Friday, February 23, 2024

Exxon Mobil Corporation ($XOM)

We were just noticing in going over earnings releases that good ol' Exxon Mobil is trading at a shareholder yield of 8%. We like doing comparisons over long time frames, and Exxon went into a drawdown in the summer of 2016 that lasted for 6 years on a price basis, until 2022. Let's compare Exxon's results for 2016 and 2023.

In 2016 (10-K), Exxon's upstream segment earned $196 million, the downstream (refining) earned $4.2 billion, and its chemical business earned $4.6 billion. They produced 2.4 million barrels per day of liquids and 4 million BOE/d total. The refinery throughput was 4.3 million barrels per day.

They had 4.2 billion shares outstanding for a market capitalization of about $350 billion, and $81 billion of net liabilities for an enterprise value of $431 billion. Cash from operations was $22 billion and they spent $12.4 billion (net) on capex for a free cash flow of $9.6 billion. (A 2% yield on the enterprise value.)

They paid $12.5 billion in dividends (3.6% yield) and bought back $1 billion of stock, borrowing to pay the difference between the free cash flow and the shareholder returns (which were 3.8% total and not fully earned).

In December 2019, three years later and just prior to covid, shares were about 25% lower. There was a further drawdown with covid.

For 2023 (release), the upstream segment earned $21 billion, the downstream earned $12 billion, the chemicals segment earned $1.6 billion, and specialty products earned $2.7 billion. They produced 2.4 million barrels per day of liquids and 3.7 million BOE/d total. Their refinery throughput was 4.1 million barrels per day.

They now have 4 billion shares outstanding for a market capitalization of $416 billion, and $43 billion of net liabilities for an enterprise value of $459 billion. (Leverage has decreased from 19% of enterprise value in 2016 to only 9% now.) Cash from operations was $55 billion and they spent $21 billion net on capex for a free cash flow of $34 billion. (A 7.4% yield on the enterprise value.)

They paid $15 billion of dividends and bought back $18 billion of stock, which is a shareholder yield of 8% on the current market cap.

So they have kept production and refining capacity flat for seven years, and their earnings per barrel produced and refined have grown significantly. Free cash flow has increased 3.5x but the enterprise value is only 6% higher because of the valuation compression. The FCF/EV yield (valuation) has compressed by almost three-quarters even as the balance sheet has gotten less risky.

The biggest profit center is their non-US upstream. They do not disclose the upstream profits by project, only by U.S. and non-U.S. They are big in offshore, and so far we are finding that offshore is even more front-loaded / inflation protected than the oil sands. They also have an LNG business selling to Asia and Europe. That’s a significant barrier to entry. And again, front loaded cost.  

Exxon is a blue chip so one of the things you wonder is could we see much higher earnings at say $100 oil, plus a revaluation to a shareholder yield of say 4%? That would make it a multibagger, plus an 8% yield along the way.

Thursday, February 22, 2024

Earnings Notes III (Q4 2023)

Chesapeake Energy Corporation (CHK)
Investors liked Chesapeake's earnings announcement this week, sending shares up about 10%. The key was that the company promised to cut capital expenditures and let production fall! They said that they will cut capex by 20% and expect production to be 22% lower in 2024 than 2023. That's a difference of 770 million cubic feet which is about 0.65% of U.S. production; not insubstantial. Chesapeake's announcement was also enough to lift the futures curve for natural gas.

The market capitalization (after the release) is now $11 billion. The company has $1 billion of net debt so the enterprise value is $12 billion. During the fourth quarter of 2023, cash from operations was $470 million and capital expenditures were $379 million for free cash flow of only $91 million, a FCF yield on the enterprise value (annualized) of a mere 3.3%.

Chesapeake is not earning its cost of capital at these natural gas prices, but with so little debt, you have a call option on natural gas that is not in immediate danger of expiring. Management points out in the investor presentation that there is going to be 12 bcf/d of LNG export capacity coming online by 2028. They think that the realized netback per MCF will be $4-6, far above the current $2.87 average realized price in the third quarter. With a cash production cost of over $1/mcf, there is subsantial leverage to higher natural gas price if LNG export drives a higher commodity price. (At $5/mcf, earnings more than double.)

Still, there are other ways to get exposure to natural gas that do not require so much capital and operating expenditure. Dorchester Minerals (DMLP) is getting about one-third of production (in BOE terms) from natural gas, which is being practically given away for $2/mcf. And we will look at Blackstone Minerals and Kimball Royalty Partners below.

Marathon Petroleum Corporation (MRO)
This Marathon is the E&P company, not the refiner (MPC). Another capex cut! Management said in the earnings release that investors should "expect 5% to 10% fewer net wells to sales in 2024 to deliver flat year-on-year total oil production as the Company optimizes well mix to maximize corporate returns and FCF generation." Very nice.

Also up about 8% after earnings, so the current market capitalization is $14 billion. They didn't publish a balance sheet with the Q4 release, but the enterprise value should be about $20 billion. During the fourth quarter of 2023, cash from operations was $1.1 billion and capital expenditures were $360 million for free cash flow of $681 million, a FCF yield on the enterprise value (annualized) of 13.6%. Shareholder returns during the fourth quarter (mostly repurchases) were $417 million, which is a shareholder yield of 12% (annualized). Their guidance for 2024 is $1.9 billion of free cash flow, assuming $75/bbl WTI and $2.50/MMBtu Henry Hub natural gas. That would be a 9.5% yield on the enterprise value.

Suncor Energy Inc. (SU)
The current market capitalization of SU (at a $33.50 share price) is $43.5 billion, and with $10 billion of net debt, the enterprise value is $54.5 billion. Cash from operations for the fourth quarter was $3.2 billion and the company spent $1.1 billion on capital expenditures. The resulting free cash flow for the quarter was $2.1 billion, which is a 15% yield (annualized) on the enterprise value. In the fourth quarter, Suncor returned $1.15 billion via repurchases, dividends, and debt repayment for an annualized shareholder yield of 10%. The fully diluted share count was down 3.5% y/y at the end of the year.

Upstream production was up 6% year over year to 808,100 barrels per day in the fourth quarter. Refinery utilization was 98% versus 94% the prior year quarter. Upstream capital expenditures were up 17% year-over-year, for a "production shortfall" of 11%. Oil sands "base" capex was up only 5% and production was up 10%, for a negative production shortfall. This is what we want to see from our slow decline oil sands with front loaded cost!

