Saturday, January 5, 2013

Sahara Investing Looks at Conrad Industries ($CNRD)

Sahara Investing looks at Conrad and concludes,

"it is always likely that an illiquid stock such as Conrad’s will trade at some discount to its intrinsic value. However, with the buyback program in place and the cash piling up (plus the possibility of a sizeable settlement from BP), I think Conrad Industries is a fantastic buy at this price."
This is a good summary of the situation. The only thing that I think is missing is the supply and demand color from other industry participants of the type that I found over the past several months. Here's a recap:
[1] "Eight percent of the current [coastal tank barge] fleet is single hull barges that must be decommissioned by the end of 2014. The size of the coastal tank barge fleet is further constrained by limited shipbuilding capacity that means the lead-time for new vessel order is over 12 months. Most new vessels replace retiring existing barges."
[2] "A resurgence in the Gulf of Mexico offshore markets, spurring both newbuild and conversion projects, and augmented by substantial U.S. government spending, has resulted in shipyard backlogs that are as good as they have been in some time; carrying well into 2014 and beyond."
[3] "US coal exports are strong and North American oil production continues to rise. Tank barge capacity in the industry continues to be in tight supply"
[4] "[E]xpecting 2013 demand for our service and product lines that support deepwater drilling to surpass the level we experienced before the Macondo incident [S]ubsea tree installations in the Gulf are not expected to reach the prior peak level of 2008 until 2016."
[5] "[T]he major yards are really pretty booked up through 2013. So the tail end to 2013 maybe farther 2014 for you to be able to get anything from the major yards"
[6] "Inland tank barge fleet utilization during the third quarter remained in the 90% to 95% range"
[7] "the increased movement of petroleum and chemical products has created a robust market for tank barges. We currently have tank barge orders into 2014."
[8] "In the U.S. Gulf of Mexico, we have seen resurgence in activity in the deepwater and ultra-deepwater arenas over the past year"
[9] "Both Schlumberger and Baker Hughes had good things to say of the Gulf of Mexico. Calling it 'the fastest growing deepwater market in the world'"
[10] A Hercules Offshore presentation showing a huge increase in GOM jackup backlog and dayrates. HERO's backlog per rig is at a 5 year high and shallow GOM lease block sales are back to early 2008 levels.
[11] Post-Macondo concerns have eased and offshore drillers are beginning a major reinvestment cycle to replace their aging jack-up fleets.
[12] "new dry barge builds required to replace retiring barges may strain the capacity of barge manufacturing during the next five years"
[13] "approximately 25% of the industry’s existing dry cargo barge fleet will need to be retired or refurbished due to their age over the next three to six years"
[14] "Most of our capacity is already booked for the next three years"
I think this is amazing, like the polar opposite of the photovoltaic solar industry. Every comment you read is bullish. Barges and GOM energy work are the big demand drivers for Conrad and both are on fire. Barges should have at least two hot years and the GOM energy stuff probably even longer.

Something that I like about Conrad specifically is that they aren't reacting to all this by announcing plans to build a huge new megashipyard to take advantage of the increased business. It looks like they will prudently earn a lot of free cash flow using their existing equipment, and then return the rest to shareholders via buybacks and dividends. That is exactly what we want.

The demand won't last forever, and it's smarter to expand your shipyard on the floor of the stock exchange, by buying back cheap shares. An employee-manager might not feel that, but an owner-manager does.


Anonymous said...

Not sure if you caught this article yet, but here is a link to the second part of the article that I posted a month ago in a comments section:

I especially like the last paragraph, stating that most tank barge use is complementary to rail crude movement, as opposed to competing against rail for traffic. This could mean that the tank barge movement is more sustainable than I originally anticipated, in that rail offers flexibility advantages over building pipelines in many cases. Therefore, crude rail traffic may stay relatively strong even as pipelines come online. As such, tank barge demand would also maintain its niche in the refinery supply chain.

CP said...

"[I]t would appear that provided you can secure the barges, you acquire greater flexibility by transferring crude from rail onto barges to complete its journey to refineries. The extent to which this becomes more common would appear to be more constrained at present by fleet capacity and weather related constrictions than other considerations such as equipment cost."

