tag:blogger.com,1999:blog-15278404914962683972024-03-18T00:55:08.697-07:00Credit Bubble StocksUnknownnoreply@blogger.comBlogger4420125tag:blogger.com,1999:blog-1527840491496268397.post-46062924779428158082024-03-13T13:00:00.005-07:002024-03-13T13:00:00.301-07:00Wednesday Night Links<ul style="text-align: left;"><li>During wartime the British would suspend the convertibility of bank
notes with the promise to restore convertibility at the previous parity
after the war. This allowed the Bank of England to help finance the war
with note issuance without the fear of a wave of redemptions at the Bank
and a drain of its gold reserves. In addition, the commitment to
restore the previous parity was equivalent to a promise to offset any
inflation created during the war from note issuance with a corresponding
deflation after the war. Many people, including many economists, have
criticized this practice since the policy-induced deflations were
particularly costly. They argue that after the war it might be best to
let bygones be bygones and simply devalue the unit of account to avoid
the costly deflation. However, if one recognizes the state’s desire for
emergency financing, it is obvious that this commitment to restore the
previous parity is necessary for long-term emergency financing. Without
that commitment, money demand would decline over time in anticipation
that the currency would be permanently devalued in an emergency and this
would make it difficult for the state to use the same tool of emergency
finance in the future. [<a href="https://www.economicforces.xyz/p/why-does-the-state-have-a-monopoly ">Economic Forces</a>]<br /><span></span></li><li><span>Ferran Adrià, the legendary chef of </span><i>El Bulli</i><span>,
once said that Mao was the most consequential figure in the history of
cooking because: “[Spain, France, Italy and California] are only
competing for the top spot because Mao destroyed the pre-eminence of
Chinese cooking by sending China’s chefs to work in the fields and
factories. If he hadn’t done this, all the other countries and all the
other chefs, myself included, would still be chasing the Chinese
dragon.” [<a href="https://www.thepsmiths.com/p/review-invitation-to-a-banquet-by ">Mr. and Mrs. Psmith’s Bookshelf</a>]</span></li><li><span>Take, for example, the 15-minute city, which is a radical proposal that people should be able to get pretty much anywhere they need to go within fifteen minutes and ideally without needing a car. It’s a lovely idea, and the parts of residential America that are like that — most of them former suburbs — are insanely desirable and therefore insanely expensive. If it were easy to make more of them, you’d think the market would have figured out how! And if I had any confidence whatsoever that anyone involved in municipal planning could produce more neighborhoods like that — leafy green places full of parks, libraries, schools, and shops — or even that they wanted to have safe, clean, and reliable transit options, I’d be all for it. But these are the same people who are gutting public safety in the cities while failing to maintain or enforce order on existing transit. These are the same people who imposed draconian Covid mitigation policies like Zoom kindergarten, padlocked churches, and old people dying alone with nothing but a glove full of warm water to mimic human touch, all of which were meant to buy time for…something (human challenge trials? nationalized N95 production?) that never happened. It’s easy to ban things; it’s hard to do things. So you’ll excuse my doubts about their ability to build a 15-minute city that looks like Jane Jacobs’s ideal mixed-use development, with safe, orderly streets and a neighborhood feel. One rather suspects they would find it far more within their wheelhouse to simply abolish single-family zoning or imposing restrictions on who can go where, when. [<a href="https://www.thepsmiths.com/p/review-the-wizard-and-the-prophet">Mr. and Mrs. Psmith’s Bookshelf</a>]</span></li><li><span>Charles Town (later Charleston), South Carolina, modeled on the capital of Barbados, was filled with theaters, taverns, brothels, cockfighting rings, private clubs, and shops stocked with goods imported from London. Life in the city was a constant churn of social engagements, signalling, and status competition: in 1773, a pseudonymous correspondent wrote in the South Carolina Gazette that “if we observe the Behavior of the polite Part of this Country, we shall see, that their whole Lives are one continued Race; in which everyone is endeavouring to distance all behind him, and to overtake or pass by, all before him; everyone is flying from his Inferiors in Pursuit of his Superiors, who fly from him with equal Alacrity…” [<a href="https://www.thepsmiths.com/p/review-american-nations-by-colin">Mr. and Mrs. Psmith’s Bookshelf</a>]</span></li><li><span>To a certain way of thinking, after all, cities are where you get culture, like live theater and fusion cuisine and $20 cocktails; they’re where you get cool parties and bodega cats and the other essential elements of twenty-first century self-actualization. Children interrupt all that: they’re a weird time-consuming hobby, like building model railroads or running ultramarathons, so the suburbs, which are full of children, are a sort of ticky-tacky storeroom for humanity either larval or on hold. Suburbs are where interesting people go once they have kids and cease to be interesting. But if you regard children as not just a lifestyle choice but part of becoming a human being, if you believe that creating a home for your family is not drudgery but a valuable undertaking, then you begin to see the point of even an exurban subdivision. (Though I still like sidewalks.) [<a href="https://www.thepsmiths.com/p/review-a-field-guide-to-american">Mr. and Mrs. Psmith’s Bookshelf</a>]</span></li><li><span> </span>My startup Terraform Industries looks to apply solar to
produce synthetic fuel, consuming substantial amounts of land (though
less than agriculture) in the process. Something like 2 billion acres,
or 7% of Earth’s land surface area, would be sufficient to provide every
man, woman, and child on Earth with US levels of oil and gas abundance
and commensurate prosperity. It’s possible to imagine a future where
people consume even more than that – widespread personal supersonic
transport, for example – but ongoing conversion of land use away from
intensive industrial agriculture toward inherently more productive solar
synthetics is a clear net win for the environment. [<a href="https://caseyhandmer.wordpress.com/2024/03/12/how-to-feed-the-ais/ ">Casey Handmer</a>]</li><li>The “Yale or Jail” mentality that shuffles moderately intelligent people who would make excellent craftsmen into low-earning degrees at noncompetitive colleges7 gives unearned status to many of those who work at computers in air conditioning. Status is a substitute for cash in human economies, leading to an oversupply of white collar workers, and the cultural rot is continually reducing the number of working-class people who are employable. I predict that wages for people doing physical work will increase substantially in the coming decade, and ironically it may be these workers who have the most leverage to improve their working conditions. [<a href="https://tomowens.substack.com/p/bull-jobs-by-david-graeber">The Tom File</a>]<br /></li><li><span>So why is strong government less appealing these days? Well, COVID happened. And our governments were pretty damn strong in dealing with it. They made strong laws and enforced them. And what did they do with their power? Absolutely retarded shit. They destroyed the world economy and made 95% of people completely miserable for 18 months. Up to 3 long years in some places. Again, as an Orient enjoyer I was very sympathetic of strong, effective government. My life has been pretty cozy thanks to it for the past decades. But after seeing boomers, hypocondriacs and neurotic menopausal women take the reins and use it against healthy people, I'm fucking done with strong effective government. [<a href="https://spandrell.ch/2024/3/3/a-post-mortem-on-neoreaction">Spandrell</a>]</span></li><li><span>Battery demand is growing exponentially, driven by a domino effect of adoption that cascades from country to country and from sector to sector. This battery domino effect is set to enable the rapid phaseout of half of global fossil fuel demand and be instrumental in abating transport and power emissions. This is the conclusion of RMI’s recently published report X-Change: Batteries. In this article, we highlight six of the key messages from the report. [<a href="https://rmi.org/the-rise-of-batteries-in-six-charts-and-not-too-many-numbers/">RMI</a>]</span></li><li><span>All we have managed to do halfway through the intended grand global energy transition is a small relative decline in the share of fossil fuel in the world’s primary energy consumption—from nearly 86 percent in 1997 to about 82 percent in 2022. But this marginal relative retreat has been accompanied by a massive absolute increase in fossil fuel combustion: in 2022 the world consumed nearly 55 percent more energy locked in fossil carbon than it did in 1997. [<a href="https://privatebank.jpmorgan.com/content/dam/jpm-wm-aem/global/pb/en/insights/eye-on-the-market/Vaclav.pdf">JP Morgan</a>]</span></li><li><span>Let’s do a first principles-based bottoms up cost estimate. What is the Platonic ideal of a solar array? An array needs a 50 um thick layer of silicon to be fully opaque, and perhaps 100 um of necessarily flexible plastic “backing” material to provide mechanical support. Throwing in power cabling and installation rigs, I expect the installed cost of solar arrays to fall to $30,000/MW within 15 years, again with no miracles required. This is roughly 10x cheaper than the current cheapest costs. If we’re prepared to consider the implications of materials science wizardry – essentially expanding