The oil sands segment generated funds from operations for the fourth quarter of $1.9 billion, with a production volume of 757 thousand barrels per day and an average crude price realization of $61/bbl. The refining and marketing segment generated funds from operations of $592 million, processing 456 thousand barrels per day and making a gross margin (LIFO) of $34.35 per barrel.

Texas Pacific Land Corporation (TPL)
The market capitalization of TPL (at $1,563 per share) is now $12 billion. The company has built up quite a cash pile during the shareholder activism dispute, so the current assets net of liabilities are $749 million and the enterprise value is $11.25 billion.

In the fourth quarter of 2023 (8-K), production volumes for TPL were 26,300 BOE per day, which was up 23% from the prior year. Oil volumes were up the same amount. This was the highest quarterly royalty production level in TPL history. Royalty revenue was up 2% thanks to the higher volumes, even though the price of oil was $78.46 versus $83.16 the prior year. Water sales, water royalties, and easement income were up 37% year-over-year, although the water service business has operating expenses, which were up.

Total expenses were $29 million (excluding depreciation) versus $25 million the prior year. Thankfully legal fees were only $3 million this quarter and not the gigantic $17 million we saw one quarter earlier this year during the heat of the shareholder activist battle.

Interesting to note that the expenses (again excluding depreciation) are a hefty 17% of total revenue. That's partly because TPL has established a "water services" business which is lower margin than collecting royalty revenue.

Operating income was $134 million for the quarter, and if you add back $3.9 million of depreciation, depletion, and amortization, you get a "cash flow-like number" of $138 million, which would be an annualized yield of 4.9% on the current enterprise value. (It was up 8.9% year-over-year.) For the full year, the company spent $100 million on dividends and $43 million on share repurchases. 

The share count shrank by only 0.33%; management let net current assets grow by $225 million during the year, to $818 million. That cash could have been used to shrink the share count an additional ~2% if it had been deployed at times when the share price was weak.

Black Stone Minerals LP (BSM)
Black Stone Minerals is another publicly traded minerals partnership. They had an IPO in 2015 although predecessor entities have been around much longer. They are bigger than Dorchester, with a market capitalization of $3.2 billion. Current assets net of all liabilities are $144 million and there is also $300 million of convertible preferred, making the enterprise value $3.4 billion. (The convertible preferred gets a quite expensive ten year yield plus 5.5% distribution rate, which is currently 9.8%.)

For the fourth quarter, BSM reported distributable cash flow of $119 million on total revenue of $191 million, which represents a yield of 15% on the market capitalization. Oil production was 1 million barrels and natural gas production was 16.5 bcf; production was therefore almost three quarters in terms of energetic equivalent BOEs. (But oil was a much greater percentage in terms of revenue.)

Something different about Black Stone compared with Dorchester is that they hedge their production. They have 570,000 barrels swapped for each quarter of 2024 at $71.45/bbl and 210,000 barrels swapped for each quarter of 2025 at $70.50 per barrel. That's about half of 2024 and a quarter of 2025 production hedged. For natural gas they have around 10 billion bcf swapped for each quarter of 2024 at $3.56 per bcf and 1 billion bcf for each quarter of 2025 at $3.65 per bcf. That's 60% of this year and a small proportion of next year.

Heading into 2023, they had swapped natural gas at $5/mcf, which obviously has supported the trailing distributions. Also noteworthy is that one of the big drillers on their Haynesville acreage (Aethon) is taking a "time out" on its drilling commitments due to low gas prices. So both volumes and prices will be lower in 2024, plus the preferred stock yield reset from 7% to 9.8% in November 2023, which will reduce income to common by a further $8.4 million per year.

Why hedge? Unlike Sitio, Black Stone does not have significant leverage. It sounds like they are bullish on natural gas over the longer term, once more LNG export capacity opens. Anyway, this is one to keep in mind if we were to get bullish on natural gas. A $5 natural gas price might give them an extra $125-150 million of earnings every year, which would be a decent boost to the current cash flow yield. (Of course, that would be assuming that management didn't bungle it with a hedging trade.)

Kimbell Royalty Partners LP (KRP)
One last publicly traded mineral partnership. Something interesting is that KRP is a limited partnership that has elected to be taxed as a corporation, so there is no K-1. There is a good bit of nepotism in the C suite to be aware of. Robert Ravnaas is the Chairman and CEO; David Ravnaas is the President and CFO, and there is also a Rand Ravnaas as VP of Business Development. KRP had its IPO in 2017 and has grown from acquisitions in 2018, 2019, 2022, and 2023.

Kimbell has a market capitalization of $1.5 billion. They have $269 million of net debt and $325 million of convertible preferred stock outstanding, for an enterprise value of $2.06 billion. Production in Q4 was 24k boe/d, coming mostly (55%) from the Permian and the Haynesville. Their recent investor presentation gives more guidance than other partnerships. They estimate that at $2 natural gas and $80 oil, their distribution (at a 75% payout ratio) would be $1.61, which would be a 10.4% yield on the current price.

Kimbell also hedges - they swapped about 140k bbl of oil and 1.3 bcf of natural gas for each quarter for the next two years (2024-2025) at prices ranging from $82-67/bbl for the oil and $3.52-$4.32/mcf for the natural gas. That is about a quarter of their oil and gas production levels.

As we mentioned in the past about Sitio, we are not big fans of borrowing (expensive capital) to buy mineral properties and then hedging the commodity price. It seems like the outcome that mainly delivers is scale. We can see how that would be important to insiders, though, since they get paid as a function of scale. The CEO of KRP was paid $5.2 million in 2023 and his son was paid $4.7 million. The CEO owns $17 million of common units and his son owns $11.7 million. 

Our humble opinion is that Dorchester has the simplest, cleanest model with the fewest moving parts, least promotional management, and longest track record.

Sprouts Farmers Market (SFM)
We wrote about Sprouts back in October 2023. At that point, the market capitalization was $4.3 billion and the enterprise value was $5.8 billion. Shares have been on a tear and the market capitalization is now $5.5 billion (+28%).