Thanks, I'll do a FPP about this.

Josh said...

They did announce a big capital spend of 20MM for 2012. At the time it seemed pretty big. In hindsight, it now looks like a pretty smart move. This was all basically funded out of existing cash flow.

It was unclear to me whether you were suggesting that there has not been any big CapEx (granted it was growth CapEx)? It is possible they announce another large spend again this year.

CP said...

Right, plus $5mm of that was to buy a parcel of land next to one of their LA shipyards.

They are very very careful about capex and had been deferring capex when possible during the depression.

So, 2012 looks to me like a catchup on maintenance capex and then it should be down to regular low levels this year.

Josh said...

Well Capex back down this year could be a small assumption. Granted I have full trust in management, otherwise I wouldn't still be long CNRD.

CP said...

How long have you owned? At what price would you sell?

Josh said...

I started buying CNRD in March 2011 and continued to add as I got more comfortable. At first I thought CNRD was an okay business with a low PE and net cash. At some point, not sure when (I think around March 2012) I realized the company had a superb business.

I think CNRD is worth conservatively around $27 but probably closer to $30 (without any BP claims settlement).

From a risk management standpoint, I am looking to trim the position near $22. I haven't sold any yet, but I put in a limit order when all the special dividend announcements were happening, hoping that CNRD would rally significantly with any announcement.

CP said...

That's pretty similar to how I got involved.

However, in the past several months, I have reassessed even higher after looking at the industry color and seeing that this is a superb business that will have several years of record demand.

I wouldn't sell at $22.

What else do you like?

Josh said...

I would not sell at $22 except from a risk and portfolio standpoint. I would trim the position (not sell all of it). It is just not letting the position become too big.

I mostly stay in the large cap space (and use options, like cc, or cash covered puts etc) but when an opportunity like CNRD comes along, you can't pass up. I am not sure which value blog I saw the idea first. Pretty much every blog I read has mentioned it and/or bought it.

I like TRN in the same space as well as the addition of railcars (especially for energy products). I like CKH also overlapping in the space.

I am a fan of copper and am bullish on copper like FCX. I just don't see copper going below 3. So again free option on copper actually going higher.

I like some beaten down oil/gas names like NFX, SD. I think that the stocks are worth the oil alone and it is a free option on nat gas rebounding. Probably would like CHK (I have owned the preferreds that you mentioned in the past) but it CHK is so hard to understand.

The only other small cap stock I like is IMH (and the preferred as a small risk/reward position)

I made a new commitment to work on my blog in 2013. I am definitely not a good writer but maybe I ll eventually get to all my positions :) and also become a better writer.

Josh said...

Probably another 5-10 small cap / micro caps that I like but I haven't had the time yet to finish my research on them. An example would be SODI which has been blogged about extensively but I need to spend 3-4 hours going through everything to get comfortable to buy.

CP said...

What micro caps besides SODI?

I think these are one of the best ways to get an edge if you are small.

Josh said...
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Josh said...

I need to spend more time reviewing before I get comfortable with some other microcaps. I don't own any SODI but it is what I think is the best one based on blog posts.

I am not the turn over rocks person like a lot of the blogs out there. My list of names are all names that other blogs have mentioned (I am going to update the blogs I follow on my site shortly) rather then list them all here.

Only 1 small cap that I feel like I turned over is AZC. I was trying to understand SLW better and was looking at some of the deals they made. AZC has some risk as their only copper mine is being permitted (in Arizona). Environmentalists want new studies, delays, etc but I think permitted is complete by March. Delays have disappointed in the past as some observers thought the company would be permitted in 2010. It is one of those trades that you put 1% in because it could be a zero but I believe that there is a 90% chance the stock makes you 500%.

You could do this same type of trade with IMH preferred. (IMPHO/IMPHP) Lawsuit about stripping the rights illegally hopefully prevails restoring preferred rights, settled for a decent common stock exchange, or cash buyout. If not the other out is the company is taken out (preferreds still par $25).

CP said...

Thanks, for some reason I don't think I had ever seen your blog before. I'll start following.