Value Investing In The Commodity Space | The Acquirer's Multiple®

In their latest episode of the VALUE: After Hours Podcast, Scanlon, Brewster, and Carlisle discuss Value Investing In The Commodity Space. Here’s an excerpt from the episode:

Bill: What he did was, if you’re producing corn or whatever, well, I guess, corn is not a great example. But oil, you can hedge it in the future, but you have the bank extend your credit facility to allow you to do that hedge, because you’re losing on your hedge and then you’re going to deliver physical in the future. So, it doesn’t actually matter, but you have a paper loss in the interim. What happened when the commodities ran like they did was people’s banks or whoever the lender was like, “We don’t actually want this much counterparty risk.” They called– or they didn’t extend further credit. It put some people into a forced liquidation scenario. He was the one that bought it. Value investing in the commodity space.

Tobias: One of my first jobs as a lawyer was suing on [unintelligible [00:17:34] agreements and it was suing on these tripartite agreements or not tripartite. They had interest rate currency and then whatever the underlying commodity that was not uncommon for them to sell them. Then if the person can’t make good, then you sue him the contract. We’re the ones who executed, we’re the ones who actually did the suing.

Bill: You were a suer.

Tobias: Well, that’s the job.

[laughter]

Bill: How many of those did you collect on?

Tobias: None.

Bill: Yeah. Your credit risk sucks.

Tobias: That said, yeah, you just brought it off, but you got to come up with some– There’s got to be some events, so you can close off the contract.

Bill: Hmm. So, you have to sue in order to close out the contract?

Tobias: Well, you’ve got a contract, and you got to terminate the contract, and then you got to find a way to collect, you never get it. I didn’t ever see it. I only did it for a few years and I don’t know how many we processed in that period like 50 or something, none of them collected.

Kyla: Well.

Bill: Yeah. People must love talking to you about their legal bills.

Tobias: I didn’t do any talking. Yeah, well, they’re all big commodity or they’re all investment banks. They’re agricultural investment banks. They got plenty of money.

Bill: Yeah. It doesn’t mean they like the legal bills, though.

Tobias: Ah, they weren’t that bad. Relative to what they were making, I’m sure they’re happy with it.

Bill: Yeah, that’s fair.

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