What we like about Sprouts is two things. First, the Sprouts stores are extremely well run and well merchandised, putting pressure on (and taking customers from) the tired old grocers that are owned by Kroger and Albertsons. Second, the business generates free cash flow even while expanding, which the company has been using to cannibalize its own shares. During 2023, Sprouts grew the share count by 21 net (5%) to 407 stores while shrinking the share count by 5.3%.  

For the full year 2023, Sprouts did $6.8 billion of sales (up 6.8% versus 2022) and generated $465 million of cash from operations (7% OCF conversion), spending $238 million on capital expenditures and an acquisition (compared with $265 million of depreciation and amortization), while paying off $125 million of debt, and repurchasing $203 million of stock.

As we said, the market capitalization is $5.5 billion and the enterprise value is $7 billion. That gives a FCF/EV yield of 3.2%. Reported net income per share (diluted) is $2.50 for the year, which gives a P/E ratio of 21.5x, and which was up 4.6% y/y. Management guidance is to open 35 new stores in 2024, with total revenue growth in the mid single digits.

Thursday, February 15, 2024

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%!

Wednesday, February 14, 2024

Earnings Notes (Q4 2023)

Freeport-McMoRan Inc. (FCX)
For Q4 2023, Freeport reported operating cash flow of $1.32 billion and capital expenditures of $1.36 billion, giving a free cash flow for the quarter of negative $42 million. Their quarterly copper production of 1.1 billion pounds was up 2% y/y, at an average realized price of $3.81 per pound. Their guidance for 2024 free cash flow is $1.2 billion (at $3.75 copper), which would be only a 2% yield on the current enterprise value of $57 billion.

FCX’s consolidated operating cash flows are estimated to approximate $5.8 billion (including $0.1 billion of working capital and other sources) for the year 2024, based on current sales volume and cost estimates, and assuming average prices of $3.75 per pound of copper, $2,000 per ounce of gold and $19.00 per pound of molybdenum. The impact of price changes on operating cash flows for the year 2024 would approximate $400 million for each $0.10 per pound change in the average price of copper, $180 million for each $100 per ounce change in the average price of gold and $120 million for each $2 per pound change in the average price of molybdenum.

Capital expenditures are expected to approximate $4.6 billion for the year 2024 (including $2.3 billion for major mining projects and $1.0 billion for the Indonesia smelter projects). Projected capital expenditures for major mining projects include $1.1 billion for planned projects primarily associated with underground mine development in the Grasberg minerals district and potential expansion projects in North America, and $1.2 billion for discretionary growth projects.

FCX’s financial policy is aligned with its strategic objectives of maintaining a strong balance sheet, providing cash returns to shareholders and advancing opportunities for future growth. The policy includes a base dividend and a performance-based payout framework, whereby up to 50% of available cash flows generated after planned capital spending and distributions to noncontrolling interests would be allocated to shareholder returns and the balance to debt reduction and investments in value enhancing growth projects, subject to FCX maintaining its net debt at a level not to exceed the net debt target of $3.0 billion to $4.0 billion (excluding net project debt for the Indonesia smelter projects).

They are quite leveraged to the copper price as you can see: $400 million additional operating cash flow for each ten cent increment in copper price. Yet even $4.75 copper would only give an additional $4 billion of operating cash flow which would be kind of lackluster on the $58 billion EV. They are crazy to be spending money on growth! They should demand contracts in hand for $6/lb before they spend a penny more on capex.

Barrick Gold Corp (GOLD)
For Q4 2023, Barrick reported cash from operations of $1 billion and capital expenditures of $861 million, giving a free cash flow for the quarter of only $136 million on an enterprise value of $25 billion. Gold production was up 1% y/y in Q4. Their cash cost was $982 per oz and their "all-in sustaining cost" was $1,364/oz. 

Like other commodity producers and miners, they are plowing it into capex: They produced 4.05 million ounces of gold in 2023, down from 4.1 million in 2022 and closer to 5 million in 2020. Cash cost has risen from $700/oz in 2020 to $960/oz last year. Operating cash flow for 2020-2023 (four years) totaled $17 billion but they spent $11 billion on capex. So only $6 billion of cumulative free cash flow ($1.5 billion per year) and production is in decline!

Remember that to recover an ounce of gold they have to process 28 tons of ore, and for every ton of ore, they have to also move 6 tons of waste.

Comstock Resources Inc (CRK)
Comstock produces almost 100% natural gas and sells it for the pittance of $2.50/mcf. They reported negative free cash flow for Q4 and FY 2023 yet they grew production 6% y/y. Although they may get some religion about lighting cash on fire now that natural gas is even lower:

"In response to weak natural gas prices, Comstock plans to suspend its quarterly dividend until natural gas prices improve. In addition, the Company plans to reduce the number of operating drilling rigs it is running from seven to five. Two of the five drilling rigs will continue to be deployed in the Company's Western Haynesville play. As a result, Comstock plans to spend approximately $750 million to $850 million in 2024 on its development and exploration projects to drill 46 (35.9 net) operated horizontal wells and to turn 44 (38.2 net) operated wells to sales in 2024. Comstock expects to spend $125 million to $150 million on its Western Haynesville midstream system, which will be funded by its midstream partnership."

Comstock has $3.4 billion of net liabilities and a $2 billion market cap. It is conceivable that the equity here goes to zero.

PrairieSky Royalty Ltd. (PREKF)
PSK reported revenue for 2023 of $380 million, generated $283 million of funds from operations (74% margin). They spend 13% of revenue on income tax, 9% on G&A expense, 3.4% on finance expense (interest), and about 1% each on production taxes and on exploration and evaluation. The $283 million of funds from operations is a 7% shareholder yield on the $4 billion market capitalization. (Based on Q4 would be an 8% yield.)

Horizon Kinetics wrote about PSK in the annual letter for their Inflation Beneficiaries (INFL) ETF:

"With today’s temporarily depressed energy prices, PrairieSky should be able to generate C$1.50 in FFO/share, which equates to a 7.5% yield. This could be viewed as a “base case” minimum return—assuming no improvement in energy prices, production volumes, or Canadian price differentials. Assuming modest improvement here, namely with pricing and volumes, it is reasonable to expect more than C$2.00/share of FFO, or a 10% yield. If prices rebound more fully, and volume grows even moderately, FFO could exceed C$2.50 share, nearly a 12% yield."

