Tag Archives : GLRI

Closing the loop on GLRI 3

Disclosure: Long GLRIW, Short GLRI. This post has been edited to remove details of trading activity. This post is designed to follow up on prior analysis regarding a current investment and should under no circumstances be considered an advertisement for the performance of past specific recommendations.

Although there’s a business to run, I do aspire to follow up on blog topics when I say I will. Only a few months in and it seems I’ve already forgotten about one. (I will cover the rest of the seed topics mentioned in my first post eventually). About 9 weeks ago, I said I would discuss how to value the post-transaction Glori Energy (GLRI) business. To my handful of non-blood relative readers, sorry!

Valuing GLRI

As it turns out, I couldn’t quite get comfortable with the valuation exercise myself. I have been exiting my position in the warrants and am presently fully hedged on the remaining position. As mentioned before, Glori has an interesting model. They acquire producing oil fields, apply their proprietary technology, and if successful increase recoveries and reduce the decline rate of the field. In principle the business should be able to generate attractive internal rates of return by purchasing oil fields at an implied yield (from the seller’s perspective), increasing that yield through their recovery technology, and then selling at a premium to redeploy the capital into other fields. By repeating this process using leverage, the business could produce attractive returns over the long term.

While yields might be attractive on a project basis, the ultimate returns to shareholders are considerably more difficult to assess. It is uncertain what projects will be acquired, on what financial terms, and of course with what degree of success in improving the ultimate recoveries. GLRI’s disclosures indicated that the AERO recovery system has had mixed success, including at least one field where recoveries did not improve at all, with a great deal of sensitivity to the geologic conditions of the fields where it is deployed. From my perspective, that makes the success of the technology simply too difficult to handicap, and I will happily let others underwrite the long-term success or failure of the business.

As for valuation, using multiples of forecast EBITDA or earnings is a bit silly given the uncertain acquisition profile, though that hasn’t stopped a few sell-side firms from trying. At the arms length valuation established by the transaction and the new fully diluted market cap, the best one could do in my opinion would be to attempt to extrapolate from the yield profile of the most recent acquisition to the company as a whole. Treating the stock like a fund, assuming the technology works as promised and the company can redeploy all of its available capital in acquisitions on similar terms, what would be the notional levered cash flow yield? At least that is how I would try to approach it. The stock is a little like investing in a listed oil and gas private equity vehicle, and with confidence in the underlying technology, one could conceivably compare the prospective risk-adjusted long-term returns to similar investment opportunities elsewhere. At the current price, there is implied value to the technology. If it doesn’t succeed increasing recoveries, then GLRI should be worth little more than its net asset value. The right assessment of asset value is of course an entirely separate discussion, which depends on reserve valuation estimates, the oil price, and interest rates, but it is significantly below the current enterprise value, and there are plenty of other options for E&P speculation.


As the initial write-up indicates, this was a special situation relating to a one-time transaction. I am ultimately not willing to underwrite speculation on the value of the business itself.

Meanwhile, the conversion right on the warrants has made for an interesting arbitrage situation. The 10:1 conversion window runs May 16-June 15, and creates a sort of convertible arbitrage opportunity during this period. At times during the window, it has been (and may again become) possible to purchase 10 warrants for less than the value of 1 share of GLRI. GLRI was difficult to locate early in the window, but for accounts large enough to participate in a pre-borrow program, I chose to hedge the entire warrant position by shorting GLRI. As the price of the underlying has risen closer to the $10 strike price, the warrants have become more efficiently priced. The slight premium to GLRI in the current price reflects option value over and above the conversion right. This is of course a basic idea behind convertible bond arbitrage — by owning a convertible security with an embedded option and hedging the price risk by shorting the underlying, one can capture some option premium while limiting downside. Cable Car does not generally engage in convertible arbitrage, but at the moment it offers a potentially more attractive risk/return tradeoff than selling the unhedged warrant position outright.

INXBW Update 1

Disclosure: Long INXBW.

The transaction closing date has been postponed a few times and is now scheduled to be completed on April 10. Meanwhile, Glori completed an oilfield acquisition, likely representative of its strategy going forward, through a $40m deal with Petro-Hunt. The closing delay is related to unspecified SEC requirements; my best guess is that Infinity received SEC comments requiring a response and/or was required to provide investors more time to evaluate the Petro-Hunt deal.

About a week ago, the warrants traded up to 77 cents, which is still a significant discount to the common but provides less of a margin of safety. Since then, the warrants have been very illiquid. Remarkably, there have been no trades at all for the past 3 trading sessions, a good illustration of why this particular situation is best suited for small accounts. Even small accounts can miss out; since Cable Car manages separate accounts for each client, I have yet to establish a position for one of my most recent clients. That in turn provides an interesting illustration of the pros and cons of separate accounts. On the one hand, my newest client may not be able to participate in this particular investment opportunity. On the other hand, in a pooled vehicle, earlier clients’ proportionate share of the position, provided I could not increase it, would be unfairly reduced by new capital. Of course, one’s perspective on the benefits of participating in any particular idea depends entirely on how it turns out. If the transaction is not completed and the warrants are ultimately worth only 60 cents, perhaps my new client got lucky!

I would still happily buy more INXBW around 70 cents, but at the moment there are no sellers.

I have some ideas for how to think about the value of the post-transaction entity, which is somewhat challenging to value. In order to avoid contributing to further lack of buying opportunities, I will refrain from discussing them until after the transaction is consummated.

INXBW: A different kind of SPAC arbitrage 1

Disclosure: Long INXBW. Please be sure to read the disclaimer — no content on this blog is investment advice.

