Midstream Earnings Notes (Q1 2024)

[Previously regarding Enterprise Product Partners, Enbridge, and Genesis Energy. This is our first time writing about the Tortoise Midstream Energy Fund.]

Enterprise Products Partners L.P.
Highlights from the first quarter results from EPD:

Enterprise reported net income attributable to common unitholders of $1.5 billion, or  $0.66 per unit on a fully diluted basis, for the first quarter of 2024, a 5 percent increase compared to $1.4 billion, or $0.63 per unit on a fully diluted basis, for the first quarter of 2023. Distributable Cash Flow (“DCF”) was $1.9 billion for the first quarters of 2024 and 2023.  Distributions declared with respect to the first quarter of 2024 increased 5.1 percent to $0.515 per common unit, or $2.06 per common unit annualized, compared to distributions declared for the first quarter of 2023.  DCF provided 1.7 times coverage of the distribution declared for the first quarter of this year, and Enterprise retained $786 million of DCF. Enterprise repurchased approximately $40 million of its common units on the open market in the first quarter of 2024.  Including these purchases, the partnership has utilized 48 percent of its authorized $2.0 billion common unit buyback program. Adjusted cash flow from operations (“Adjusted CFFO”) was $2.1 billion for the first quarter of 2024, compared to $2.0 billion for the first quarter of 2023.  Adjusted CFFO was $8.2 billion for the twelve months ended March 31, 2024.  Enterprise’s payout ratio, comprised of distributions to common unitholders and partnership unit buybacks, for the twelve months ended March 31, 2024, was 56 percent of Adjusted CFFO. Total capital investments were $1.1 billion in the first quarter of 2024, which included $875 million for growth capital projects and $180 million of sustaining capital expenditures.  Organic growth capital investments are expected to be in the range of $3.25 billion to $3.75 billion in 2024 and 2025.  Sustaining capital expenditures are expected to be approximately $550 million in 2024.

The $0.66 quarterly earnings are a 9.1% annualized yield on the current unit price of $29. The quarterly distribution is only $0.515 because they are retaining earnings, so the current dividend yield is ~7.3%. The big question with Enterprise is whether all of the "growth" investments pay off by resulting in higher free cash flow generation? If so, cash from operations would increase and capital expenditures would (hopefully) decrease, resulting in a lot more cash available for distributions to unitholders.

We just noticed that Bruce Berkowitz owns EPD in his amusingly concentrated Fairholme mutual fund portfolio, where he has 86% in JOE (Florida land) and 9% in EPD.

Enbridge Inc.
ENB is an $80 billion market capitalization company yielding 7.2% (dividend) which is quite high compared to what it has yielded historically. (It rarely yielded more than 7% prior to 2017.) And it is a C-corp so you don't even get the annoying Schedule K-1 that you do from other midstream companies. Their first quarter (release) adjusted EBITDA was $3.7 billion, up 11% year-over-year. Distributable cash flow was $2.6 billion, up 8.9% year-over-year.

Half of the EBITDA is from their liquids pipelines. Segment EBITDA was $1.8 billion in Q1, up 2.2% year-over-year. They own the Mainline pipeline from the western Canadian oil sands and then the Line 5 that takes that crude to eastern Canada refiners. The Flanagan South and Seaway can also take that Mainline oil from Canada down to Gulf Coast refiners. ("We transport about 30% of the crude oil produced in North America. We transport about 65% of U.S.-bound Canadian exports.") The Mainline System moved 3.1 million barrels per day, about the same as last year.

A quarter of their EBITDA is gas transmission. Segment EBITDA was $936 million in Q1, up 4.9% year-over-year. They carry natural gas from western Canada to export, and also to the eastern U.S. Enbridge connects PA gas to the eastern U.S. as well as Gulf Coast. ("Enbridge moves about 20% of the natural gas consumed in the United States. We are the largest natural gas supplier to New England, the Southeast and virtually all of Florida. Our transmission network is also webbed throughout the Gulf Coast. We are also one of the largest offshore natural gas transporters in the Gulf of Mexico.") They are working on LNG export from western Canada, called the Woodfibre LNG project.

Other quarter is gas distribution (natural gas utility). Segment EBITDA was $566 million in Q1, up 6.8% year-over-year. ("Enbridge’s gas utility business, Enbridge Gas Inc., becomes the largest by volume in North America—with about 7,000 employees delivering 9.3 billion cubic feet of natural gas per day (Bcf/d) to about 7 million customers.") The Enbridge Gas business earns the most during the winter - the first and fourth calendar quarters of the year. This year's heating degree days in Enbridge's markets were only 1,377 HDDs, which was 20% lower than last year.

