It's safe to ignore Europe's lingering financial woes, folks. Despite the threat of a deep crisis cracking the EU apart, the Federal Reserve says it's willing to keep the spigot open and QE3 sailing full steam ahead. On cue, the Dow Jones Industrial Average responded with a sharp jump.
The following three stocks faced a run of a different sort this week as investors turned tail, but don't go running over the cliff with them like a bunch of lemmings just yet: This could just be a temporary situation. Let's first see whether they had good reason to fall, as panic-fueled routs can sometimes lead to excellent buying opportunities.
Chesapeake Granite Wash Trust
Cia Energetica de Minas Gerais
Thank you, sir. May I have another?
It took a little time for the info to sink in, but the 10-K filed by Chesapeake Granite Wash Trust last week apparently showed that all those glowing words written of proven oil reserves at the time of its IPO last year ran smack into the reality of poor results when it actually tried to recover them.
According to an article this week on Seeking Alpha, the trust's PV-10 value reported when it was spun off from Chesapeake Energy was $17.35 per unit. Last week's annual report, however, showed they were nearly halved to $9.47 per unit because of lower amounts of reserves. PV-10 is an arcane calculation that oil and gas companies use to estimate future gross revenue to be generated from the production of proven reserves, minus the costs associated with production and future development and then discounted at a 10% rate. The trust's valuation saw its greatest impact from reductions to the quantity of reserves, which alone swiped a fifth of the value.
Considering the numerous spinoffs of trusts that occurred over the past year or so, it would seem the Granite Wash Trust is as tapped out as its wells.
The possibility that Brazil's utility regulator, ANEEL, would cut the preliminary asset valuation used to estimate rate reviews sent shares of the country's second largest utility operator, Cia Energetica de Minas Gerais, tumbling. Because the utility, also known as CEMIG, may see its ability to raise rates pressured by the action, the market quickly looked askance at its future profit generating potential.
CEMIG says the reaction to the news was exaggerated because the utility had already factored the rate cut into its forecasts, though at least one research firm downgraded the shares to a hold. Brazil is seen as having a government more willing to intervene in its economy, which could pose problems for the private sector, but with a consumer base still willing to spend their way out of a recession, the effects will be limited.
It's not as if utilities aren't highly regulated already so CEMIG just may be right that the haircut it got yesterday was a bit much.
Suntech Power's default on its bonds was weighing heavily on the solar sector, and ReneSola was seen as yet another shop in risk of financial failure. With $790 million in debt and just $268 million in cash and equivalents at the end of last year, there was good reason for worry. But now the company has been thrown a lifeline by the China Development Bank, getting a $50.9 million loan that should tide it over for awhile.
It's not just ReneSola getting bailed out, but virtually all Chinese solar shops are hitting up banks from the state all the way down to the local level. Still, even a $638 million loan from the CDB to Suntech couldn't stop the default or from having eight banks put pressure on the courts to declare one of its subsidiaries bankrupt. With $1.4 billion of bank debt, its future isn't bright. and despite ReneSola's bailout, it might not survive much longer, either.
Ready for a resurrection
Energy investors would be hard-pressed to find another company trading at a deeper discount than Chesapeake Energy. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While the debt issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.
The article 3 Stocks Facing a Crisis of Confidence originally appeared on Fool.com.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool has options on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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