The Nairobi Solution: Ch. 3
The price of Sapele Petroleum blinked red. Down 10%.
Erik’s stomach tightened.
Just minutes earlier it had been -5%. Then just now the price had taken another lurch lower. Somone must really be trying to get out.
Earlier in the day there had been rumours the CFO of Oben Exploration was being investigated for fraud. The stock had been trading steadily lower for 2 weeks already. So someone must have known. Now the news was out. So Oben was down 20% on the day. Which was fine, Erik didn’t own Oben. What concerned Erik was that Sapele Petroleum was also trading down a lot; like the Oben news was somehow related. Erik reasoned there must be traders out there who were long both stocks and derisking everything at once.
“What to do?” he kept thinking. “Cut Sapele? Or, stick with it.”
The other factor adding to Sapele’s weakness was the soft oil price. Oil had been trending lower on weak China data.
Weak oil backdrop. Now this fraud investigation at Oben. Oben was going to be an overhang for the whole sector. It confirmed everyone’s worst fears about Nigerian oil companies.
His stomach was telling him to sell.
Of the 6 screens in front of him there was one he looked at every 90 seconds. The top left screen with his year to date (YTD) P&L. Take that YTD number, times it by 0.2 and that was his bonus. He stared at it all the time. The Sapele move had cut that number in half. If he sold and got out here, it was still a decent number. They would be fine. Nicole would still be happy. But if Sapele sunk even lower, he didn’t have much time left in the year to make it back. As they say “December dollars are real dollars.” He imagined coming home and trying to explain to Nicole that he had eviscerated his bonus in the last month on a Nigerian oil company.
On the other hand Saplele had a big well coming up in the Dahomey Basin. He liked the CEO and liked how they had positioned Sapele with a big block in a new unexplored basin. It could be a huge discovery. That was the whole reason he was in it. If the well hit, Sapele would triple. 20% of that would be life changing. And wouldn’t it look stupid, and wouldn’t he hate himself if he sold on the lows because of a fraud at another company which was totally unrelated? Wasn’t that a muppet move?
Erik mulled the regrets back and forth. In which scenario would he hate himself more? His anxiety rising. Worried he didn’t have time to think about this much longer.
Better something than nothing.
As if acting on their own his fingers tapped out an order to sell 1/3 of the position. That was always his style. In times of extreme uncertainty act. Sell 1/3 and see how it feels. Don’t be a deer in the headlights. He hit send which routed the order directly to the exchange. In the position monitor Erik could see the number of Sapele shares he owned tick down as the order was filled. There was a feeling of relief. A slight lessening of the anxiety.
Erik waited half an hour. Staring intently at the screen.
There was no improvement. Sapele drifted sideways, and down; flirting with -11%. The volumes were high, but the stock couldn’t lift. Erik thought back to the CEO’s London roadshow. Everyone was in the same trade and now trying to get out.
Like before, as if on autopilot, Erik tapped out another order to sell 1/3 of the original position. He hit send. After this he would be 2/3 out.
Sapele drifted further to -12% as the order was filled. He decided he wanted to be out of Sapele before the US markets opened and the East Coast traders also started to sell.
An hour later Erik was out of Sapele and the share price was -15%.
His anxiety lessened, but was replaced with frustration. The Sapele loss was such a big set back to what had, up to this point, been a good year running the Africa book for Dwight. Erik tried to look at the upside though. At least if the year ended here and nothing else went wrong, he had a bonus, even if it wasn’t amazing.
A voice brought him out from his self-reflection.
“Erik. You have a second? Can we chat off the desk?” Dwight asked from the other side of the desk behind his own bank of monitors.
Erik’s stomach tightened again. Here it comes. This was it.
Here is where Dwight pulls him into a conference room, yells at him for losing him money and fires him. Another stop to explain on his CV.
“Yes, Dwight. I’m free now if you want,” Erik replied trying to sound as calm as he could.
Dwight led Erik into the glass conference room and they both sat down. Out on the trading floor every trader pretended to be staring intently at their screens, but Erik knew they were all following the drama which was about to unfold.
“Tough day in Sapele” Dwight started.
“Yes. I decided to cut it. I know there is still the big well they are going to drill next year, but I don’t like how the oil price is acting, plus they still need to raise another $20 million for the well. If for any reason they can’t raise the money, or the well misses it will be a zero. So, I took off the position. I know we’ve given back a lot of P&L.”
Dwight leaned back in his chair, sighed, raised his arms above his head and stretched his back. Maybe he was stressed too. He was looking at the ceiling and seemed to be thinking.
Erik was on edge. He wasn’t sure what Dwight was going to say.
He’d come to learn that while Dwight like to portray himself as easy going and relaxed, he actually had a vicious temper. He had seen Dwight yell and ridicule other traders in front of everyone else with surprisingly cutting remarks. Dwight was creative in his insults. He would also yell at the brokers if a trade hadn’t gone well or the firm had been slighted on a deal allocation.
It was hard to tell with Dwight. Sometimes he didn’t care. Other times he would erupt viciously.
Dwight ended his stretch and looked back at Erik.
“It was good to take off the position. It was good risk management. You did the right thing. It’s December. Cut the losses and protect your bonus. Forget about Sapele. Move on to the next thing.”
What?? Did Dwight just compliment him and say “You did the right thing?”
Erik couldn’t believe it. Dwight didn’t seem fussed about the loss. Instead, he liked that Erik had acted and cut his losses early.
‘Dear God thank you for bringing such a kind, patient and understanding hedge fund manager into my life at this point in my career, when I need it most’ Erik silently prayed.
“I want to talk to you about something else.” Dwight added.
“Yes, what is it? How can I help?” Anything to move the conversation away from Sapele.
“A broker in Kenya called me about an opportunity. There is a small bank in Kenya which needs to raise some money. It’s a private market transaction. Apparently, they’ve been funding that big railway project, and the exposure got too big. The regulator wants them to raise $20 million in new equity, or they get taken over by the central bank. It’s kind of a distressed situation which makes it interesting.”
“Did they say which bank it is?”
“It’s Turkana Trust. Do you know it?”
“A little bit. I’ve heard the stories. Is that the bank owned by the Indian family, or the ‘Kenyan Indian’ family? The one where the great grandfather came over to Kenya when the British were building the first railway in the late 1900’s? And the CEO is Rajiv Dessai?”
“Yes, that’s the one. Can you take a look at it? The family is kind of desperate for money, and there aren’t many other funds investing in Africa so the broker brought them to us. They are in a bad spot. If we promise we will act quickly, and not drag them through tons of due diligence, we should be able get in at less than 0.5x book value with full control. It could be a great deal.”
“You want to take full control? But we’re mostly traders. We don’t know how to run a bank.”
“Of course we aren’t going to run the bank. It’ll be like remote control. The Rajiv guy handles all the local noise like dealing with regulators and customers. We just recap it and collect some divies along the way. Then in 3 years after the rail project is complete, and the loan book looks clean, we sell to the muppets for 1.5x book as a ‘play on African growth’. Oh, and we also pay ourselves a big check. I just need you to take the lead and do some research on it so we can do the deal.”
That sounded like a good plan. Especially the ‘big check’ part.
“It sounds like a great idea. I’ll definitely take a look!”