Enbridge also has a renewable power generation business that earned $190 million of EBITDA, up 89% year-over-year.

Genesis Energy Limited
Genesis has four segments: offshore pipelines in the Gulf of Mexico, carrying crude and natural gas produced offshore to refineries along the Gulf Coast; a soda ash business in Wyoming (like the business where NRP owns an interest); sulfur services (which removes sulfur from refinery inputs and sells it as sodium hydrosulfide); onshore pipelines and terminals; and a marine transportation business with boats and barges to transport crude oil and refined products.

For the first quarter of 2024 (results), the offshore pipelines contributed $98 million of segment margin (the same as Q1 2023), soda and sulfur contributed $45 million (down 31% from prior year), marine transportation did $31 million (up 22%), and the onshore pipelines and terminals $6.5 million (up 21%). Total segment margin of $181 million was down 7.2% from the prior year.

The market capitalization of the partnership (at $13 per unit) is $1.58 billion. Genesis has quite a bit of leverage (see 10-Q): $3.84 billion of debt, and $814 million of convertible preferred units. (The distribution rate on the preferred units is 11.24%.) The enterprise value is thus $6.23 billion, and the EV/EBITDA is 9.6 times the first quarter's annualized EBITDA of $163 million.

Their guidance for 2024 had been $680-$740 million of EBITDA and $200-$250 million of capex, which would mean anywhere from $430 to $540 million of cash flow, which is a range of 6.9% to 8.7% on the enterprise value. The first quarter's EBITDA annualizes to $652 million which is below the low end of guidance and would mean the free cash flow on the enterprise value would be 6.5% if capex for the year was $250 million.

Management thinks that cash flow is going to "ramp" from 2025 onwards as offshore volumes grow (with two new platforms coming online) as well as additional soda ash earnings. Concluding an investment cycle is very powerful if it works: you get higher earnings and the capital expenditures decline, resulting in a big increase in free cash flow.

The company just refinanced its 6.25% notes due 2026 with new notes yielding 7.875% that are due 2032.

Tortoise Midstream Energy Fund, Inc.
This (NTG) is a closed end fund that invests in "natural gas infrastructure entities operating real, long-lived, essential pipeline and logistical assets that are actively participating in the energy evolution". Something interesting about closed end funds is that the investors can not redeem from them. As a result from that, there is no arbitrage mechanism to force the market price of a fund unit or share to trade at the fund's net asset value. In this case, the unit price is an 18.9% discount to the net asset value of the fund.

As of April 30, 2024, the top holdings (71% of the fund's investment securities) of NTG were:

Targa Resources Corp (TGRP) 10%
Williams Companies Inc. (WMB) 9.4%
MPLX LP (MPLX) 9.1%
ONEOK, Inc.  (OKE) 8.9%
Plains GP Holdings, LP (PAGP) 8.2%
Hess Midstream LP (HESM) 6.6%
Energy Transfer LP (ET) 5.2%
Enterprise Products Partners LP (EPD) 4.7%
DT Midstream Inc (DTM) 4.4%
Western Midstream Partners LP (WES) 4.1%

Something else unique about closed end funds is that because they have permanent capital (unlike an exchange traded fund), they can use leverage. NTG has total assets of about $300 million and has borrowed $56 million of funds, comprised of $29 million of notes and $12.8 million on a credit facility. There is one note (Series S) for $25 million at a 2.5% interest rate that is due in December 2028. Two other smaller notes yield around 4% and are due in 2025 and 2026. The note at 2.5% is likely worth much less than par and thus the fund's net asset value, which does not discount the note to fair value, is somewhat understated. The credit facility is floating rate, currently 6.7%. In addition to the $42 million of debt, there is also $14 million of preferred shares. The bulk of this is $7.5 million due in December 2027 at a rate of 2.9%, again, so low that it would likely be worth less than par.

Another nice thing about closed end funds is that they "block" the investor from receiving and having to deal with the taxable income (and Schedule K-1) of the underlying investments that are partnerships.

We tend to like midstream investments right now, and investing in a closed end fund gives some benefits, like blocking the K-1s and giving a discount to the value of the underlying portfolio. The dream scenario would be if the midstream companies' earnings grew, they were revalued to higher earnings multiples (i.e. their dividend yields fell), and the closed end fund's 18.9% discount narrowed. 