One big hope for PSK would be more export of natural gas from Canada. Their share of natural gas production for the quarter was 5.4 million Mcf of gas which was sold for only $2.19 per Mcf.

Intercontinental Exchange Inc. (ICE)
For the full-year 2023, ICE earned $3.05 billion of free cash flow on $8 billion of total revenue (less transaction-based expenses) for a royalty-like 38% free cash flow margin. The current market capitalization is $78 billion the enterprise value is around $100 billion, so at a 3% free cash flow yield, it is not cheap. Something else to note was FCF was flat from 2022 to 2023. Their M&A goals: "deepen moats, gain intellectual property, increase customer wallet-share".

Peabody Energy Corp (BTU)
The market capitalization of Peabody is now $3.35 billion versus $3.3 billion when we wrote about them last quarter. (It was $4 billion when we wrote about them in August 2022.) Total liabilities less current assets are now $335 million, so we would put the enterprise value at $3.7 billion now. For the fourth quarter of 2023, Peabody's adjusted EBITDA was $345 million, up from $270 million in the third quarter. Adjusted EBITDA for the full year 2023 was $1.4 billion which is about equal to the Q4 annualized figure. That puts the EV/EBITDA at 2.7x. Operating cash flow for the quarter was $282 million and $1,036 million for the year. Capital expenditures were $158 million for the quarter and $348 million for the year. So the free cash flow yield on enterprise value is 13% based on the most recent quarter or 19% for the full year.

Thoughts from Coal Trader: "If executed successfully, the Centurion and Shoal Creek organic investments should deliver extremely high IRR's and return significant free cash flow to Peabody in the coming years. Peabody’s team also found a way to further enhance the Centurion investment by acquiring the adjacent Wards Well deposit. These investments will pivot the company more towards the met market where the long term fundamentals are far more favorable compared to thermal. The long term prospects of the company have significantly improved with Centurion being the flagship of their portfolio in the years ahead. The average realizations of the met segment will improve significantly with the addition of Shoal Creek and eventually Centurion. This is probably something that will be overlooked by many analysts, but I believe the 'relativities' in the metallurgical coal market are something the sector if going to have to contend with for far longer than most believe. That is to say, the price spreads between high-quality coking coals relative to lower-quality coking coals may be here to stay..."

Seems cheap and everything, but would rather own coal royalties at current valuations.

Natural Resource Partners, L.P. (NRP)
No year-end results yet, but NRP put out an 8-K in January about a warrant settlement:

On January 29, 2024 (the "exercise date"), holders of Natural Resource Partners L.P.'s (the "Partnership's") warrants to purchase common units ("warrants") exercised 462,165 warrants with a strike price of $34.00. On January 31, 2024, the Partnership settled the warrants on a net basis with $10 million in cash and 198,767 common units. The 15-day VWAP ending on the business day prior to the exercise date was $97.62. Of the originally issued 4.0 million warrants, 1.08 million warrants with an exercise price of $34.00 remain outstanding.

As of the September 30, 2023 quarterly results, NRP had 2,190,000 warrants outstanding. An October purchase (8-K) brought them down to 1.54 million warrants. We had been wondering what they did with their Q4 cash - we won't know for sure for another few weeks until they report earnings, although they did aggressively tackle the warrants. Wonder if they were redeeming the preferred (12% liability) during the fourth quarter?

Exxon Mobil Corp (XOM)
XOM reported cash from operations of $13.7 billion and free cash flow of $8 billion (58% of CFO) for the fourth quarter of 2023. The market capitalization is $400 billion and the enterprise value is $420 billion so the free cash flow yield is 7.6% at current oil (and LNG) price. For the full year of 2023, shareholder distributions were $32.4 billion ($14.9 billion of dividends, and $17.4 billion of share repurchases) which is a 8% shareholder yield.

Imperial Oil Ltd (IMO)
We mentioned IMO last week. Production in the fourth quarter was up 8.5% versus the prior year, while capex for the quarter was down 34% versus the prior year. (See results. Full year capex was down 2% from 2022.) Free cash flow for the quarter was $667 million, which is about an 8.6% yield on the enterprise value. Imperial is a share cannibal. During 2023, they shrank the share count by 8.3%. 

Enbridge Inc (ENB)
Enbridge shares have been really weak, under-performing Enterprise Products, for example. (Also compare with EPD, NTG, and FEI over the past three years.) It's a $70 billion market capitalization company yielding 7.9% (dividend) which is quite high compared to what it has yielded historically. And it is a C-corp so you don't even get the annoying Schedule K-1 that you do from other midstream companies. From the Q4 call:

2023 showcased the predictability of our business amid continued geopolitical instability, persistent inflation and rising interest rates. This is as a result of the 98% of Enbridge's earnings being generated from either cost of service or take-or-pay contract assets. Our debt portfolio is less than 10% exposed to floating rate volatility. Our customer base is over 95% investment grade, and 80% of our EBITDA is earned from assets with protection against inflation. We are rated BBB+ by all rating agencies and remain committed to our long-held leverage target of 4.5x to 5x.

Half of the EBITDA is from their liquids pipelines. They've got the Mainline pipeline from the western Canada oil sands and then the Line 5 that takes it 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.")

A quarter of their EBITDA is gas transmission. They carry from western Canada to export, also to eastern U.S. Connects PA gas to 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 (utility). ("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.")

Allison Transmission Holdings Inc (ALSN)
We keep noticing ALSN on the daily all-time highs list. Per their website, Allison is the world’s largest manufacturer of fully automatic transmissions and hybrid propulsion systems for commercial-duty vehicles. 

On fourth quarter sales of $775 million, they did $170 million of net income and $186 million of adjusted free cash flow (24% free cash flow margin). On full year sales of $3 billion, they did $659 million of adjusted free cash flow (22% FCF margin). Revenue for the year was up 10% for 2022 and adjusted free cash flow was up 37%. They repurchasing $260 million of shares during 2023 (6 percent of outstanding). The market capitalization is $6.25 billion and the enterprise value is $8 billion, so the FCF yield is 8%.

