on a 17.5% drop in the dividend.

I do still like these guys because they are doing smart things, and their leverage ratio remains under 2x. Compare with AGNC which is running between 7x and 8x leverage.

Update Mar 29
CIM went ex-dividend today, and dropped from 4.18 to 4.02.  Maybe the impending dividend was part of why the dividend cut didn't have as much of an impact on the price.  I will be watching for the price to go down because people are getting out.

Also, not CIM directly, but mortgage REITs in general "got Cramered" today. On his lightning round, Cramer mentioned AGNC and said "I don't understand how they can pay that yield."  Now a lot of people listen to Cramer, but not all of them do what he recommends. People know he's full of crap. The point is that a lot of people watch his show, read his blog, or the zillion others that just repeat "what Cramer said today." The story is coming up on the google news feed for a lot of mREIT shares. It's exposure, and we know that (in the short term) the market is a popularity contest. Exposure leads to popularity.

Something else: I've noticed that TheStreet.com has been posting news stories when the mortgage REITs are about to go ex-dividend.  Saw this with AGNC a week ago, and now CIM. The result seems to be a much sharper drop on the ex date - previously, it would take a day or two or three from the ex date before the price would drop and bottom. On these two most recent ones the price opened sharply lower on the ex date, and settled quickly from there.

It seems this would make my short-across-the-dividend idea work better, and more quickly.  Stay tuned for more on this idea.

Idea: Oil & Gas Production - ATP Oil and Gas [ATPG]

ATP Oil and Gas [ATPG]

Business: ATP are an oil and gas production company. They buy leases where they drill and operate oil and gas wells, mostly in the Gulf of Mexico and the North Sea.

Investment Thesis: ATP, along with lots of other Gulf of Mexico oil producers, had a huge setback from the Deepwater Horizon spill. Since drilling and production is ATP's business, the moratorium has prevented them from growing.

Buy Catalyst: The Federal Moratorium on new drilling in the Gulf is being lifted, and new permits are being issued. ATP's value will increase significantly as they complete new wells and begin production.  The big opportunity was during the spill, but the drilling moratorium has extended the opportunity. The BOEM issued ATP's permit Friday Mar 18.

Why this is a good idea

• Price is discounted because ATP's business has been at risk due to the Gulf spill and drilling moratorium. This is about to resolve itself.
• New wells are about to come online (Telemark) for production.
• ATP owns and operates deepwater drilling rigs (Titan, esp.) which are in high demand.
• ATP is a small-cap stock ($980M) with lots of room for growth.
• Management is seeking to develop other oil-producing locations in Israel that aren't drilled-out like the Gulf and North Sea.
• Long-term, the price of oil has and will continue to rise, increasing the revenue of producers like ATP.
• ATP produces a significant amount of natural gas, which is currently at historic low prices in the U.S.  Another long-term upside as usage and price eventually rise.

Downside: These guys had some serious cash flow problems because they couldn't operate their Titan and other drilling rigs during the moratorium, and couldn't move it elsewhere because it was (and remains) under contract. They did some creative financing and used the rig as security for a $150M revolving credit facility, which kept them afloat but also adds a big debt load.

Why this is a bad idea

• ATP is in a "do or die" situation where they have mortgaged their production equipment for cash, and must start producing in order to pay that back. Silver lining: another company mortgaged their plants and equipment and has done very well in the last few years.
• The company has significant debt (>3x market cap), and is currently losing money. I believe that Q4 was a "kitchen sink" quarter (get all the bad stuff in the same quarter's results), which will make future results look better.
• Drilling is very capital intensive, and bad wells, accidents or other unforseen costs can easily push costs up and beyond available capital.
• Q4 included a $20M expense for "pipeline hydrate remediation" that was billed as one-time. More unplanned expenses could come up.

Sell Catalyst: ATP are drilling in the Gulf and North Sea, which are well-explored areas. Production will decline and eventually become un-economical even with higher oil prices.

I bought this at: $17.35 on Mar 17, 2011

Links: 
Most recent earnings call (Q4 2010)
George Fisher Article - Above average risk, controversy and potential reward (Nov, 2010)

George Fisher Article - Above average risk, controversy and potential reward, Part II (Mar, 2011)

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