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Author: rjf53 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 630  
Subject: Re: nice dividend yield on Mart Date: 10/12/2012 6:42 AM
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94 cents looks even more enticing, but seeing how ATPG played out does make me more wary with companies that have a lot of debt.

You had to go and bring up ATPG didn't you. :<)

Nothing, other than the word debt, is the same when it comes to the two stories.

Worse case, if the bank wants to pull their support as I understand it, is it will set off a one year clock where Arcan would be forced into a situation of selling off assets and/or seeking a partner.

So the question for shareholders (investors buying now) is if the assets have enough value that a sale would still leave enough for their investment to be money good. I may not be sure what exactly the true worth of the assets might be, and I certainly can't predict what they might bring in a fire sale, but with Arcan trading currently at 17% of what Crescent valued the company at just last year and with really zero indication that there has been any type of change that would alter the value of the assets fundamentally by anything approaching that amount I consider this a huge margin of error.

ATPG was continuously outspending their cash flow with ongoing large capital needs, where Arcan has already announced they will work within their cash flow. Granted this could lead to the company being stuck on a treadmill where they are continuously struggling to simply replace declines if wells disappoint or they fail to stem decline rates through their water flood efforts. But for now at least, they are easily servicing their bank line debt and will be working within their cash flow going forward.

None of this is intended to imply that the company hasn't managed to step in a great big pile of doo doo, but this ain't no ATPG by a long shot, not yet at least.

If anything, I think I can use lessons learned from my ATPG experience to make better decisions with regards to Arcan. First and foremost what ATPG taught (reminded) me is if you are going to bet on a risky company like this how critically important it is to de-risk the position if you manage to get ahead and not simply make decisions based on your perception of value.

Another thing ATPG reminded me of is the strategy you plan to use after the purchase should also be used to help determine your decision when to buy. What I mean by this is if I were convinced that the best way to approach this was to simply view Arcan as a turnaround story with let's say a ultimate value of $5 a share, then for me to obsess over whether I should get in at a $1.00, $0.90 or $0.80 is somewhat unimportant in the grand scheme of things. On the other hand if I know in advance that my plan is to attempt to de-risk the position early and hopefully often then that entry point becomes a heck of a lot more important.

I have already made the determination that at a buck Arcan represents a buy, what I'm trying to figure out is at what price, given the above, is the optimal point within the context of my de-risking strategy.

If not for the debt overhang the decision would be easy as I would likely see taking a laddered approach to buying as it falls a sensible approach. But in this case because I expect continued volatility I'm wondering if a better approach might be to go large immediately. Let's assume for example it were to fall again today and I were given a chance to buy some at $0.85 (might as well be greedy) if I took the laddered approach and ended up with a third or half of a normal position and the shares rallied to $1.15 I would be presented with a de-risking opportunity (price wise) but due to the position size it really wouldn't be an opportunity at all. Now contrast that to a go large position where I'd have an opportunity to sell half of my shares and be left with a decent position and a effective cost basis of $0.55.

I get it, there is no free lunch and that shot at a $0.55 cost basis isn't risk free or a sure thing by any stretch. But all things considered, I'm inclined to conclude that it is likely the best and safest decision from which I have to choose, barring a decision to avoid the name all together.

I haven't decided for sure, but I'm getting close, I guess I'll see what today brings.

Good luck with whatever you decide,

B
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