Penske Automotive Group, Inc. (PAG)
Highlight from fourth quarter results:

For the three months ended December 31, 2023, total new and used units delivered increased 8% to nearly 117,400, and total retail automotive revenue increased 5% to $6.2 billion. Same-store new and used units delivered increased 9% to nearly 116,700, and same-store revenue increased 4%, including a 7% increase in service and parts revenue. Total retail automotive gross profit decreased 1% to $1.0 billion, including a 1% decrease on a same-store basis. Same-store service and parts gross profit increased 7%.

Revenue for the fourth quarter was $7.3 billion, gross profit was $1.2 billion, EBITDA was $357 million, and capital expenditures were $103 million. The current market capitalization is $10 billion. Net income was $190 million for the quarter and $1 billion for the full year.

AutoNation Inc (AN)
Highlight from fourth quarter results:

New Vehicle Gross Profit - Decreased $102 million reflecting gross profit per vehicle retailed of $3,653, compared to $5,633 a year ago, partially offset by an 8% increase in unit sales. Used Vehicle Gross Profit - Decreased $27 million reflecting gross profit per vehicle retailed of $1,455, compared to $1,847 a year ago and a 4% decrease in unit sales. After-Sales Gross Profit - $540 million, an increase of $61 million or 13% from a year ago.

Revenue for the fourth quarter was $6.8 billion, gross profit was $1.2 billion, and net income was $216 million. During the quarter, AutoNation repurchased 1.15 million shares of common stock (3% of shares outstanding at start of quarter) for an aggregate purchase price of $151 million. The current market capitalization is $6 billion. Net income was $1 billion for the full year.

Enterprise Products Partners LP (EPD)
Highlights from fourth quarter results:

Enterprise reported net income attributable to common unitholders of $5.5 billion, or $2.52 per common unit on a fully diluted basis, for 2023 compared to $5.5 billion, or $2.50 per common unit on a fully diluted basis, for 2022. Operational DCF was $7.5 billion for 2023 compared to $7.6 billion for 2022. DCF provided 1.7 times coverage of the distributions declared with respect to 2023. Enterprise retained $3.2 billion of DCF in 2023 to reinvest in the partnership, repurchase partnership common units, and reduce debt. Distributions declared with regard to 2023 increased 5.3 percent compared to those declared for 2022 and marked Enterprise’s 25th consecutive year of distribution growth.

Steady as she goes. The real question will be, do the growth investments pay off? If so, earnings will rise and capex will go down, resulting in a lot more cash for distributions. (As we pointed out in October, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years.)

Altria, Inc (MO)
Highlight from fourth quarter results:

Smokeable products segment reported domestic cigarette shipment volume decreased 7.6%, primarily driven by the industry’s decline rate (impacted by macroeconomic pressures on ATC disposable income and the growth of illicit e-vapor products) and retail share losses, partially offset by trade inventory movements. When adjusted for trade inventory movements, smokeable products segment domestic cigarette shipment volume decreased by an estimated 9%.

Cigarettes volumes down 9%. Cigarette revenues down 2.4% y/y net of excise tax. They are not able to raise price of pack enough to maintain flat revenue. Operating income from cigarettes down 1.3% y/y.

Chipotle (CMG)
Highlights from fourth quarter results:

Total revenue increased 15.4% to $2.5 billion. Comparable restaurant sales increased 8.4%. Operating margin was 14.4%, an increase from 13.6%. Restaurant level operating margin was 25.4%, an increase of 140 basis points.

Market capitalization is $70 billion, they earned $282 million in Q4 on sales of $2.5 billion. Sixty times earnings is steep! Net income for fourth quarter was up 11% year-over-year.

Marathon Petroleum (MPC)
This Marathon is the refiner, not the E&P company (MRO). They refine almost 3 million barrels per day, which is the most in the U.S., followed by Valero (VLO) and ExxonMobil, each with about 2 million barrels per day. Highlight from fourth quarter results:

“In 2023, the business generated $14.1 billion of net cash from operations, driven by strong operational performance and commercial execution,” said Chief Executive Officer Michael J. Hennigan. “This enabled the return of $12.8 billion of capital to shareholders. We believe MPC is positioned to generate strong through-cycle cash flow with the ability to deliver superior returns to our shareholders.”

That's on a market capitalization of $63 billion. 

Marriott International, Inc. (MAR)
We wrote about Marriott in November as a royalty-like business. Highlights from Q4 results:

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) totaled $1,197 million in the 2023 fourth quarter, a 10 percent increase compared to fourth quarter 2022 adjusted EBITDA of $1,090 million. The company repurchased 4.7 million shares of common stock in the 2023 fourth quarter for $965 million. For full year 2023, Marriott repurchased 21.5 million shares for $3.9 billion. 

In 2024, we expect another year of solid growth and significant shareholder returns. With normalizing RevPAR growth around the world, we anticipate a worldwide full year RevPAR increase of 3 to 5 percent and net rooms growth of 5.5 to 6 percent. We expect this should yield adjusted EBITDA of approximately $4.9 billion to $5.0 billion for the year and enable us to return $4.1 billion to $4.3 billion to shareholders after factoring in $500 million to purchase the Sheraton Grand Chicago.

That would be quite a nice shareholder return on the current market capitalization of $69 billion.

Warrior Met Coal Inc. (HCC)
The market capitalization of Warrior is now $3.2 billion. Their current assets net of all liabilities (ignoring deferred income taxes) are $660 million, so the enterprise value is $2.5 billion. For the fourth quarter of 2023 (release), Warrior's adjusted EBITDA was $164 million, up from $148 million the prior year. For the full year (2023), adjusted EBITDA was $700 million, down from $1 billion in 2022. That puts the EV/EBITDA at 3.8x using the fourth quarter (annualized) or 3.6x using the entire year.

They sold 1.53 million tons versus 1.45 million the prior year. The average price was $234/t and the average cash cost was $121/t. Cash from operations was $245 million for the quarter and they spent $182 million on capital expenditures. 

For the full year 2023, $700 million of cash from operations, but they spent $525 million on capex. No share repurchases, even though the stock was trading for 1.2x EBITDA earlier last year.

The price per ton of met coal averaged $219 in 2023 vs $304 in 2022. It seems insane to invest so much (~$1 billion for the new Blue Creek mine) in producing more of a commodity that does not have a firm price. There are some good pictures of it in the new investor presentation though.