the class of known manufacturing techniques to include arbitrary configurations of known elements, a solar array could be made that’s even thinner, lighter, and cheaper, or even self-assembling. But even without such science fiction, existing manufacturing techniques will be extended to give us at least another decade of steeply falling costs, along with commensurate additional installations. The market will demand it and industry will provide. [<a href="https://caseyhandmer.wordpress.com/2023/10/11/radical-energy-abundance/ ">Casey Handmer</a>]</span></li><li><span>Your particular contribution is to pluck a worthy idea from the infinite sea of possibility, to determine how it must take form in the physical world, and to contrive a way to connect it to the engine of capitalism so it can generate self-sustaining wealth and value for its users. [<a href="https://caseyhandmer.wordpress.com/2023/08/25/you-should-be-working-on-hardware/">Casey Handmer</a>] <br /></span></li></ul><p></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-71036610679515418592024-03-08T12:00:00.020-07:002024-03-08T12:04:26.462-07:00Earnings Notes V (Q4 2023)<p><i>[Previous earnings notes for Q4 2023: <a href="http://www.creditbubblestocks.com/2024/02/earnings-notes-q4-2023.html">I</a>, <a href="http://www.creditbubblestocks.com/2024/02/earnings-notes-iv-q4-2023.html">II</a>, <a href="http://www.creditbubblestocks.com/2024/02/earnings-notes-iii-q4-2023.html">III</a>, and <a href="http://www.creditbubblestocks.com/2024/02/earnings-notes-ii-q4-2023.html">IV</a>.]</i><br /><br /><b>
Franco-Nevada Corporation (<a href="https://finance.yahoo.com/quote/FNV">FNV</a>)</b><br />As you may recall from our <a href="http://www.creditbubblestocks.com/2023/06/books-q2-2023.html">notes</a> last year on <a href="http://www.creditbubblestocks.com/2023/06/books-q2-2023.html">Rise of the Mining Royalty Companies</a>, Franco-Nevada was the original mining royalty company, and is the largest, with a $20 billion market capitalization. Newmont acquired Franco-Nevada in 2002 and spun it back out in 2007.</p><p>FNC gets 64% of revenue from gold, 17% from oil and gas, 10% from silver, 5% from "other mining," and 3% from PGM metals. The revenue mix is 32% Canada and U.S., 30% South America, and 26% Central America and Mexico. Unfortunately, their biggest asset, the Cobre Panama mine in Panama which is operated by First Quantum Minerals, is currently on preservation and safe maintenance because of a political dispute.<br /></p><p>FNV has net cash on the balance sheet, so the enterprise value is $18.5 billion. For <a href="https://finance.yahoo.com/news/franco-nevada-reports-2023-results-221600570.html">2023</a>, revenue was $1.2 billion and cash from operations was $985 million. (So the OCF/EV yield is 5.3% and the OCF margin is 82% of revenue.) They spent $520 million on acquisitions of new interests and paid $233 million of dividends. (A 1.2% dividend yield.) General and administrative expense is only 2% of revenue.</p><p>Note that FNV's average selling price for gold in the fourth quarter was just under $2,000/oz and it comprised 66% of their revenue, but the price of gold just hit $2,200/oz.<br /><br /><b>
Costco Wholesale Corporation (<a href="http://www.creditbubblestocks.com/search/label/COST">COST</a>)</b><br />Look at a <a href="https://www.barchart.com/stocks/quotes/COST/technical-chart?plot=BAR&volume=total&data=MO&density=X&pricesOn=1&asPctChange=0&logscale=0&sym=COST&grid=1&height=500&studyheight=100#google_vignette">chart</a> of Costco - it's like a meme stock. Even after a post-earnings (fiscal Q2 2024 <a href="https://www.sec.gov/Archives/edgar/data/909832/000090983224000012/costex9918-k21824.htm">release</a>) selloff, it is still up 50% (not including dividends) over the past year. The market capitalization is now $324 billion. </p><p>Total revenue was up 5.7% year-over-year, and comp sales in the U.S. (adjusted for gasoline price changes) were up 4.8%. Operating income for the quarter was up 8.4%, to $2.1 billion. (Note that membership fees for the quarter of $1.1 billion are equal to 54% of operating income.) Operating cash flow for the first half of fiscal 2024 has been $5.4 billion. The company spent $2.1 billion on capex (new stores) and paid shareholders $8 billion of dividends.</p><p>So the shares are pricey, but growth is good.<br /><br /><b>
OTC Markets Group Inc. (<a href="https://www.otcmarkets.com/stock/otcm/overview">OTCM</a>)</b><br />This is an idea for a royalty-like business that is not as expensive as a business of similar quality (e.g. Intercontinental Exchange) because it is smaller. In the fourth quarter, OTCM had an operating income margin of 35% of its revenue less transaction based expenses. The market capitalization is currently $670 million and the enterprise value $638 million. <br /></p><p>Free cash flow for 2023 was $31.5 million, a 4.9% yield on the enterprise value. (If you subtract stock based compensation, the FCF is only $25.6 million, a 4% yield on the EV.) Last year, the company returned $26.5 million to shareholders via dividends and $3.4 million via repurchases, which is a shareholder yield of 4.5%.</p><p>One concern is that growth has not been great recently for how expensive the stock is. The free cash flow has been lower each of the past two years. However, if you look back five years (to 2018), net revenue then was $56 million (vs $101 million last year), free cash flow (excluding SBC) was $20 million (vs $26 million last year) and shareholder returns were $15 million. So free cash flow was only up 30% in five years, not nearly as good as Enterprise Products Partners (for <a href="http://www.creditbubblestocks.com/2023/10/enterprise-products-partners-epd-q3-2023.html">example</a>).<br /><br /><b>
Petróleo Brasileiro S.A. (<a href="http://www.creditbubblestocks.com/search/label/PBR">PBR</a>)</b><br />Our guest writer <a href="http://www.creditbubblestocks.com/search/label/%40pdxsag">@pdxsag</a> first <a href="http://www.creditbubblestocks.com/2023/06/guest-post-pdxsag-on-petroleo.html">wrote</a> about Petrobras for us last June when it was trading for $12.25 per share, an $85 billion market capitalization and an enterprise value of $118 billion. At the time, their recent quarter's free cash flow was $7.9B for a FCF/EV yield of 27%. The market capitalization (at $15 per share) is now $97 billion and the enterprise value is $124 billion. Last year (see <a href="https://www.investidorpetrobras.com.br/en/results-and-announcements/results-center/">results</a>), Petrobras generated cash from operations of $43 billion and had $12 billion of capex, for free cash flow of $31 billion. They paid $19.7 billion in dividends and repaid $10 billion of debt. (A FCF/EV yield of 26% and a shareholder yield of 20%.)<br /><br />Petrobras shares were down 10% on March 8th after some <a href="https://finance.yahoo.com/news/petrobras-ceo-says-green-energy-160102694.html">alarming comments</a> from the company about reducing dividends to invest in an energy transition. Is it worth investing in a country where you would not want to drink the water just to get a bit higher free cash flow yield than you can get on Canadian oil sands?<br /><br />
<b>Natural Resource Partners L.P. (<a href="http://www.creditbubblestocks.com/search/label/NRP">NRP</a>)</b><br />Let's start with the highlights from NRP's Q4 2023 conference call:<br /></p><p><i>*Years of hard work and persistence are paying off. The business is generating robust levels of free cash flow, the capital structure is solid and our financial outlook is much improved. As of today, <u>our total remaining obligations, which include debt, preferred equity and warrants, stand at approximately $270 million, a 40% decrease from just 1 year ago</u>. I would like to express my sincere thanks for the support of our employees, external stakeholders and Board of Directors, without which none of these results would have been possible. We retired $178 million of preferred equity at par in 2023 and settled 1.5 million warrants, both with cash. And early this year, we settled an additional 1.2 million warrants utilizing cash and common units. There are two factors we consider when deciding whether to settle warrants with cash or common units: First, do we have ample liquidity, which we define quite conservatively, I might add; and second, is the market value of the common units less than our estimate of intrinsic value? If the answer to both of those questions is yes, we settle with cash. <u>While we will not comment specifically directly on our view of intrinsic value, I will say that it was our inability to answer yes to the liquidity question that caused us to issue units to settle a portion of the warrant exercises early this year</u>. We continue to add additional bank revolver capacity that will provide financial flexibility to settle warrants with cash and accelerate redemptions of preferreds.</i><br /><br /><i>*<u>We received $81 million in cash distributions from Sisecam Wyoming in 2023, which is the highest annual amount of regular distributions we've ever received.</u> This result was driven by record high sales prices, both domestic and export during the first half of the year. Unfortunately, global soda ash export prices fell significantly in the back half of the year as new low-cost soda ash supply came online in China, Turkey and the United States. <u>We expect 2024 to be a challenging year as global soda ash markets absorb significant new production volumes, a process that we believe will take several years to complete. Cash distributions to NRP will adjust accordingly as profit margins compress due to the combination of lower sales prices and inflation-driven cost increases</u>. Despite the current headwinds facing the soda ash industry, our long-term view of our investment in Sisecam Wyoming has not changed. We are one of the world's lowest-cost producers of a product that has favorable long-term fundamentals, driven by urbanization, the megatrends for renewable energy and the electrification of the global auto free fleet.