Third Martini Investments

With last weekend being the only one in recent memory without rain or the need to go to the office, there was only one thing to do: hit the beach. Being just like any self-respecting (future) high-net worth individual in the glamorous world of finance, taking the train or a bus out to Long Island was not an option. So with suntan lotion, towel, and beach toys (including girlfriend) in tow, I headed for the Hertz on 77^th and Amsterdam. All the luxury cars were already gone, so I could pretend to be disappointed. In the end, I was stuck with the standard Ford pinto-esque piece of crap. No Problem, at least I’ll save on gas…WRONG. Filling that baby up on the way home cost me nearly as much as paying for dinner that night.

Yes, I’m very concerned about the effects of high fuel prices on the economy. Inflation, lower growth and all that really aren’t great for anyone’s portfolio. But I’m really concerned more about having to shell out so much for the privilege to drive a car I can barely fit into. And speaking of portfolio, I realized yesterday at the pump that without oil and gas exposure in my Fidelity account, I couldn’t even take comfort in the fact that the absurd price I was paying was helping Exxon-Mobil to another record year of profits.

What to do, what to do? Buy shares in major oil? Not right now- been there, done that, overvalued. And besides, Oil companies are evil. Really, they are.

The investment professionals at Third Martini Investments (meaning “myself”) always see beyond the conventional plays, though. If one desires to profit from $70 oil, one should buy $70 oil, with one caveat: Buy it for less.

Someone told me that a two year HBS education could be boiled down to this: “Buy low, sell high; collect early, pay late.” Well, this is the first part of that equation in action. Allow me to introduce you to two gentlemen, Mr. Patrick Johnson and Mr. Aloy Okafo. Both reside in the lovely city of Lagos, Nigeria, and can be contacted through http://www.alibaba.com/trade/search?SearchText=oil&CatId=&Areaca=NU&Country=NG&opt=EXT&IndexArea=offer_en&OfferType=SALE%2CAGENT%2CMISC&PostTime=&advancesearch2=Search . Both gentlemen will sell you crude oil for USD$40 per barrel. WTI/Brent is currently around $70 or so in the US, and many of us think it will go higher. Do I smell an arbitrage opportunity?

“Well,” you’re saying, “a lot of good a barrel of Nigerian oil is going to do me. Who am I going to sell it to- Nigerians?” Nope- the answer lies at  http://www.maritimesales.com/Ships%20for%20Sale.htm. For $1,550,000 you can buy your very own oil tanker. Bring the oil over here, sell it to whomever you please, and force guys like me who want to go the beach to pay too much for it.

A quick number crunch: Buy 1MM barrels from Patrick or Aloy @40= 40MM. Sold in New York for $70MM. Tanker charter rates are around $30,000/day- assuming a 55% margin at that price, operating costs would be $16,500 per day. At 10 days (the average number of days between the middle east and the states according to a Sept. 2005 article in the Houston Chronicle), operating costs would be $165,000- round trip at $330,000. Throw in the cost of the tanker and around $5MM for “unforeseen contingencies” (bribing officials, hiring someone who can drive the damn boat, airline ticket to Panama to buy it, etc), and you still end up with $23,120,000 in profit. And this assumes you only do it once. You tell me you’ve seen triple-digit IRRs?- I’ll show you quadruple-digits, baby!!!

[A note on risk management: We all know Nigeria is famous for scams, so proceed with caution. A quick look at the profile of Mr. Johnson and Mr. Okafo may help you decide between whom to go with. Patrick Johnson’s office is located at No. 20 Border Thomas Street, Surulere, Lagos. Mr. Okafo conducts his business at 21 Computer Street, Lagos, Lagos. Now, I’m well aware of the fact that Lagos is the IT capital of Africa, but I can’t seem to get comfortable with the fact that the city has a street named “Computer Street.” Perhaps he meant to write “Internet-café-where-I-hatch-my-online-ripoff-schemes Street.”]