Coal Trader tweeted: "It seems like they’re really struggling to move this coal. Maybe the transition to more HVA is hurting more than I figured, or maybe the spreads in the Atlantic basin are making it more difficult than I assumed. Prices in Q4 were terrible, and inventories increased A LOT."

That's so brutal. There really shouldn't be any question of being able to move the product if you are expanding production.

Occidental Petroleum Corporation (OXY)
From Q4 results, Occidental's oil volume (total U.S.) was down 2.2% in the fourth quarter (year/year). Their total U.S. production in BOEs though was up 1.3%. In the Permian specifically, oil was flat and natural gas was up 14%. The wells are getting gassier!

Total oil and gas capex in the second half of the year was up 4.5% versus the second half of 2022, but in the Permian was actually down 20%. (They really slashed Permian capex in Q4... in Q3 it was up 8% y/y so maybe we'll see volumes fall off more in Q1 2024.)

Their operating cash flow in Q4 was $2.5 billion with capex of $1.4 billion, giving free cash flow of only $1.1 billion. Market cap is $50 billion and the enterprise value is $80 billion. So EV/FCF is only 5.5%.

Truly no idea what Buffett sees here. 
Royal Gold Inc. (RGLD)
Reported results: cash from operations was $101 million for Q4 2023 and $416 million for the full year 2023, virtually the same as Q4 2022 and the FY 2022. There were no capital expenditures in Q4 and only $2.7 million for the full year. They spent $325 million on debt repayment and $100 million on dividends. So the shareholder yield is 5.8% on the $7 billion market capitalization. (Net debt is down to $151 million.)

Kraft Heinz Company (KHC)
Noticing from Q4 results that Kraft's North American volumes were down 5.5% despite 2.5% price increase, resulting in fourth quarter sales down 3%. (They're calling this "headwinds that were driven by ongoing consumer pressure".)
The market capitalization is $42 billion and the enterprise value $63 billion. Cash from operations for the full year was $4 billion; surprisingly they actually have $1 billion of capital expenditures, so free cash flow is only $3 billion. They spent $191 million on debt repayment, $2 billion on dividends, and $455 million on share repurchases.

Sunday, February 11, 2024

Guest Review: Part II of @pdxsag on A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

Noted investor and polymath Edward O. Thorp wrote an autobiography in 2017, A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (3/5). This is part 2, on lessons concerning Thorp's health and longevity. In part 1, I reviewed the book and the lessons from Thorp's investing and business successes.

We closed part 1 with the lament that Ed had very little in the book about his health and things he did to maximize it. He mentions being a small, scrawny kid prior to college, fitting the stereotype of a big brain sucking up the majority of resources from the growing body. Later in the book he mentions never smoking cigarettes. Further, as far back as 1985 he had a rule he wouldn't hire smokers or let anyone smoke on the office premises. An ardent anti-smoker, along with a propensity for walking and hiking for leisure activity, was pretty much it from the book as far as his health practices and habits.

We are left, then, with making a few hypothesis and looking for evidence on each from the book's subtext and available other sources. These are, from most probable to least:

  • Occam's Razor: (as always) lucky genes
  • Close second to that: be rich and live in Southern California
  • The Null Hypothesis: he's not an outlier, just an early peak at true normal
  • OTC supplement maxxer, but is demure discussing it
  • Esoteric billionaire longevity stack, but sworn to secrecy

Evidence for lucky genes is strong. He has an outstanding intellect (lucky), and IQ is positively correlated with all the good life-outcomes, such as longevity. He is a "small bro," indicating naturally low insulin. He outlived his wife (ie. shared environment) who passed from cancer in 2011 at the age of 81. Occam's Razor says go with the simplest explanation staring you in the face. So there you go.

As to being rich and living in Southern California, let us take each of those in turn. 

Jane Austen observes (through the character of Fanny Dashwood in Sense & Sensibility), "people always live forever when there is an annuity to be paid them." More recently, the joke at CalPERS expense among actuaries is if you want to live to 100 you should endeavor to become a retired California high school teacher. The corollary to these is that death rates invariably spike following stock market crashes. It's not entirely from stock brokers jumping out their windows. It's most true among early retirees, those 65-70. Particulars aside, the overall message is well-known and obvious: stress kills and the financial anxiety from a shrinking, fixed income is the most stressful of all.

As a statistical arb trader before that was a thing, Thorp's fund literally never had a down year from its founding in November 1969 to its closing in December 1988. He was one of the few private sources of capital (ahem) willing and able to buy in the teeth of the 1987 crash. He writes about the argument he had with his chief trader who was unwilling to put on the full size of trades that Ed wanted to.

The Southern California weather and lifestyle prior to the immigration flood-gates opening, combined with the financial security from being rich (and satisfied with life, a theme from the book) is about as good as it gets for health and longevity. The closest analogs we have are the famous Blue Zones, where idyllic weather and traditional social structures combine to create regions with the greatest number of centenarians.

Additionally, it is instructive to compare Thorp to other well-known billionaires: Munger and Buffett at 99 & 93, Jim Simons then at 78, and Carl Ichan at 86 to pick the first set that to come to mind. To be sure, they all look good for their age, but they don't look good-good. One could use them to make the argument that being rich spots you 10 years, but to get to 20 years, such as Thorp exhibits, you need SoCal over the NY/midwest, and you need low-stress. I think you'd be hard pressed to find less stress per million dollars than a statistical arb PM with tenured college professor as his back-up gig. 

Moving on to the null hypothesis, one of the jokes from time to time on social media is how old celebrities in the 80's looked compared to people now. While celebrities routinely undergo cosmetic surgery (and politicians – they do this to fool voters from realizing how pickled their brains are), even among normal people it's easy to see a difference between Boomers today and adults of the same age in previous generations. Better diets, less smoking, and less grueling physical labor all contribute to make a noticeably more physically youthful appearing population.

It may be that Ed isn't unique at all, he's just early. We are comparing him to his cohort of Silents and members of previous generations that we know. However, we are not able to compare him to Gen X and Millennials that haven't had a chance to reach 80 and 90 years old. His lifestyle more closely matches today's adults today than his contemporaries. From his experience meeting with the strength training club in college, Ed took an active interest in his health and fitness level at a time most people didn't think much of it at all. Also, unlike the vast majority of his cohort, but like the vast majority of GenX and Millennials, he never smoked. Third, he had an office job for his entire career. This pretty much describes the average Gen X and Millennial.