</i><br /><br /><i>*You are right in what you summarized initially that <u>at our current run rate that it's not too long before we get to the point where we're obligation free</u>. But I don't want to speculate now on what we would do in 1.5 years, 2 years from now if we had excess cash. I can tell you at this point in time, we don't see opportunities in the market. <u>If we were in that theoretical situation where we had excess cash today, they are not on the horizon overly attractive opportunities to deploy capital</u>. That being said, I will point out that we are focused on the task at hand right now, and we're not out beating the bushes for places to deploy capital. I think you can rest assured that we are going to be quite thoughtful about anything we do with respect to deploying capital in any manner other than distributing it out to unit holders. </i></p><p>At the current unit price of $92, the market capitalization is $1.2 billion (using the February 2024 unit count and not the year-end). They have spent $55.7 million repurchasing warrants in Q1 2024 and have hopefully earned about the same amount from two months of cash flow. If that is the case, the enterprise value is currently around $1.4 billion. Last year's free cash flow of $313 million represents a 22% yield on the enterprise value.<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-29991179074918757022024-02-29T09:30:00.001-07:002024-02-29T09:55:16.451-07:00Canadian Natural Resources Limited - 2023 Earnings ($CNQ)<p><i>[Previously regarding <a href="http://www.creditbubblestocks.com/search/label/CNQ">Canadian Natural Resources Limited</a> (CNQ).] </i></p><p>An outstanding year from the titan of the Canadian energy industry. Some key highlights from the <a href="https://www.cnrl.com/content/uploads/2024/02/0229-Q423-Front-End.pdf">results</a> (dollar figures in USD):<br /></p><ul style="text-align: left;"><li>CNQ achieved its target net debt level of $7.4 billion in Q4 2023 (slightly earlier than their forecast of Q1 2024). This means that they will <u>target 100% return of free cash flow to shareholders</u> via dividends and buybacks.</li><li>Capital expenditures were 4.7% lower in 2023 than in 2022, yet production of liquids was up 4.3% and total production (including natural gas) was up 4%. They averaged 974k bbl/d for the full year and 1.05 million bbl/d in Q4.<br /></li><li>Out of $9.1 billion of cash from operations, $5.6 billion of capital was returned via share repurchases, dividends, and debt repayment, and $3.6 billion was spent on capex. The share count was 2.8% lower year-over year.</li></ul><p>The current market capitalization of CNQ (at a $75 share price) is $75 billion, and the enterprise value is $82.5 billion. Cash from operations for the fourth quarter was $3.6 billion and the company spent $722 million on capital expenditures. The remaining free cash flow for the quarter was $2.9 billion, of which $450 million was used for debt repayment, $1.15 billion was used for share repurchases, and $725 million was used for share repurchases. The free cash flow yield on the enterprise value was 14% and the shareholder yield was 12% (both based on the quarter's results annualized).<br /><br />This was during a quarter with an average WTI price of $78. In its latest <a href="https://www.cnrl.com/content/uploads/2024/02/V_Corp_Pres_Feb.pdf">investor presentation</a>, CNQ says that free cash flow per share would be 40% higher at $95 WTI than at $80 WTI. Notice also on slide 8 of the presentation, CNQ management points out that oil sands mining and upgrading requires much less capital expenditure to maintain production than shale. They call this the "long life no decline advantage".</p><p>The net present value of future net revenues, before income tax, discounted at 10%, is $78 billion for proved developed producing reserves and $138 billion for total proved plus probable reserves.</p><p>This is very speculative, but if WTI did go back to $95, that implies that the shareholder yield would be 16.8%. If that happened and investors decided to value CNQ, with a 40+ year reserve life, more like a "quality compounder" (such as Marriott or Visa) at a 4.2% shareholder yield, shares would quadruple. (We have observed in the past that investors <a href="http://www.creditbubblestocks.com/2021/03/sector-rotation-value-strategy.html">double</a> <a href="http://www.creditbubblestocks.com/2015/05/on-importance-of-asset-class-bubbles.html">count</a>: low multiples when things are bad, high multiples when things are good.)<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-21476844731446602682024-02-27T05:00:00.001-07:002024-02-27T05:00:00.138-07:00Genesis Energy Limited ($GEL)<p>We mentioned <a href="https://www.genesisenergy.com/">Genesis Energy</a> (<a href="https://finance.yahoo.com/quote/GEL">GEL</a>) in one of the earnings <a href="http://www.creditbubblestocks.com/2024/02/earnings-notes-ii-q4-2023.html">notes</a> 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.</p><p>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. </p><p>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. </p><p>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. </p><p><i>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. <u>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</u>, 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.<br /><br />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.</i></p><p>Regarding uses of capital:</p><p><i>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. <u>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</u>.
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.</i><br /></p><p></p><p></p><p></p>Concluding an investment cycle is very powerful <u>if</u> it works: you get higher earnings <i>and</i> the capital expenditures decline, resulting in a big increase in free cash flow.<p>Wanted to add some highlights from the Q3 investor call - another instance of a quarterly call with <u>no questions</u>.<br /></p>
<i>* 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 <u>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</u>, 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.<br />
* 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, <u>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 <b>our</b> industry-leading infrastructure in the Central Gulf of Mexico</u><br />
* 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 <u>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</u>, 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.<br />
* 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. <u>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</u>. 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.<br />
* 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 <u>natural producers with solution
mining operations have the absolute lowest cost of production and thus
continue to have a competitive advantage</u> 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.<br />
* 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. </i><span><i>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. <u>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</u>. 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.<br />
*
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, <u>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</u>. As we have an increasingly clear sight — clear line of sight to <u>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</u>, 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.<br /></i>
<br />
And then from the Q4 call:<br />
<br /><i>
*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.</i></span>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-13564616205396980202024-02-26T15:00:00.012-07:002024-02-26T15:04:50.767-07:00Earnings Notes IV (Q4 2023)<p><b>Alpha Metallurgical Resources, Inc. (<a href="http://www.creditbubblestocks.com/search/label/AMR">AMR</a>)</b><br />Alpha Met is the largest U.S. met coal producer, representing about one-fifth of total U.S. production. According to their recent <a href="https://www.sec.gov/Archives/edgar/data/1704715/000170471524000029/amrinvestorpresentation2.htm">investor presentation</a>, 71% of AMR's met coal production is exported, with India accounting for 37% of their export sales over the past five years.<br /><br />The market capitalization of AMR is now $5.7 billion after earnings. AMR stock has been on an absolute tear since they are allocating lots of cash to share repurchases. (Up 151% since we <a href="https://totalrealreturns.com/n/AMR?start=2023-03-31">mentioned</a> last March.) Their current assets less total liabilities (ignoring deferred taxes) are now $255 million, so we would put the enterprise value at just under $6 billion.<br /><br />For the fourth quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1704715/000170471524000027/pressrelease12312023.htm">release</a>, <a href="https://www.sec.gov/Archives/edgar/data/1704715/000170471524000028/amr-20231231.htm">10-K</a>), AMR's adjusted EBITDA was $266 million and for the full year (2023) it was $1 billion. That puts the EV/EBITDA at about 5.8x. AMR sold 4.6 million tons of met coal in Q4, 18% more coal than the prior year quarter. They got $184/t for met coal versus $155/t the previous quarter. Their cost of met coal sales was up slightly to $119 per ton from $110 per ton the prior quarter.<br /><br />Cash from operations was $199 million and capital expenditures were $62 million for the quarter, for $137 million of free cash flow, an annualized yield on the enterprise value of 9%. That seems somewhat rich, especially compared with the FCF/EV yields of a coal <i>royalty owner</i> like Pardee, Beaver Coal, or Natural Resource Partners.<br /></p><p>AMR had said that they were going to cease paying and focus their cash