Activists (such as Boaz Weinstein of Saba) are pressuring closed end fund managers to take steps to narrow the discounts. (Saba owns ~10% of NTG per recent disclosures.) First Trust had a bunch of midstream closed end funds, and they recently merged them into an exchange traded fund (EIPI). When your CEF becomes an ETF, the discount evaporates.

Tortoise has a bunch of midstream CEFs with no clear purpose for being separate, the same way First Trust did. It would be great if NTG were merged with the other, overlapping midstream CEFs and converted to an ETF. Closing that NAV discount would give a 23% return, on top of the underlying investment returns of the midstream investments.

It will be interesting to see whether the new First Trust ETF (EIPI), which its four CEFs were merged into, retains much of the AUM from those CEFs. If so, that would make it more compelling for other managers to convert their jumbles of CEFs into ETFs.

A step short of liquidating or converting to an ETF is for the closed end fund to buy back or tender for its own shares. Last October, all five of the Tortoise midstream funds tendered for up to 5% of their outstanding shares at 98% of net asset value. Not everyone tendered their shares, so for NTG a shareholder who tendered was able to sell the company 10.18% of shares tendered at 98% of NAV. If they continue with this "discount management program," shareholders may be able to eke out a little bit more return.

Genesis Energy Limited ($GEL)

We mentioned Genesis Energy (GEL) in one of the earnings notes earlier this month. Genesis has four segments: offshore pipelines in the Gulf of Mexico, carrying crude and natural gas produced offshore to refineries along the Gulf Coast; a soda ash business in Wyoming (like the business where NRP owns an interest); sulfur services (which removes sulfur from refinery inputs and sells it as sodium hydrosulfide); onshore pipelines and terminals; and a marine transportation business with boats and barges to transport crude oil and refined products.

The offshore pipelines contributed $407 million of operating income for 2023, soda and sulfur contributed $282 million, marine transportation did $110 million, and the onshore pipelines and terminals $28 million. Adjusted EBITDA for 2023 was $756 million. 

The market capitalization of the partnership (at $11 per unit) is $1.35 billion. Genesis has quite a bit of leverage: $3.75 billion of debt, and $814 million of convertible preferred units. (The distribution rate on the preferred units is 11.24%.) The enterprise value is thus $5.9 billion, and the EV/EBITDA is 7.8x. Guidance for 2024 is $680-$740 million of EBITDA and $200-$250 million of capex, which would mean anywhere from $430 to $540 million of cash flow, which is a range of 7% to 9% on the enterprise value. 

Management thinks that cash flow is going to "ramp" from 2025 onwards as offshore volumes grow (with two new platforms coming online) as well as additional soda ash earnings. 

In addition to our record results in 2023, we also achieved some significant project milestones that will continue to benefit the partnership for many decades to come. First and foremost, we reached substantial completion and commissioned our Granger expansion project. This almost four-and-a-half-year construction project overcame many challenges and delays as a result of the Covid-19 pandemic, but I could not be prouder of our team on the ground in Green River, WY for their tireless effort getting this project to the finish line. This project will add approximately 750,000 short tons per year of additional soda ash production capacity at Granger, bringing its total production capacity to approximately 1.25 million short tons per year, and significantly lower Granger’s operating cost per ton, making it one of the most efficient and lowest cost production facilities in the world. I would also point out that Granger has multiple decades of reserves in the current seam at these new production rates along with hundreds of millions of tons of additional measured and indicated trona resources in those same seams.

As we mentioned last quarter, we also successfully laid the 105 miles of the SYNC pipeline in over 5,000 feet of water, which as many of you can imagine is an engineering marvel. This was a tremendous achievement and a testament to our offshore engineering, construction and operation’s teams that helped complete this portion of the project on schedule. In addition, we made significant strides in advancing our CHOPS expansion project, which includes installing pumps at certain strategic junction platforms. These offshore projects are long-term investments that are underpinned by existing upstream developments which have production profiles going out multiple decades, not years, and have ample capacity to handle much more than the currently discovered and contracted volumes.