The big difference between today's adults and those of Ed's (earlier) time is rampant diabetes and pervasive omega-6. As those two are judiciously avoided by a great many health-conscious GenX and Millennials, it may be that in forty and fifty years from now a large number of right wing internet autists (also notoriously avoidant of the Covid vaccinations) pass for 10-20 years younger than the average obese, stroked-out retiree-American. You read it here first.

While I called “lucky genes” the Occam's Razor explanation, none of the preceding are mutually exclusive. We don't have to pick just one, and it's probably more correct to say all the above are the Occam's Razor explanation. Ed looks great because he maximized on all axises for longevity.

But what fun is that in a blog post.

So we shall consider the more speculative hypotheses for which we have only indirect evidence. Our sources here will be his interviews with Tim Ferris, as well as some passing mentions in this book.

One of my complaints about podcast interviews of famous rich guys is the podcasters all ask the same question, namely: “how can we be rich like you, but right now.” So weak. What none of them ask is, “you look great and you're still playing everyday in the equivalent of the major leagues. Come on brother, no really, what's your secret?”

Ok, looking at a guy like Weinstein or FoundersPodcast guy, we don't have to wonder.

I think if a guy like Weinstein even were to ask, he'd get a non-answer. Thorp hinted at as much with the kooks that wrote him with their own gambling and investing strategies; the housekeeper that nagged and nagged him for stock advice only to ignore the most important part after he relented and gave her some, which was to check with him before selling; and the wordcel that asked for his expert opinion on matters, but really just wanted to tally a binary vote among his friends and associates. Giving advice to Normies is often casting pearls before swine.

However, there is an exception with the Tim Ferris podcast. Tim Ferris and his audience are health and longevity maxxers themselves. Not only did Tim ask, he's asking from a place where Thorp would expect to be listened to. Thorp's initial answer (discussion starts about 46 min mark) was that the data on supplements was not very compelling (true) and so he “doesn't take much of them.” Well, scratch that.

And yet... in the same breath, Thorp mentions reversing osteopenia by taking supplements for bone health (calcium, magnesium, and K2). Then later on in the interview (1hr 11 min) he discusses taking finasteride for the last 20 years(!) for prostate health, and which also has the pleasant side-effect that it restores and maintains hair growth. Does this point to the possibility that there is a secret, boutique longevity doctor among SoCal's elite?

Bone health supplements and finasteride are hardly esoteric pharma secrets. Also, you'd have to assume other billionaires would be doing it too and we felt we could only spot them 10 years. But there is one more interesting data point that dropped just as I was finishing up this post. In these interviews Thorp has an unmistakeable facial tic where he squints hard and closes both eyes every 5 to 15 seconds. In Tucker Carlson's interview of Vladimir Putin, Putin had a similar facial tic, though far less pronounced. Putin also had restless legs. Putin is 71 and, like his many of his western counterparts, has had cosmetic work done. Is there a longevity drug they are taking which causes facial tics? Not sure, but you can bet we'll be watching for more instances among rich, old guys.

Tuesday, February 6, 2024

Imperial Oil Ltd ($IMO)

Imperial Oil is a Canadian integrated oil company that is majority (69.6%) owned by ExxonMobil. Their upstream production is 308k bbl/d and their refining (downstream) is 407k bbl/d. They are an oil sands producer and they own 25% of Syncrude (in partnership with Suncor, Sinopec and CNOOC) which gives them 85k bbl/d. Their other upstream projects are Cold Lake (140k bbl/d, thermal in situ) and Kearl (218k bbl/d their share, from open pit oil sands). For their downstream operations, Imperial has three refineries: Nanticoke, Sarnia, and Strathcona.

Two things about Imperial have caught our eye recently. First is their upstream operations are avoiding the "shale treadmill" effect. Production in the fourth quarter was up 8.5% versus the prior year, while capex for the quarter was down 34% versus the prior year. (See results. Full year capex was down 2% from 2022.) Free cash flow for the quarter was $667 million, which is about an 8.6% yield on the enterprise value.

Second, Imperial is a share cannibal. During 2023, they shrank the share count by 8.3%.

Monday, January 22, 2024

Guest Review: @pdxsag on A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

Noted investor and polymath Edward O. Thorp wrote an autobiography back in 2017: A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market (3/5).

His first book, which enjoyed huge popular success, was his guide to counting cards in blackjack, Beat the Dealer, published in 1962.

In 1967, he wrote Beat the Market, a guide to market arbitrage using warrants and convertible bonds. Five years later, Fischer Black and Martin Scholes would publish their options pricing model which would win the Nobel Prize, largely inspired by the work in Thorp's book.

This latest book by Thorp (his fifth for a popular audience) is mostly a memoir, though it finishes with a few chapters of general advice on investing, geared to a mostly non-investing public.

Man for All Markets starts with Thorp's earliest childhood memories as an odd-duck and prodigy, continues through high school in rural Orange County, California – back when it actually had oranges – then college at Berkley before transferring to UCLA, starting his career in academia, then his side-hustles in the gambling and the investment worlds, the latter of which turned into his main-hustle after he quit work as a college professor to run full-time the hedge fund which he had started several years prior.

As a timeline: born in August 1932, he graduated high school in 1949, graduated college in 1953, and received his PhD in Mathematics in spring of 1958. He did a post-doc stint in 1959-1961 at MIT, where he met Claude Shannon and among a bunch of fun side-projects, they invented the first wearable computer for predicting roulette. He taught at New Mexico State from '61 to '65, before moving to the then brand-new UC-Irvine where he would remain until retiring from academia in 1982.

I had seen Thorp name-dropped in fin-twit a few times. He was remarked upon for his phenomenal investing record running an arb shop, almost as a proto-Citadel or Reniassance Tech. Equally often remarked upon was his youthful visage, easily passing for someone 10 to 20 years younger. In fact, here is a photo of him taken this month looking remarkably youthful at the age of 91.

Here Ed is in a pair of Tim Ferris interviews in May and June 2022. Based upon the show notes, it appears the first episode covers the outline of Man for All Markets, and the second episode uses the book's latter third on investing advice as jumping off points for discussing a wider range of topics.