on share repurchases, "as long as buybacks make sense from a market,
trading price, and valuation perspective." They paid $13 million of dividends for the fourth quarter and bought back $137 million of stock, for a shareholder yield of 10.5% (annualized) on the current market capitalization. They shrank the share count by <u>17%</u> year-over-year!</p><p><b>AerCap Holdings N.V. (<a href="http://www.creditbubblestocks.com/search/label/AER">AER</a>)</b><br />We mentioned aircraft lessor AerCap way back in the "What I Would Buy Instead of Tesla" <a href="http://www.creditbubblestocks.com/2020/10/what-i-would-buy-instead-of-tesla.html">post</a> in October 2020. At that point the market capitalization was $3.3 billion, which was only a third of book value. They had $35 billion of aircraft (at book value net of depreciation), $10 billion of other assets, and $35 billion of debt, for a net of $10 billion of shareholder equity. It was trading for 3x earnings and we said, "If lots of airlines go bankrupt, this is a zero. If things return to normal, it's worth close to triple."<br /><br />The market capitalization is now $16 billion and the share price did in fact triple. The share count and market capitalization grew in March 2021 when AER acquired GE's aircraft leasing business (GE Capital Aviation Services) for cash and stock. The other big development was when Russia invaded Ukraine, 152 AER aircraft were stranded in Russia. However, settlements were received from various Russian airlines and insurance companies.</p><p>Looking at the 2023 <a href="https://www.aercap.com/investors/news-events/news/detail/556/aercap-holdings-n-v-reports-record-3-1-billion-2023-net">results</a>, book value has grown to $16.6 billion as of year-end 2023. AerCap has $57 billion of "flight equipment," $14 billion of other assets, $46 billion of debt, and $8 billion of other liabilities. So the shares are now at 1x book value.<br /><br />In 2023, AER earned $3.1 billion. Note that there were $1.3 billion of recoveries related to the Russian planes, so a real steady-state number would obviously be lower. Operating cash flow for the year was $5.3 billion. They spent $4.1 billion (net) on new aircraft and aircraft downpayments. They spent $2.6 billion on share repurchases which was more than their free cash flow, however they have some float from things like security deposits received from customers. With the $2.6 billion of repurchases, they shrank the share count by <u>18%</u> during 2023.</p><p>We like specialty finance businesses with barriers to entry. Another example would be Burford (BUR). Good luck starting an aircraft leasing company; it's not like opening a bank to make mortgages at 4%. The concerns that we have with AER are the leverage (assets 4.4x their equity) and the China risk. They have 16% of their planes on lease to Chinese airlines so in the event of a Taiwan conflict, they could have a massive hole blown in their balance sheet. Why does China need to finance its planes with western capital, anyway?<br /></p><p><b>Lamar Advertising Company (<a href="http://www.creditbubblestocks.com/search/label/LAMR">LAMR</a>)</b><br />The reason that we initially became interested in Lamar was its high free cash flow margins - the signature feature of a <a href="http://www.creditbubblestocks.com/2023/11/free-cash-flow-conversion-marriott.html">"royalty-like"</a> business.</p><p>The market capitalization of Lamar at $108 per share is $11
billion and the enterprise value is $16 billion. During the fourth quarter of 2023 (<a href="https://ir.lamar.com/news-releases/news-release-details/lamar-advertising-company-announces-fourth-quarter-and-year-4">release</a>),
the company reported operating cash flow of $254 million, which was up 4%
from the prior year quarter. This quarter's operating cash flow yield on the
enterprise value (OCF/EV) annualizes to 6.4%.</p><p>Revenue for the
quarter was $556 million, which was up 4% from the prior year quarter. Notice
that Lamar enjoys a healthy operating cash flow margin of 46% of revenue. The quarterly dividend of
$1.25 per common share was a total of $128 million returned to
shareholders, a 4.6% dividend yield. (As a REIT, Lamar is required to
distribute 90% of earnings to shareholders.)<br /><br />For the entire year 2023 (<a href="https://ir.lamar.com/node/13311/html">10-K</a>), Lamar generated $784 million of cash from operations (37% of revenues). The company reinvested
$317 million in acquisitions and capital expenditures and paid $511
million in distributions to shareholders. </p><p>Let's compare Lamar's results for the year 2023 with those of <a href="https://www.sec.gov/Archives/edgar/data/1090425/000156459019004025/lamr-10k_20181231.htm">2018</a> (five years ago). Their <a href="https://www.macrotrends.net/stocks/charts/LAMR/lamar-advertising/shares-outstanding">shares outstanding</a> have grown only 3% in five years, revenue has grown 30% (a bit better than the 25% <a href="https://fred.stlouisfed.org/series/PPIACO">PPI</a> inflation), and cash from operations has grown 39%.<br /></p><p>So,
cash from operations per share went from $5.70 to $7.67, an increase of 35%. It is nice that this is comfortably outpacing PPI inflation. Obviously, CFO is different than free cash flow because it ignores
both maintenance and growth capital expenditures, but by using CFO we
normalize for the different levels of <i>growth</i> expenditures over time. And billboards do not exactly require tons of maintenance. (They actually said on the Q4 2023 earnings call that maintenance capex is $50 million in 2024 which is less than $500 per billboard.)</p><p>Management also mentioned on the call that they think that M&A and consolidation is going to "accelerate" over the next 18 to 36 months.</p><p><b>ONEOK, Inc. (OKE)</b><br />The market capitalization of <a href="https://www.oneok.com/">ONEOK</a> is $42 billion, not quite as big as Enterprise Products ($60B) or Enbridge ($73B). You may recall that OKE <a href="https://www.creditbubblestocks.com/2023/05/oneok-to-acquire-magellan-midstream.html">acquired</a> our <a href="https://www.creditbubblestocks.com/search/label/MMP">Magellan Midstream</a> last year. For 2023, OKE earned $2.7 billion, generated $4.4 billion of operating cash flow, spent $1.6 billion on capital expenditures, and paid $1.8 billion of dividends. Earnings were obviously up significantly over 2022 thanks to the Magellan acquisition, which was funded with both cash and stock. Since the acquisition closed in September 2023, the best proxies that we have for the going-forward results are the Q4 2023 and management's guidance for 2024. Guidance in the <a href="https://ir.oneok.com/~/media/Files/O/ONEOK-IR-V3/financial-reports/2024/q4-2023-earnings-presentation.pdf">investor presentation</a> is for $2.6 to $3 billion of net income, $5.9 to $6.3 billion of adjusted EBITDA, and somewhere near $2 billion of capital expenditures, mostly for growth.</p><p> </p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-23162330123242183472024-02-23T15:30:00.001-07:002024-02-23T15:33:51.848-07:00Exxon Mobil Corporation ($XOM)<p>We were just <a href="http://www.creditbubblestocks.com/2024/02/earnings-notes-q4-2023.html">noticing</a> 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.<br /></p><p></p><p>In 2016 (<a href="https://www.sec.gov/Archives/edgar/data/34088/000003408817000017/xom10k2016.htm">10-K</a>), 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.<br /><br />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.)<br /><br />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).<br /><br />In December 2019, three years later and just prior to covid, shares were about 25% lower. There was a further drawdown with covid.<br /><br />For 2023 (<a href="https://www.sec.gov/Archives/edgar/data/34088/000003408824000007/f8k4q23991.htm">release</a>), 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.<br /><br />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.)<br /><br />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.<br /><br />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.<br /></p><p>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. </p><p>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.<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-76316881080797013452024-02-22T20:00:00.002-07:002024-02-23T14:40:12.986-07:00Earnings Notes III (Q4 2023)<p></p><p><b>Chesapeake Energy Corporation (<a href="http://www.creditbubblestocks.com/search/label/CHK">CHK</a>)</b><br />Investors liked Chesapeake's earnings <a href="https://investors.chk.com/2024-02-20-CHESAPEAKE-REPORTS-FOURTH-QUARTER-AND-FULL-YEAR-2023-FINANCIAL-AND-OPERATING-RESULTS-AND-ISSUES-2024-OUTLOOK">announcement</a> 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 <a href="https://filecache.investorroom.com/mr5ir_chk/861/CHK_4Q_FY23_Outlook.pdf">expect</a> 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 <a href="https://www.hfir.com/p/public-chesapeake-plays-the-role?">lift the futures curve</a> for natural gas.<br /></p><p>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%.<br /></p><p>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.)</p><p>Still, there are other ways to get exposure to natural gas that do not require so much capital and operating expenditure. Dorchester Minerals (<a href="http://www.creditbubblestocks.com/search/label/DMLP">DMLP</a>) 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.<br /></p><p><b>Marathon Petroleum Corporation (<a href="http://www.creditbubblestocks.com/search/label/MRO">MRO</a>)</b><br />This Marathon is the <a href="https://www.marathonoil.com/">E&P company</a>, not the <a href="https://www.marathonpetroleum.com/Operations/Refining/">refiner</a> (<a href="http://www.creditbubblestocks.com/search/label/MPC">MPC</a>). Another capex cut! Management said in the earnings <a href="https://ir.marathonoil.com/2024-02-21-Marathon-Oil-Announces-2024-Capital-Budget-and-Reports-Fourth-Quarter-and-Full-Year-2023-Results">release</a> 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.