Regarding uses of capital:

We opportunistically accessed the capital markets on two separate occasions in 2023 and successfully issued $500 million in new 8.875% notes due 2030 in January and $600 million in new 8.25% notes due 2029 in December, which allowed us to re-finance our 2024 and 2025 unsecured maturities, respectively. More importantly, the combination of these two re-financings ultimately triggered an automatic 12-month extension of our senior secured facility’s maturity date, which now expires in February 2026. These transactions have provided us with the financial flexibility and liquidity to complete our remaining spend on our major capital growth projects in 2024 and bridge us to 2025 when we expect to begin harvesting increasing amounts of free cash flow driven by both earnings’ growth and materially reduced growth capital expenditures. In addition, we utilized a portion of our available liquidity to opportunistically re-purchase $75 million of our Class A convertible preferred units throughout the year at a discount to the contracted call premium as well as purchase 114,900 of our Class A common units at an average price of $9.09 per unit.

Concluding an investment cycle is very powerful if it works: you get higher earnings and the capital expenditures decline, resulting in a big increase in free cash flow.

Wanted to add some highlights from the Q3 investor call - another instance of a quarterly call with no questions.

* Regardless of the makeup of our 2024 results and any uncertainty that might exist today, it is important to remember that the long-term outlook for Genesis remains intact and as strong as I have seen it during my tenure at the company. In fact, 2024 should really be viewed as a transition year for Genesis, as we expect to complete our ongoing growth capital expenditures in mid-to-late 2024, in advance of the significant step changes in offshore volumes and corresponding segment margin contributions beginning in late 2024 and accelerating into 2025, as the Shenandoah and Salamanca developments are expected to come online. The combination of these events will provide us with increasing amounts of cash flow after all of our cash obligations and generate increased financial flexibility to continue to simplify our capital structure, return capital to our stakeholders and ultimately allow us to continue to build long-term value for everyone in the capital structure for many years ahead.
* To put this in perspective, the 9.4 million acres of leased but as yet undeveloped acreage is more than 6.5 times the size of ExxonMobil’s total gross acreage position in the Permian Basin post their recent acquisition of Pioneer. Suffice it to say, there is a tremendous resource in the Gulf of Mexico that has yet to be explored under existing and valid leases, and it should undoubtedly provide for decades and decades of drilling inventory and future production volumes, a large percentage of which should find their way to our industry-leading infrastructure in the Central Gulf of Mexico
* The sheer size and scale of the resource in the Gulf of Mexico being produced from such a relatively small percentage of the existing and valid leases, its proximity to the Gulf Coast refinery complexes and its industry-leading low greenhouse gas footprint is extraordinarily impressive and fascinating to us. And some of us have been working this basin from an infrastructure point of view for well over 30 years. All of these attributes provide further evidence as to why we have seen a number of operators turning their focus away from onshore shale basins, as these basins have seen or will soon see peak production and they have instead started to focus on the Gulf of Mexico, where production is increasing, there is a vast swath of undeveloped acreage and countless new large-scale developments both sanctioned and yet to be sanctioned on the horizon.
* Along these lines, we have successfully laid the 105 miles of the sink lateral and remain on schedule and importantly on budget with this project and our CHOPS expansion project, both of which we expect to be ready for service in the second half of 2024. The contracted Shenandoah and Salamanca developments and their combined 160,000 barrels of oil per day of incremental production handling capacity remain on schedule and will be additive to our then base of volumes in 2024. These two new projects, combined with our steady base volumes and increasing inventory of identified subsea tiebacks, provides us with the visibility to generate north of $500 million per year of segment margins starting in 2025. All of this is to say, we remain well positioned to deliver steady, stable and growing cash flows from our offshore pipeline transportation segment for many years to come.
* All natural producers of soda ash, which only supply approximately 28% of global demand, enjoy this advantage, with operating costs of about half of the costs of synthetic producers, which supply the other 72%, and in general, a significantly smaller environmental footprint relative to synthetic producers. Furthermore, those natural producers with solution mining operations have the absolute lowest cost of production and thus continue to have a competitive advantage over all producers during periods of excess supply and or lower demand. Increasing our exposure to low-cost solution mining was a central investment thesis in our Grainger expansion project and once fully ramped, roughly half of our total production capacity will be from solution mining.
* Our Marine Transportation segment continues to meet or exceed our expectations as market conditions and demand fundamentals continue to remain steady. As mentioned in the release, we continue to operate with utilization rates at or near 100% of available capacity for all classes of our vessels, as the supply and demand outlet for Jones Act tanker tonnage remains structurally tight. This structural change in market dynamics has been driven by a combination of steady and robust demand, the continued retirements of older equipment and effectively zero new construction of our types of marine vessels. This lack of new supply of marine tonnage combined with strong demand continues to drive spot day rates and longer term contracted rates in both of our fleets to record levels. To provide some additional context, we along with other industry participants, continue to believe that current day rates that are still not — are still not yet high enough to justify the construction of new marine equipment. In addition to the significant cost of a new vessel, the long construction period, which can be three plus years to four plus years in some cases for larger vessels, the lack of available shipyards to build a new vessel and the need to keep day rates elevated through the construction period and for a prolonged period of time once underwater to justify construction, all point to a market that should remain structurally tight for the foreseeable future.
* In advance of this additional cash flow, we have utilized a portion of our available liquidity this year to opportunistically repurchase $75 million of our Series A Preferred Equity at a discount to the contracted call premium, as well as purchase 144,900 of our common units at an average price of $9.09 per unit. As we have stated in the past, we will continue to be opportunistic in acquiring any security across our capital structure to the extent we feel they remain mispriced on the market. As we have an increasingly clear sight — clear line of sight to generating roughly $200 million to $300 million or more per year of free cash flow starting in 2025, we will continue to evaluate the various levers we can pull to return capital to our stakeholders, including paying down debt, raising our common distribution, repurchasing additional amounts of our corporate preferred security or continuing to purchase our common unit or mispriced debt security.