Our interest in this autobiography was three-fold. One, did his story add-up?

I hadn't heard of him before last year. I was curious whether he truly was as he was presented by others on twitter as a proto Jim Simons or Ken Griffin. He boasted their acumen and success, but from the late 60's to the late 80's. This was well before the financialization of the economy in the later Greenspan era in which the numbers put up by the biggest hedge fund managers on Wall Street, the 0.1%, beggar belief if you bother to think about them in terms of buying power, instead of just numbers on a screen.

Two, did he share any useful information on the source of his youthfulness?

Since this was a memoir and one of his popular anecdotes was how he got into strength training at college in the early 1950's, we wondered what else he might have to share on the topic of health and longevity. He certainly looks great for his age, but was it lucky genes or something else. As an autist before the era of the internet, he taught himself card counting and investing arbitrage; then wrote the book on each. Maybe he taught himself the keys to health and longevity in a similar fashion.

Thirdly, we always like to see if we can read between the lines and pick up interesting bits that are usually missed by the conventional reading public.

This also relates to assessing whether his story adds up. Reading between the lines, you can often figure out whether someone's story adds up, or whether they are relying on borrowed ideas and successful execution of partners, which they spin a story around to make themselves into the central character. This is particularly true for anyone lucky enough to be entering adulthood in the 1950's and 1960's. The second half of the 20th century for the United States was such a phenomenal growth engine, many people got incredibly far just by being lucky enough to be in the right place at the right time, such as, for example, moving to Orange County, California, in the late-1960's.

As fortune has it, after I read the book I saw that blogger Rational Walk had written a pretty thorough synopsis of Man for All Markets not long after it was first published in 2016. I'll save myself a couple thousand words and direct your attention to his longer synopsis and then (more recently) in ten bullet points.

As to the first question, did his story add up? It certainly did to me. I went to a large suburban high school and a small engineering college. I knew first-hand the type of incredibly smart, 1% of the 1%, math and science guys which Ed's anecdotes from his youth fit to a 'T': self-taught in chemistry and electronics, cringy sense of humor – particularly for practical jokes, treated academic performance as a competition just like athletes treat sports competitions – if you don't win first place, you lost. With that character, the story definitely fit.

He also rubbed elbows with some incredibly smart people before they were household names – Claude Shannon, Fischer Black, and Warren Buffett. He also caught a massive fraud decades before he infamously became a household name – Bernie Madoff. I have no doubt Ed was truly the central character in his gambling and investing hustles.

What did we pick up between the lines? There were a few interesting things.

* Ed was born in 1932, a Silent. From our reading of Helen Andrews' Boomers, we know Silents were really behind all the social liberalism Boomers gave themselves credit for. True to form, Ed couldn't resist slipping in a few socially liberal comments and opinions from events in college as an undergrad, and also with regard to the current events as of his writing in the chapters covering general investment advice. Just wanted it to be known, I guess. (CBS pointed out the same thing in John McPhee's latest work. McPhee and Thorp are the same age.)

* Some of the best asides were of his wife's sharp judgement of character. Physiognomy is real, readers. Could have used more of these in the book.

As Vivian said at the start, “this is going to be a waste of time. Norman's been doing this for years and you can tell he's barely getting by. Just look at his worn-out shoes and shabby clothes. And you can tell from the quality of his wife's old and dated outfits that they were once better off.” (p.149)

My wife was an almost unerring judge of character, motives, and future behavior. I was repeatedly amazed when she applied this to business and professional people I introduced to her for the first time. She did this easily, based on so little evidence I couldn't believe it. But over and over again, Cassandra-like if I didn't listen, she was right... After meeting one of the characters, she said, “He's greedy, insincere, and you can't trust him... You can see he's greedy from the way he drives. The insincerity comes out when he smiles. His eyes don't really smile, too; they mock you. And his wife has a sad look in her eyes that doesn't add up. The face she sees at home isn't the one he shows the world.”

* Post World War II really was easy-mode for anyone that was first to apply scientific rigor to some corner of business.

Much of what I read was dross, but like a baleen whale filtering the tiny nutritious krill from huge volumes of seawater, I came away with a foundation of knowledge. Once again, just as with casino games, I was surprised and encouraged by how little was known by so many. (p.146)

Our computers used so much electricity that the office was always hot. Our landlord didn't charge tenants for utilities, instead paying it form his lease revenues. When the heat got my attention, I calculated that the cost of the electricity we used was more than our rent. (p.169)

When the CBOE opened for business we appeared to be the only ones trading the [Black-Scholes] formula. Down on the floor of the exchange it was like firearms versus bows and arrows.

*The Efficient Market Hypothesis was dunked on every chance Ed got. As a hard science guy, his disdain of economics and economists was subtle but sharp.

When the S&P500 Index fell 23 percent on October 19, 1987, a leading academic finance professor said that if the market had traded every day for the thirteen-billion-year life of the universe, the chance of this happening even once was negligible.
(p. 190)

I also asked believers in the EMH to explain why the stock failed to recover in the eleven days after the hoax was exposed. The news for EMLX was good. So...?
(p. 227)

* On the successful "word-cel that never reads" type of guy:

I also learned early that when I gave Ned my opinion on anything, no matter how careful or reasoned, it didn't have much impact. Others had the same experience. To make a decision, Ned would simply poll everyone he knew for their opinion and then go with the majority view. Once I figured this out, I stopped wasting my time sharing my thoughts with him. The Ned polling method works remarkably well in certain situations... But like most simplifications, this has a flip side. Here [Bernie Madoff] there were just two answers, fraudster or investment genius. The crowd voted genius and got it wrong. I call the flip side to the wisdom of crowds the lunacy of lemmings. (p219-220)

Good stuff. Strictly speaking none of that is new territory at CBS blog, but we're always on the look-out for evidence that tests our rules, be it confirms or contradicts.

Now, returning to the second reason for picking up this book. What did Ed have to say about health and longevity? Is it a case of lucky genes or is it something more, and, more importantly, reproducible by us? The short answer is nothing definitive. The book barely made a couple oblique references on the topic. However, there are a few things that can be gleaned from Ed and his life. A long answer will be its own future post.