<br /></p><p>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.<br /></p><p><b>Suncor Energy Inc. (<a href="http://www.creditbubblestocks.com/search/label/SU">SU</a>)</b><br />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 <a href="https://sustainability-prd-cdn.suncor.com/-/media/project/suncor/files/news-releases/2024/2024-02-21-news-release-earnings-q4-2023-en.pdf?modified=20240221223201">fourth quarter</a>, 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.</p><p>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. <u>This is what we want to see from our slow decline oil sands with front loaded cost!</u><br /><br />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.</p><p><b>Texas Pacific Land Corporation (<a href="http://www.creditbubblestocks.com/search/label/TPL">TPL</a>)</b><br />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.<br /><br />In the fourth quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1811074/000181107424000013/exhibit991q42023earningsre.htm">8-K</a>), 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 <u>the highest quarterly royalty production level in TPL history</u>. 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.<br /></p><p>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.<br /><br />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.<br /><br />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. </p><p>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. <br /></p><p></p><p><b>Black Stone Minerals LP (<a href="https://blackstoneminerals.com/investor-relations/">BSM</a>)</b><br />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%.)<br /></p><p>For the fourth quarter, BSM <a href="https://www.sec.gov/Archives/edgar/data/1621434/000162828024005445/a12312023-exhibit991.htm">reported</a> 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.)</p><p>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.</p><p>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.<br /></p><p>Why hedge? Unlike <a href="http://www.creditbubblestocks.com/2023/11/mineral-royalty-owner-earnings-dmlp-nrp.html">Sitio</a>, Black Stone does not have significant leverage. It <a href="https://www.insidermonkey.com/blog/black-stone-minerals-l-p-nysebsm-q4-2023-earnings-call-transcript-1262212/#q-and-a-session">sounds like</a> 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.)</p><p><b>Kimbell Royalty Partners LP (<a href="https://kimbellrp.com/">KRP</a>)</b><br />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 <a href="https://kimbellrp.com/our-team/">nepotism</a> 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.</p><p>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 <a href="https://kimbellrp.investorroom.com/download/Spring_2024_Investor_Presentation.pdf">investor presentation</a> 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.</p><p>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.</p><p>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. </p><p>Our humble opinion is that Dorchester has the simplest, cleanest model with the fewest moving parts, least promotional management, and longest track record.<br /></p><p><b>Sprouts Farmers Market (<a href="http://www.creditbubblestocks.com/2023/10/sprouts-farmers-market-inc-sfm.html">SFM</a>)</b><br />We <a href="http://www.creditbubblestocks.com/2023/10/sprouts-farmers-market-inc-sfm.html">wrote</a> 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%). <br /></p><p>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%. <br /><br />For the full year 2023, Sprouts <a href="https://s28.q4cdn.com/791277983/files/doc_earnings/2023/q4/earnings-result/SFM-Q423-Earnings-Release-FINAL.pdf">did</a> $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.</p><p>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.</p>Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-1527840491496268397.post-61925386899881613382024-02-15T15:00:00.001-07:002024-02-15T15:00:00.140-07:00Earnings Notes II (Q4 2023)<p><b>Arch Resources Inc. (<a href="http://www.creditbubblestocks.com/search/label/ARCH">ARCH</a>)</b><br />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.</p><p>For the full year <a href="https://www.sec.gov/Archives/edgar/data/1037676/000110465924024342/tm246092d1_ex99-1.htm">2023</a>, 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.<br /></p><p></p>
<p><b>Cenovus Energy Inc. (<a href="http://www.creditbubblestocks.com/search/label/CVE">CVE</a>)</b><br />
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 <a href="https://www.sec.gov/Archives/edgar/data/1475260/000147526024000004/q42023newsrelease.htm">release</a> and <a href="https://www.sec.gov/Archives/edgar/data/1475260/000147526024000004/q42023interimconsolidatedf.htm">financials</a>.)<br /><br />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.) <br /><br />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.<br /> <br />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.</p><p>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 <u>100%</u>) once net debt drops below $3 billion.<br /></p>
<p><b>Genesis Energy LP (GEL)</b><br />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.</p><p>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. </p><p>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. </p><p><i>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. <u>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</u>, 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.<br /><br />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.</i></p><p>Regarding uses of capital:</p><p><i>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. <u>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</u>. 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.</i><br /></p><p></p><p></p><p></p><p>Concluding an investment cycle is very powerful <u>if</u> it works: you get higher earnings <i>and</i> the capital expenditures decline, resulting in a big increase in free cash flow.<br /></p><p><b>Lithia Motors, Inc. (<a href="http://www.creditbubblestocks.com/search/label/LAD">LAD</a>)</b><br />Thought this was interesting - Lithia <a href="https://finance.yahoo.com/news/lithia-motors-inc-nyse-lad-141732160.html">announced</a> that they are getting less interested in acquisitions:<br /></p><p><i><u>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</u>. 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.</i><br /></p><p>Current market capitalization is $8.4 billion. They <a href="https://investors.lithiadriveway.com/press-releases/lslokvjh2baz7a57kv7https://investors.lithiadriveway.com/press-releases/lslokvjh2baz7a57kv7">earned</a> $1 billion for the full year. Something amazing is that <a href="https://totalrealreturns.com/n/LAD?start=2009-04-04">LAD stock is up 165x</a> from the 2009 low. That's compounding at 41%!<br /></p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-66673871209453024212024-02-14T15:44:00.001-07:002024-02-14T15:44:56.799-07:00Earnings Notes (Q4 2023)<p><b>Freeport-McMoRan Inc. (FCX)</b><br />For Q4 2023,
Freeport <a href="https://s22.q4cdn.com/529358580/files/doc_news/2024/FCX_240124_4Q_2023_Earnings_Release.pdf">reported</a> operating cash flow of $1.32 billion and capital expenditures of $1.36 billion, giving a free cash flow for the quarter of <i>negative</i> $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.<br /><br /><i>FCX’s consolidated <u>operating
cash flows are estimated to approximate $5.8 billion (including $0.1
billion of working capital and other sources) for the year 2024</u>,
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.<br /><br /><u>Capital expenditures are expected to approximate $4.6 billion for the year 2024</u> (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.<br /><br />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 <u><b>up to</b> 50% of available cash flows generated <b>after planned capital spending</b> and distributions to noncontrolling interests would be allocated to
shareholder returns and the balance to debt reduction and investments in
value enhancing growth projects</u>, 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).</i><br /><br />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. <br /><br /><b>Barrick Gold Corp (GOLD)</b><br />For Q4 2023, Barrick <a href="https://s25.q4cdn.com/322814910/files/doc_news/2024/02/Barrick_Q4_2023_Results.pdf">reported</a> 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. </p><p>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!</p><p>Remember <a href="http://www.creditbubblestocks.com/2020/08/berkshire-bought-tiny-gold-mining-stake.html">that</a> 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. <br /></p><p><b>Comstock Resources Inc (<a href="https://www.creditbubblestocks.com/search/label/CRK">CRK</a>)</b><br />Comstock produces almost 100% natural gas and sells it for the pittance of $2.50/mcf. They <a href="https://investors.comstockresources.com/news-releases/news-release-details/comstock-resources-inc-reports-fourth-quarter-2023-financial-and">reported</a> 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:<br /><br /><i>"In response to weak natural gas prices, <u>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</u>. 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."</i><br /><br />Comstock has $3.4 billion of net liabilities and a $2 billion market cap. It is conceivable that the equity here goes to zero.</p><p><b>PrairieSky Royalty Ltd. (<a href="http://www.creditbubblestocks.com/search/label/PREKF">PREKF</a>)</b><br />PSK <a href="https://www.prairiesky.com/prairiesky-announces-fourth-quarter-and-year-end-results-for-2023-including-record-oil-royalty-production-strong-leasing-activity-and-increased-annual-dividend/">reported</a> 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.)