And then from the Q4 call:

*We remain focused on completing our growth capital program in the next nine to 12 months, all while having no debt maturities until 2026 and an increasingly clear line of sight to generating roughly $250 million to $350 million or more, of free cash flow on an annualized basis after all cash obligations starting in 2025. I would also point out, that this expectation remains on track even if, it might take a little bit longer than we expect for the inevitable recovery in soda ash export prices off the lows we're seeing here in early 2024. We will continue to evaluate the various levers we can pull to return this capital to our stakeholders including paying down debt, raising our common distribution, repurchasing additional amounts of our corporate preferred security, continuing to purchase our common units or any mispriced debt securities all while maintaining an appropriate level of liquidity and of course maintaining a focus on our long-term leverage ratio.

Earnings Notes II (Q4 2023)

Arch Resources Inc. (ARCH)
The market capitalization of Arch is $3 billion versus $2.8 billion last quarter. Their total liabilities less current assets are now $87 million, and current assets exceed current liabilities plus long term debt by $550 million. We would put the enterprise value at $3.1 billion now. Adjusted EBITDA was $180 million for the fourth quarter and $714 million for the whole year, which puts the EV/EBITDA at 4.3x using either mrq (annualized) or the full year.

For the full year 2023, Arch had cash from operations of $635 million. (Their net income plus depreciation, depletion, and amortization was $610 million.) Capital expenditures and investments in affiliates were $193 million. That gives free cash flow of about $430 million, which is a 14% yield on the enterprise value. They paid $206 million of dividends, bought back $125 million of stock, repaid $80 million of debt, and built their cash balance by $52 million.

Cenovus Energy Inc. (CVE)
The market capitalization of Cenovus is $33 billion (at a $17.5 share price) and their enterprise value is $40 billion. The upstream segment earned $1.8 billion of operating margin during the fourth quarter (compared with $1.6 billion the prior year) and the downstream (refining) segment lost $225 million (compared with $413 million earned the prior year). (See 2023 release and financials.)

For the full year, cash from operations was $5.5 billion versus $8.4 billion in 2022. Capital expenditures were $3.2 billion versus $2.7 billion the prior year. The "free funds flow," as they define it, was $3.3 billion versus $5.4 billion in 2022. The 2023 free funds flow is an 8.3% yield on the enterprise value. (There is room for this to be better if they get the downstream/refining operations straightened out.)

Capital expenditures for in their upstream segment were up flat year-over-year in the fourth quarter and were up 42% for the full year 2023 versus 2022. Liquids production in Q4 was flat versus the prior year, and liquids production for the full year was up 1%. Total upstream production (including natural gas) was flat in the fourth quarter and down 1% for 2023 versus 2022.
 
For the year, the company spent $950 million on debt repayment, $1.3 billion buying back shares and warrants, and $730 million on common share dividends. The share count (fully diluted) was down 4% year over year. The $3 billion returned is a 9% shareholder yield; however the company drew down its cash by $1.7 billion.

Net debt at the end of the year was $3.8 billion. Management has said that they will increase shareholder returns (from 50% of "excess free funds flow" to 100%) once net debt drops below $3 billion.

Genesis Energy LP (GEL)
This is a new midstream investment idea. Genesis has four segments: offshore pipelines in the Gulf of Mexico, carrying crude and natural gas produced offshore to refineries along the Gulf Coast; a soda ash business in Wyoming (like the business where NRP owns an interest); sulfur services (which removes sulfur from refinery inputs and sells it as sodium hydrosulfide); onshore pipelines and terminals; and a marine transportation business with boats and barges to transport crude oil and refined products.

