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"Oil's Bernie Madoff" Trumps Platinum Partners PDF Print E-mail

As the Fed-induced stock market bubble comes to an end we are starting to see which company's are overvalued and whose assets are in disrepair. Last month the SEC accused Platinum Partners and two of its hedge fund advisory firms of running a $1 billion Ponzi scheme ( https://www.sec.gov/litigation/complaints/2016/comp-pr2016-267.pdf ), which involved inflating asset values and illicitly moving "to cover losses and liquidity problems." The claims dominated the financial news cycle. However, Weatherford International's -- "Oil's Bernie Madoff" -- $14 billion Ponzi Scheme puts Platinum Partners' scheme to shame. I explain below.

 

Platinum Partners Experienced Liquidity Strain Since 2012

According to the SEC Platinum Management reported steady, positive returns every year and averaged 17% annually from 2003 - 2015. It guaranteed investors liquidity and allowed redemptions on 60 - 90 days notice. Platinum Partners Value Arbitrage Fund L.P. ("PPVA") faced a liquidity crisis for years, but hid it from investors. Its concentration in illiquid positions made it even more difficult to meet redemptions. Internal documents described "Hail Mary time," pursuant to hopes that new subscriptions would be enough to meet redemptions. As early as November 2012, Nordlict and Landesman complained that redemptions were "daunting" and "relentless."

In June 2014 Nordlicht wrote Landesman that:

"It can't go on like this or practically we will need to wind down ... this is code red ... We can't pay out 25 million in reds [redemptions]and have 5 come in."

Weatherford Has Experienced Liquidity Strain Since 2015

In Q1 2015 the company had free cash flow of -$263 million. What gave me pause was that revenue was in decline, so the company should have been a cash generating machine. It should have collected on receivables, sold inventory, reduced payables and pocketed the difference. Instead, Weatherford experienced cash burn from operating activities. Cash out flow from the change in operating assets and liabilities - a subset of the $42 million cash burn from total operating activities - was $334 million. In particular, the change in inventory was -$32 million; this implied inventory was slow-moving or stale. As a result the company had to borrow $307 million in short-term debt to help fund itself.

In 2016 Weatherford has raised over $4 billion to fund principal payments, push back near-term principal payments and fund operating losses. The company has burned through $400 million through year-to-date September 30, 2016. I will burn more once payments on its $140 million SEC fine kick in in Q4 2016.

Platinum Overvalued The Fund's Assets

According to the SEC complaint Platinum Management deceived investors by vastly overvaluing its interest Golden Gate Oil LLC ("Golden Gate"), a small oil production company. The position was valued at times around $170 million, and was purported to represent more than 19% of PPVA's total assets at the end of 2013. In reality, it was a fraction of that. Golden Gate consumed more than $20 million in PPVA loans and yet barely produced any oil, suffered large operating losses and never made a single interest payment on PPVA's loans. Tellingly, when Platinum Management engaged in transaction involving Golden Gate, including buying or selling options to buy interests in the company, they were at values much lower than what it carried on its books ... It eventually purchased the remaining 52% of Golden Gate for a mere $3.2 million, and yet it was still touting an enterprise valuation of at least $170 million. Platinum Management's inflation of Golden Gate's valuation by itself led to an overstatement of PPVA's AUM by as much as 13% at the end of 2014.

Weatherford's Assets Are Overstated By $6 billion

Weatherford built up billions in goodwill, inventory and PP&E during its growth phase. Now that oil prices are more than 50% off their Q2 2014 peak, those assets are worth far less. In January 2016 I estimated ( http://seekingalpha.com/article/3789136-will-weatherfords-collapse-kill-halliburton-baker-hughes-merger ) its goodwill and inventory were impaired by a combined $2 billion. Covenants with short-term lender, JPMorgan Chase (NYSE:JPM), required it to maintain a debt-to-capitalization of less than 60%. By maintaining its inflated goodwill and inventory, the company was able to avert a potential covenant breach which would have prompted lenders to accelerate its short-term debt ($1.7 billion).

Those inflated assets also allowed Weatherford to raise [i] $630 million in equity in March 2016 and [ii] $2.7 billion in debt in June 2016. In Q3 2016 Weatherford reported after-tax charges of $1.43 billion, including 1) $719 million related to impairment of long-lived assets, inventory write-downs, and accounts receivable, and 2) $683 million of tax valuation allowances. Had the company reported such write-offs when I had screamed about them nearly a year earlier, it might have hampered Weatherford's ability to raise capital and stay afloat.

At Q3 2016 I estimate its assets (particularly goodwill, inventory and PP&E) are overstated by $6.4 billion and the company is insolvent by $4.1 billion ( http://seekingalpha.com/article/4025042-weatherford-insolvent-4-billion ).

Conclusion

Weatherford has been "Robbing Peter to pay Paul," just like Platinum. Its $14 billion Scheme trumps Platinum. The only difference is that Weatherford has been able to continually raise debt and equity to stay afloat. The question remains, "When will 'Oil's Bernie Madoff' be wound down?"

On Shock Exchange 

With the critically acclaimed, Shock Exchange: How Inner-City Kids From Brooklyn Predicted The Great Recession And The Pain Ahead, author Ralph W. Baker, Jr. predicted the current global economic slow down, the demise of China, emerging markets and the pending stock market crash.

Where to Buy:

"Shock Exchange" is available electronically through Barnes & Noble (NOOK), Amazon (Kindle), iTunes, etc. The print version is available through the following retailers and bookstores:  

Print Version: 

Amazon http://www.amazon.com/

Barnes & Noble online http://www.barnesandnoble.com/

Hampden-Sydney College Bookstore: http://cougar.hsc.edu/cgi-bin/main_inv.exe , item number: 38561. Or call Jason Huskey at 434-223-6117.   

 

 

 

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