</p><p>Horizon Kinetics wrote about PSK in the <a href="https://horizonkinetics.com/app/uploads/INFL_2023_Annual-Letter.pdf">annual letter</a> for their <a href="https://horizonkinetics.com/products/etf/infl/#holdings">Inflation Beneficiaries</a> (<a href="https://finance.yahoo.com/quote/INFL">INFL</a>) ETF:</p><p><i>"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. <u>This could be viewed as a “base case” minimum return—assuming no improvement in energy prices, production volumes, or Canadian price differentials</u>. 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."</i></p><p>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.</p><p><b>Intercontinental Exchange Inc. (ICE)</b><br />For the full-year 2023, ICE <a href="https://www.sec.gov/Archives/edgar/data/1571949/000110465924011936/tm245272d1_ex99-1.htm">earned</a> $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".</p><p><b>Peabody Energy Corp (<a href="http://www.creditbubblestocks.com/search/label/BTU">BTU</a>)</b><br />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 <a href="https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=318042780&type=HTML&cdn=4b09078cbcc4e09287dc62ccabad0ff2&formType=8-K&dateFiled=2024-02-08&cik=0001064728&symbol=0001064728&companyName=#btu8k20240208ex991.htm">fourth quarter</a> 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.<br /><br />Thoughts from <a href="https://thecoaltrader.substack.com/p/peabody-post-earnings-thoughts">Coal Trader</a>: <i>"If executed successfully, the <a href="https://www.peabodyenergy.com/Operations/Australia-Mining/Queensland-Mining/Centurion-Mine">Centurion</a> and <a href="https://www.peabodyenergy.com/Operations/U-S-Mining/Southeastern-Mining/Shoal-Creek-Mine">Shoal Creek</a> 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 <a href="https://www.worldcoal.com/coal/02112023/stanmore-signs-sale-agreement-with-peabody-for-wards-well-tenements/">acquiring</a> the adjacent Wards Well deposit. <u>These investments will pivot the company more towards the met market where the long term fundamentals are far more favorable compared to thermal</u>. 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..."</i></p><p>Seems cheap and everything, but would rather own coal royalties at current valuations.</p><p><b>Natural Resource Partners, L.P. (<a href="http://www.creditbubblestocks.com/search/label/NRP">NRP</a>)</b><br />No year-end results yet, but NRP put out an <a href="https://www.sec.gov/Archives/edgar/data/1171486/000143774924002969/nrp20240129_8k.htm">8-K</a> in January about a warrant settlement:</p><p><i>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.</i></p><p>As of the September 30, 2023 quarterly results, NRP had 2,190,000 warrants outstanding. An October purchase (<a href="https://www.sec.gov/Archives/edgar/data/1171486/000143774923029545/nrp20231025_8k.htm">8-K</a>) 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?</p><p><b>Exxon Mobil Corp (<a href="http://www.creditbubblestocks.com/search/label/XOM">XOM</a>)</b><br />XOM <a href="https://corporate.exxonmobil.com/news/news-releases/2024/0202_exxonmobil-announces-2023-results">reported</a> 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.</p><p><b>Imperial Oil Ltd (<a href="http://www.creditbubblestocks.com/search/label/IMO">IMO</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>We <a href="http://www.creditbubblestocks.com/2024/02/imperial-oil-ltd-imo.html">mentioned</a> 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 <a href="https://www.imperialoil.ca/-/media/imperial/files/2024-sec/sec-filing-q4-2023-31jan24.pdf">results</a>.
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 <a href="https://www.macrotrends.net/stocks/charts/IMO/imperial-oil/shares-outstanding">share cannibal</a>. During 2023, they shrank the share count by 8.3%. </p><p><b>Enbridge Inc (ENB)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Enbridge shares have been really weak, <a href="https://stockcharts.com/h-sc/ui?s=ENB%3AEPD&p=D&yr=3&mn=0&dy=0&id=p77708291455">under-performing</a> Enterprise Products, for example. (Also <a href="https://stockcharts.com/freecharts/perf.php?ENB,EPD,NTG,FEI&n=780&O=011000">compare</a> 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 <a href="https://www.macrotrends.net/stocks/charts/ENB/enbridge-inc/dividend-yield-history">historically</a>. 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 <a href="https://finance.yahoo.com/news/enbridge-inc-nyse-enb-q4-133535270.html">call</a>:</p><p><i>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.</i><br /></p><p>Half of the EBITDA is from their <a href="https://www.enbridge.com/About-Us/Liquids-Pipelines">liquids pipelines</a>. 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.")<br /><br />A quarter of their EBITDA is <a href="https://www.enbridge.com/about-us/natural-gas-transmission-midstream-and-lng">gas transmission</a>. 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 <a href="https://www.enbridge.com/projects-and-infrastructure/projects/woodfibre-lng">Woodfibre LNG</a> project.<br /><br />Other quarter is <a href="https://www.enbridge.com/About-Us/Gas-Distribution-and-Storage">gas distribution</a> (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.")</p><p><b>Allison Transmission Holdings Inc (ALSN)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>We keep noticing ALSN on the daily all-time highs list. Per their <a href="https://www.allisontransmission.com/transmissions">website</a>, Allison is the world’s largest manufacturer of fully automatic transmissions and hybrid propulsion systems for commercial-duty vehicles. </p><p>On <a href="https://www.sec.gov/Archives/edgar/data/1411207/000119312524033768/d787994dex991.htm">fourth quarter</a> 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%.</p><p><b>Penske Automotive Group, Inc. (PAG)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Highlight from fourth quarter <a href="https://www.prnewswire.com/news-releases/penske-automotive-group-reports-quarterly-and-full-year-2023-results-302055630.html">results</a>:</p><p><i>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%.</i></p><p>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.</p><p><b>AutoNation Inc (AN)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Highlight from fourth quarter <a href="https://finance.yahoo.com/news/autonation-reports-fourth-quarter-full-115900169.html">results</a>:</p><p><i>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.</i></p><p>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.</p><p><b>Enterprise Products Partners LP (<a href="http://www.creditbubblestocks.com/search/label/EPD">EPD</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Highlights from fourth quarter <a href="https://finance.yahoo.com/news/enterprise-reports-results-fourth-quarter-110000048.html">results</a>:</p><p><i>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 25<sup>th</sup> consecutive year of distribution growth.</i></p><p></p><p>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 <a href="http://www.creditbubblestocks.com/2023/10/enterprise-products-partners-epd-q3-2023.html">pointed ou</a>t in October, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years.)</p><p><b>Altria, Inc (<a href="http://www.creditbubblestocks.com/search/label/MO">MO</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Highlight from fourth quarter <a href="https://investor.altria.com/press-releases/news-details/2024/Altria-Reports-2023-Fourth-Quarter-and-Full-Year-Results-Provides-2024-Full-Year-Earnings-Guidance-Announces-New-1-Billion-Share-Repurchase-Program/default.aspx">results</a>:<br /></p><p><i>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%.</i></p><p>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.</p><p><b>Chipotle (<a href="http://www.creditbubblestocks.com/search/label/CMG">CMG</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Highlights from fourth quarter <a href="https://ir.chipotle.com/2024-02-06-CHIPOTLE-ANNOUNCES-FOURTH-QUARTER-AND-FULL-YEAR-2023-RESULTS">results</a>: <br /></p><p><i>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.</i></p><p>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.</p><p><b>Marathon Petroleum (MPC)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>This Marathon is the <a href="https://www.marathonpetroleum.com/Operations/Refining/">refiner</a>, not the <a href="https://www.marathonoil.com/">E&P</a> company (<a href="http://www.creditbubblestocks.com/search/label/MRO">MRO</a>). They refine almost 3 million barrels per day, which is the most in the U.S., followed by Valero (<a href="http://www.creditbubblestocks.com/search/label/VLO">VLO</a>) and ExxonMobil, each with about 2 million barrels per day. Highlight from fourth quarter <a href="https://www.sec.gov//Archives/edgar/data/1510295/000151029524000005/mpcq42023earningsrelease.htm">results</a>:</p><p><i>“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.”</i><br /></p><p>That's on a market capitalization of $63 billion. </p><p><b>Marriott International, Inc. (<a href="http://www.creditbubblestocks.com/search/label/MAR">MAR</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>We <a href="http://www.creditbubblestocks.com/2023/11/free-cash-flow-conversion-marriott.html">wrote about</a> Marriott in November as a royalty-like business. Highlights from Q4 <a href="https://news.marriott.com/news/2024/02/13/marriott-international-reports-strong-fourth-quarter-and-full-year-2023-results">results</a>:</p><p><i>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. <br /></i></p><p><i>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.</i></p><p>That would be quite a nice shareholder return on the current market capitalization of $69 billion.</p><p><b>Warrior Met Coal Inc. (<a href="http://www.creditbubblestocks.com/search/label/HCC">HCC</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>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 (<a href="https://investors.warriormetcoal.com/news-releases/2024/02-14-2024-210544630">release</a>), 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.