The offshore pipelines contributed $407 million of operating income for 2023, soda and sulfur contributed $282 million, marine transportation did $110 million, and the onshore pipelines and terminals $28 million. Adjusted EBITDA for 2023 was $756 million. The market capitalization (@ $11) is $1.35 billion. Genesis has quite a bit of leverage: $3.75 billion of debt, and $814 million of convertible preferred units. (The distribution rate on the preferred units is 11.24%.) The enterprise value is thus $5.9 billion, and the EV/EBITDA is 7.8x. Guidance for 2024 is $680-$740 million of EBITDA and $200-$250 million of capex, which would mean anywhere from $430 to $540 of cash flow, which is a range of 7% to 9% on the enterprise value. 

Management thinks that cash flow is going to "ramp" from 2025 onwards as offshore volumes grow (with two new platforms coming online) as well as additional soda ash earnings. 

In addition to our record results in 2023, we also achieved some significant project milestones that will continue to benefit the partnership for many decades to come. First and foremost, we reached substantial completion and commissioned our Granger expansion project. This almost four-and-a-half-year construction project overcame many challenges and delays as a result of the Covid-19 pandemic, but I could not be prouder of our team on the ground in Green River, WY for their tireless effort getting this project to the finish line. This project will add approximately 750,000 short tons per year of additional soda ash production capacity at Granger, bringing its total production capacity to approximately 1.25 million short tons per year, and significantly lower Granger’s operating cost per ton, making it one of the most efficient and lowest cost production facilities in the world. I would also point out that Granger has multiple decades of reserves in the current seam at these new production rates along with hundreds of millions of tons of additional measured and indicated trona resources in those same seams.

As we mentioned last quarter, we also successfully laid the 105 miles of the SYNC pipeline in over 5,000 feet of water, which as many of you can imagine is an engineering marvel. This was a tremendous achievement and a testament to our offshore engineering, construction and operation’s teams that helped complete this portion of the project on schedule. In addition, we made significant strides in advancing our CHOPS expansion project, which includes installing pumps at certain strategic junction platforms. These offshore projects are long-term investments that are underpinned by existing upstream developments which have production profiles going out multiple decades, not years, and have ample capacity to handle much more than the currently discovered and contracted volumes.

Regarding uses of capital:

We opportunistically accessed the capital markets on two separate occasions in 2023 and successfully issued $500 million in new 8.875% notes due 2030 in January and $600 million in new 8.25% notes due 2029 in December, which allowed us to re-finance our 2024 and 2025 unsecured maturities, respectively. More importantly, the combination of these two re-financings ultimately triggered an automatic 12-month extension of our senior secured facility’s maturity date, which now expires in February 2026. These transactions have provided us with the financial flexibility and liquidity to complete our remaining spend on our major capital growth projects in 2024 and bridge us to 2025 when we expect to begin harvesting increasing amounts of free cash flow driven by both earnings’ growth and materially reduced growth capital expenditures. In addition, we utilized a portion of our available liquidity to opportunistically re-purchase $75 million of our Class A convertible preferred units throughout the year at a discount to the contracted call premium as well as purchase 114,900 of our Class A common units at an average price of $9.09 per unit.

Concluding an investment cycle is very powerful if it works: you get higher earnings and the capital expenditures decline, resulting in a big increase in free cash flow.

Lithia Motors, Inc. (LAD)
Thought this was interesting - Lithia announced that they are getting less interested in acquisitions:

Past practices prioritized acquisitions as more beneficial strategically than buybacks, but at our current size and scale, we are now returning to a balanced deployment of free cash flows to drive the strongest possible returns. We continue to monitor valuations of both, being patient for strong assets priced within our acquisition hurdle rates. We expect pricing to take some time to normalize and now estimate annual acquired revenues, excluding the Pendragon acquisition, in the range of $2 billion to $4 billion a year. Our near-term target of $50 billion in revenue remains within our sights, and our team is confident in our ability to achieve this while doing so in the most prudent fashion possible. Our team is experienced in executing and integrating acquisitions, and we remain committed to achieving strong returns as we build out our network.

Current market capitalization is $8.4 billion. They earned $1 billion for the full year. Something amazing is that LAD stock is up 165x from the 2009 low. That's compounding at 41%!