A major development has happened this week, as a US Judge ruled in favor of a Canadian hedge fund, Crystallex in what appears to be the most significant news coming from Venezuela and its failing oil industry. The judge ruled that New York City based Tenor Capital Management (who basically bought the lawsuit from Crystallex), has the right to get $1.5 billion in US dollars as a settlement for Venezuela seizing a gold mine from Crystallex.
Lawsuits as an asset class
Think of it this way… You need help paying bills because someone rear ended your car, broke your foot, and you can’t work. The credit card companies don’t care that you’ll be getting a settlement from the car accident, they want their money now, and bills add up. You need to find a way to pay the bills and not go bankrupt, so you find someone willing you lend you they money based on the fact that you WILL be getting a settlement. That is exactly what happened in this case, with Tenor Capital buying the firm or “bailing it out” and paying its bills, in exchange for the company turning over all future assets or “income” from the lawsuit.
Seizing assets from Venezuela
Looking at the overall picture, how do you think a goldmine lawsuit from a canadian company, bought by a New York investment firm, involving the Venezuelan goverment could change your everyday life? It could, and in a big way. The assets at the center of the lawsuit are owned by PDVSA, and cover three US based refineries, 48 oil terminals in New Jersey, pipelines, and not to mention, over 14,000 Citgo branded franchise gas stations.
The judge in the case ruled that Federal Marshals can seize the US based assets and auction them off to help pay the debt, or Tenor Capital could have just paid $70 million for almost $2 billion in oil and gas assets.
So where does this leave the consumer? Day to day gas station operations will most likely remain unchanged, (seriously, no one is coming to seize a convenience store and prevent you from getting food off the roller). Impacts will be felt by franchise gas stations possibly not being able to get refined gas because of gas purchase agreements.
The US – Venezuela relationship
Right now, full 2017 numbers show the US importing 7% of our oil from Venezuela, making it a top 5 producer for the US, but constant devaluing of the Bolivar AND another $2 billion lawsuit and possible asset seizure from ConocoPhillips ($COP), means that there could shortly be no way to get Venezuelan oil.
What happens next
Oil prices will most likely fluctuate, with oil producers and energy tracking ETF’s taking an immediate hit. If you are looking to play the Oil and Gas ETF market, take a look at ProShares UltraShort Bloomberg Crude Oil ETF, ticker $SCO. This is a way to play the commodities market without having to directly own the commodity itself. The short aspect of this inverse ETF means that as the price of oil goes down, the ETF value goes up.
Crude is currently sitting at $67.61 per barrel, and $SCO is sitting at $16.17 a share. If crude falls, the ETF will go up, and buying options is a great way to even further leverage this impending seizure.
Buying 20 MAR 2020 $30 CALL options for $1.55 an option, and getting 10 contracts, brings your entry cost to $1,550. If oil crashes from market volatility, and the $SCO ETF hits $32.50 by 5 JAN 2020, you can liquidate your position selling your $30 call for $4.62 an option, bringing your profit on the trade to $3,070 (198% profit).
There is the VERY real possibility that this seizure can happen in the coming days or weeks, and if that happens, money will print itself. Those same 10 contracts with a $30 strike price, hitting $32.50 by 9 JAN 2019, would bring you an incredible 481% return, or a $7,450 in profit.