</p><p>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. </p><p>For the full year 2023, $700 million of cash from operations, but they spent $525 million on capex. <u>No share repurchases, even though the stock was trading for 1.2x EBITDA earlier last year</u>.</p><p>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 <a href="https://investors.warriormetcoal.com/~/media/Files/W/Warrior-IR-V2/documents/warrior-q423-investor-presentation.pdf">presentation</a> though.</p><p>Coal Trader <a href="https://twitter.com/dyer440/status/1757880562126049570">tweeted</a>: "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."</p><p>That's so brutal. There really shouldn't be any question of being able to move the product if you are expanding production.<br /></p><p><b>Occidental Petroleum Corporation (<a href="http://www.creditbubblestocks.com/search/label/OXY">OXY</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>From Q4 <a href="https://www.oxy.com/siteassets/documents/investors/quarterly-earnings/oxy4q23earningspressrelease.pdf">results</a>, 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!</p><p>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.)</p><div>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%.<br /></div><div><br /></div><div>Truly no idea what Buffett sees here. </div><div> </div><div><b>Royal Gold Inc. (<a href="http://www.creditbubblestocks.com/search/label/RGLD">RGLD</a>)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Reported <a href="https://www.royalgold.com/investors/press-releases/press-release-details/2024/Royal-Gold-Reports-Strong-Fourth-Quarter-and-Full-Year-2023-Operating-and-Financial-Results/default.aspx">results</a>: 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.)<br /></div><div><br /></div><div><b>Kraft Heinz Company (KHC)</b><a href="http://www.creditbubblestocks.com/search/label/XOM"><br /></a>Noticing from Q4 <a href="https://ir.kraftheinzcompany.com/news-releases/news-release-details/kraft-heinz-reports-fourth-quarter-and-full-year-2023-results">results</a> 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".)</div><div> </div><div>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. <br /></div>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-25690238406793718122024-02-11T11:05:00.002-07:002024-02-11T12:29:31.023-07:00 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 <p>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 <a href="https://www.creditbubblestocks.com/2024/01/guest-review-pdxsag-on-man-for-all.html">part 1</a>, I reviewed the book and the lessons from Thorp's investing and business successes.<br /></p><p>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.</p><p>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:<br /></p><ul style="text-align: left;"><li>Occam's Razor: (as always) lucky genes</li><li>Close second to that: be rich and live in Southern California</li><li>The Null Hypothesis: he's not an outlier, just an early peak at true normal</li><li>OTC supplement maxxer, but is demure discussing it</li><li>Esoteric billionaire longevity stack, but sworn to secrecy</li></ul><p>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 "<a href="https://twitter.com/boazweinstein/status/1744479020807508168">small bro</a>," 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.</p><p>As to being rich and living in Southern California, let us take each of those in turn. </p><p><b>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."</b> 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.<br /><br />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.</p><p>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.</p><p>Additionally, it is instructive to compare Thorp to other well-known billionaires: Munger and Buffett at <a href="https://www.youtube.com/watch?v=kfzp_IgA6YQ">99 & 93</a>, Jim Simons then at <a href="https://www.youtube.com/watch?v=gjVDqfUhXOY&t=0s">78</a>, and Carl Ichan at <a href="https://www.youtube.com/watch?v=z00y3aWYRKs">86</a> 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. </p><p>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.</p><p>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.</p><p>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, <b>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</b>.</p><p>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.<br /><br />But what fun is that in a blog post.<br /><br />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.<br /><br />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?”<br /></p><p>Ok, looking at a guy like <a href="https://twitter.com/boazweinstein/status/1744479020807508168">Weinstein</a> or <a href="https://twitter.com/dhaval_kotecha/status/1638235732568317976">FoundersPodcast guy</a>, we don't have to wonder.</p><p>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.</p><p>However, there is an exception with the Tim Ferris <a href="https://www.youtube.com/watch?v=gs39QFYIbBY">podcast</a>. 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.</p><p>And yet... in the same breath, <b>Thorp mentions reversing osteopenia by taking supplements for bone health (calcium, magnesium, and K2)</b>. 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?</p><p>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. <b>Is there a longevity drug they are taking which causes <a href="https://www.bannerhealth.com/healthcareblog/teach-me/tardive-dyskinesia-a-common-culprit-of-face-and-body-tics">facial tics</a>? Not sure, but you can bet we'll be watching for more instances among rich, old guys.</b><br /></p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-79025768342028957022024-02-06T12:30:00.001-07:002024-02-06T12:41:13.141-07:00Imperial Oil Ltd ($IMO)<p>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.</p><p>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 <a href="https://www.imperialoil.ca/-/media/imperial/files/2024-sec/sec-filing-q4-2023-31jan24.pdf">results</a>. 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.</p><p></p><p>Second, Imperial is a <a href="https://www.macrotrends.net/stocks/charts/IMO/imperial-oil/shares-outstanding">share cannibal</a>. During 2023, they shrank the share count by 8.3%. <br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-48684188835563156122024-01-22T14:30:00.000-07:002024-01-22T14:44:29.261-07:00Guest Review: @pdxsag on A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market<p>Noted investor and polymath Edward O. Thorp wrote an autobiography back in 2017: <a href="https://www.amazon.com/Man-All-Markets-Street-Dealer/dp/1400067960">A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market</a> (3/5).<br /></p><p>His first book, which enjoyed huge popular success, was his guide to counting cards in blackjack, <a href="https://www.amazon.com/Beat-Dealer-Winning-Strategy-Twenty-One/dp/0394703103">Beat the Dealer</a>, published in 1962.<br /><br />In 1967, he wrote <a href="https://www.amazon.com/Beat-Dealer-Winning-Strategy-Twenty-One/dp/0394703103">Beat the Market</a>, a guide to market arbitrage using warrants and convertible bonds. Five years later, <a href="https://www.creditbubblestocks.com/2015/07/review-of-fischer-black-and.html">Fischer Black</a> and Martin Scholes would publish their options pricing model which would win the Nobel Prize, largely inspired by the work in Thorp's book.<br /><br />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.<br /><br /><u>Man for All Markets</u> 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.<br /><br />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.<br /><br />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 href="https://twitter.com/boazweinstein/status/1744479020807508168">a photo of him</a> taken this month looking remarkably youthful at the age of 91.<br /><br />Here Ed is in a pair of Tim Ferris interviews in <a href="https://www.youtube.com/watch?v=CNvz91Jyzbg">May</a> and <a href="https://www.youtube.com/watch?v=gs39QFYIbBY">June</a> 2022. Based upon the show notes, it appears the first episode covers the outline of <u>Man for All Markets</u>, and the second episode uses the book's latter third on investing advice as jumping off points for discussing a wider range of topics.<br /><br />Our interest in this autobiography was three-fold. One, did his story add-up?<br /><br />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.<br /><br />Two, did he share any useful information on the source of his youthfulness?<br /><br />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. <b>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.</b><br /><br />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.<br /><br />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.<br /><br />As fortune has it, after I read the book I saw that blogger Rational Walk had written a pretty thorough synopsis of <u>Man for All Markets</u> not long after it was first published in 2016. I'll save myself a couple thousand words and direct your attention to his <a href="https://newsletter.rationalwalk.com/p/book-review-a-man-for-all-markets">longer synopsis</a> and then (more recently) in <a href="https://newsletter.rationalwalk.com/p/the-digest-184">ten bullet points</a>.<br /><br />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.<br /><br />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.<br /><br />What did we pick up between the lines? There were a few interesting things.<br /><br />* Ed was born in 1932, a Silent. From our reading of Helen Andrews' <a href="https://www.creditbubblestocks.com/2022/01/guest-review-pdxsag-on-boomers-men-and.html">Boomers</a>, 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 <a href="https://www.creditbubblestocks.com/2023/09/books-q3-2023.html">pointed out</a> the same thing in John McPhee's latest work. McPhee and Thorp are the same age.)<br /><br />* 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.<br /><br /><i>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.”