This is a post originally shared on the investment ideas forum SumZero. It is a relatively illiquid opportunity suitable only for small accounts, but it describes an interesting corner of the stock market. In brief, an investor can buy warrants in Infinity Cross Border Acquisition Corporation (INXB) for about 70 cents today, which will be convertible into shares worth 80 cents in 6 weeks. There is downside to 60 cents in the event a planned merger with Glori Energy falls through and further upside if investor demand for Glori is high after the transaction.

Back in 2009, when cash was paramount and everything was on sale, SPACs (special purpose acquisition companies, i.e. blank check firms that IPO with a mandate to reverse merge with another company later) became a popular arbitrage vehicle for those who still had funds to invest.

A SPAC is typically structured so that the initial investors have some sort of opportunity to get their money back if they disagree with management’s proposed acquisition. Usually this protection is in the form of a mandatory tender offer at the IPO price and/or a liquidation right, again at or near the IPO price, if a deal is not approved by shareholders and consummated by a certain date. During the financial crisis, the price of many SPACs that had yet to find their acquisition targets dropped well below the IPO price, offering investors a low-risk opportunity to buy below cash and then take advantage of the liquidation right or tender once a deal was announced. This often resulted in the deals failing to close, but the original shareholders were usually long gone and the arbitrage could generate 10-20% returns in a matter of months.

There was a certain poetic justice to this, as SPACs are a great example of Wall Street’s excesses. Why do your own diligence on an IPO when you can fund a shell company to do it for you? Why pay a private equity firm fees to manage a portfolio of private companies when you can pay an often untested management team $10-20m in stock options to buy just one? Often the proposed acquisition target won’t even be in the same industry as the SPAC initially planned.

The structure has a colorful history too, as it was first used by (often fraudulent) stock promoters in the 1980s before becoming discredited and more heavily regulated. It reemerged during the last decade with the protections just described, and it was a popular IPO vehicle during the boom. There was a great Steven Davidoff article on a recent SPAC IPO that describes the history in more detail.

Enter Infinity Cross Border Acquisition Corp, traded on the NasdaqCM as INXB, INXBW, and INXBU for the common, warrants, and units (common plus warrants) respectively. Backed by the Infinity Group, an Israeli-Chinese private equity firm, it was originally supposed to buy something in China. But no matter — the SPAC eventually identified an interesting oil extraction technology start-up to buy and take public, Glori Energy. Glori’s VC backers will retain a controlling stake and take INXB shares at the IPO price of $8, with customary lock-ups. Infinity and the Thomas Hicks family office are buying additional shares at that price as well.

There is downside risk below 60 cents if INXB trades below $6 after the transaction. However, with the major investors injecting capital at $8, equivalent to an 80-cent warrant price, buying warrants at 70 cents is like buying into the offering with a $1 margin of safety.

Glori could be a very interesting business if its technology really performs as advertised at scale. Glori has a proprietary biomass system called AERO that is supposed to reduce the decline rate of older oil wells under certain conditions. In principle, this means Glori can purchase a well at standard industry multiples based on the usual recovery rates, then apply its technology and ultimately extract more value from the well over time than the seller could have. The plan is for Glori to roll-up small producing wells with the right geological characteristics — yes, including some in China — monetizing its technology by applying it in the field. If the investor presentation (Jan 9th 6-k exhibit 15.1) is to be believed, Glori may be able to achieve IRRs in excess of 40% on well acquisitions assuming AERO performs as intended.

As an aside, I personally have limited expertise with oil & gas exploration and have no real way to evaluate the technology. It apparently works in some pilot projects, but whether it will scale and Glori’s acquisition strategy will be successful is not a question I have tried to answer for this arbitrage situation. I would welcome comments from anyone with a background in exploration & production.

Back to the opportunity today: unlike many SPACs that required majority shareholder approval and ended up in mandatory liquidation rather than consummating a deal, Infinity learned its lesson from SPAC arbitrage and has a relatively lenient standard in its articles of association for the transaction to proceed. The maximum tender condition is set such that INXB must retain at least $8m in its trust account. In other words, a maximum of 4.75m of the 5.75m public shares may be tendered into the deal, or 83%. Only 17% of the public shareholders need hold onto their shares for the deal to close.

That said, there is still a meaningful risk that the deal does not go through. SPAC arbitrage is still popular, even when the discounts to liquidation value are quite small, as in the current environment any yield is potentially preferable to sitting on cash. For example, INXB common shares currently trade at $7.95 and traded as low as $7.60 early last year, versus an $8 IPO and mandatory tender offer price. It is probable that a substantial number of arbitrage funds who hold INXB will tender into the deal. Based on available filings as of 9/30, it appears that 13-F filers and mutual funds that are or might be arbitrage funds own approximately 2 million of the shares outstanding, but there could be other, smaller arbitrageurs who are not required to disclose their positions. 824k shares were tendered through January 31.

If the deal closes, the tenor and strike price of the warrant change, but they also gain a conversion right during the 30 days after the transaction closes. 10 warrants are convertible into 1 share of stock, so provided INXB continues to trade around $8 after the deal, the warrants would be worth at least 80 cents. If the deal fails to close, the company will liquidate and the warrants will be worth 60 cents in liquidation. There is a parallel tender offer for warrants at 60 cents but it does not affect the maximum tender condition.

INXBW currently has an ask of 70 cents, so the situation sets up a risk/reward trade-off of 10 cents down, 10+ cents up. Although there is a risk that too many shares tender, Infinity and the other deal participants are highly incentivized to ensure that the transaction closes. I’m betting they can convince $8m of investor capital to participate in the deal. The tender expires on March 17, and the warrants become convertible for a one-month period beginning 31 days after the transaction closes.