</i> (p.149)<br /><i><br />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.” </i>(p.178)<br /><br />* Post World War II really was easy-mode for anyone that was first to apply scientific rigor to some corner of business.<br /><br /><i>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.</i> (p.146)<br /><br /><i>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.</i> (p.169)<br /><i><br />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. </i>(p.176)<br /><br />*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.<br /><i><br />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. </i>(p. 190)<br /><i><br />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...?</i> (p. 227)<br /><br />* On the successful "word-cel that never reads" type of guy:<br /><br /><i>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</i>. (p219-220)<br /><br />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.<br /><br />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.<br /></p>Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-1527840491496268397.post-38731356155869023862024-01-10T14:00:00.002-07:002024-01-10T14:04:23.794-07:00Review of Material World: The Six Raw Materials That Shape Modern Civilization<p>Ed Conway is a <a href="https://edconway.substack.com/">journalist</a> who has gotten interested, in Vaclav Smil fashion, in the materials that underlie our civilization and world. Hence his new book, just published in November: <a href=" https://www.amazon.com/Material-World-Materials-Modern-Civilization/dp/0593534344/">Material World</a>. While Vaclav Smil has <a href="http://www.creditbubblestocks.com/2022/07/review-of-how-world-really-works.html">argued</a> that the "four pillars of modern civilization" are cement, steel, plastics, and ammonia, Conway focuses on six <i>raw</i> materials that he thinks are underrated: sand, salt, iron, copper, oil, and lithium. <br /></p><p>It's not entirely clear that "underrated" is Conway's organizing concept for choosing these six, and one thing we quickly see is that he is not as logically organized, thorough, or data driven as Smil. But his argument seems to be that these are underrated and overlooked since on the one hand they are so important, but on the other hand they are cheap relative to the value they create (copper is under $4 per pound), they are used in enormous volumes (big, bulky, yet overlooked flows), and because they are bulky, producing them requires displacing even more enormous amounts of overburden and ore. Tearing down <a href="https://en.wikipedia.org/wiki/Bingham_Canyon_Mine">mountains</a>, and that sort of thing. <br /></p><p>Another point that Conway raises is that these raw materials less fungible than the casual observer might realize. Sand, for example, comes in <a href="https://www.reddit.com/r/askscience/comments/pb5x04/does_the_type_of_sand_matter_for_glass_production/">different varieties</a> with important differences in grain size and shape and mineral composition. The sand that is needed for making high quality optical glass is different than the sand that is acceptable for use in making concrete. Sand is also turned into silicon for making semiconductors, but that has more to do with the refining and ingot producing process than the raw ingredient sourcing. If you have ever thought, "how can sand be rare, or important?," the answer is in these idiosyncrasies that make the different types non-fungible.</p><p>The iron chapters got our attention because we have been thinking quite a bit about iron, steel, and metallurgical coal. Conway observes that iron accounts for 95% of the metal that we produce and use, and that it is "so fundamental to our lives that it is just as good a measure of living standards as GDP." The most developed countries in the world have an installed base of steel of about 15 tons per capita. (As he puts it, "iron is the bones of our society.") The per capita figure for China is only about half as much. His back-of-the-envelope calculation is that if everyone in the world were to come up to the developed country amount of steel per capita, it would be an additional 144 billion tons - four times the amount that has been already produced in human history.<br /></p><p>We had already been thinking lately that, if the GDP per capita of India keeps growing then their use of steel per capita (and oil too, of course) should as well. India is already the <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/india-drives-jump-in-us-coal-exports-as-producers-eye-further-demand-growth-76313272">largest importer</a> of U.S. metallurgical coal for making steel. India is the second largest steel producer but its per capita consumption and per capital installed base lag far behind the rest of the world. The straightest path forward would be for steel production to continue to grow, resulting in increasing demand for imported metallurgical coal. (Every ton of steel produced requires almost a ton of metallurgical coal to go in the blast furnace alongside the iron ore.)<br /></p><p>The writer "Coal Trader" <a href="https://thecoaltrader.substack.com/p/developing-thesis-for-2024">argued</a> recently that "emerging markets appear to be approaching a level of self-sufficiency and mutual support. They no longer seem to rely heavily on the investment and consumer demand from major Western corporations." If Coal Trader is right and their economies are decoupling from the U.S. (the "training wheels are starting to come off," he says) we should see it in their GDP growth figures (e.g. <a href="https://fred.stlouisfed.org/series/NGDPRNSAXDCINQ">India</a>). And if they decouple it should make demand for these raw material commodities less volatile. (Coal Trader had an interesting observation: "I believe we need to
invest as if our offices were in Singapore, or perhaps even Jakarta.")<br /><br />If these countries continue to develop, they should soon begin consuming much more oil per capita too. Enough to make a big difference to total world oil demand. India is currently something like 5% of world oil demand with per capita usage that’s only about one-third of China. If India develops just to the level of China, it would cause incremental increased oil demand of around ten million barrels per day. An astonishing figure, it dwarfs any possible near-term savings from electric vehicles in richer countries, and the incremental demand would be almost as big as total U.S. oil production. And note that it will take machines built of steel to burn this oil.<br /></p><p>People who are short commodities are betting against the up-and-to-the-right GDP trends of countries like China and India. Maybe those trends will continue and maybe they won't, but they are the status quo. Which brings up another point from the book. </p><p>As we have elsewhere <a href="http://www.creditbubblestocks.com/2023/07/review-of-crude-volatility-history-and.html">observed</a>, there is a great tension between physics-based pessimism (Malthusian) about natural resources and economics-based optimism (some might say cornucopianism) about the ability to respond to higher prices with substitution and invention. As an example, the new lithium-iron-phosphate (LFP) battery chemistry seems like a major point in favor of the cornucopian, economist viewpoint. We would not have thought it possible a few years ago to make a battery with just lithium and iron. </p><p>In the book, Conway points out that even as the ore concentration of copper has plummeted over the past century, the price has fallen in real terms. There have been huge fluctuations, having to do with the <a href="http://www.creditbubblestocks.com/2023/05/review-of-capital-returns-investing.html">capital cycle</a> in copper mining, but worse ore grades have not caused prices to rise. The Malthusian and Cornucopian forces have held in balance. (Perhaps the long-run destiny is for these forces to always remain in balance?)<br /></p><p>It therefore seems prudent for an investor to make not highly leveraged bets ("torque") on <i>much </i>higher commodity prices, but rather to find ways of benefiting from the status quo of growth, development, and human invention. <br /></p><p>So let us talk about ways to do this. As we have observed in the past, owners of royalties on natural resource production make money in status quo conditions, they do well if prices rise, but they can even <i>benefit </i>if the producers foolishly over-expand their capacity and drive down their commodity price (which they have a marked tendency to do throughout history), at least as long as they own a royalty on the new production too. </p><p>The opportunity that we have seen is that these royalty interests in hydrocarbons are bond-like assets priced to give equity-like returns because of ESG investing and because of a brutal bear market, and subsequent investor disinterest, in natural resource production.<br /></p><p>We have mentioned both <a href="http://www.creditbubblestocks.com/search/label/NRP">Natural Resource Partners</a> and <a href="http://www.creditbubblestocks.com/2022/01/cheap-cyclicals-and-value-vs-growth.html">Pardee Resources</a> in past writing. NRP derives a significant portion of its revenue from royalties on metallurgical coal production, but also from thermal coal production as well as an interest in a soda ash business in Wyoming. While the partnership <a href="https://nrplp.com/business/">owns</a> 13 million mineral acres, it does not own any surface acres. In contrast, Pardee owns about 155,000 surface and mineral acres, mostly in West Virginia, with active metallurgical coal production. </p><p>The current market capitalization of NRP at $96 per share is $1.2 billion. NRP has a more complicated balance sheet, with debt, preferred stock, and warrants. (The liabilities keep going up as the share price goes up, because of the warrants.) Depending on the valuation assumptions you make, they probably have $371 million of additional liabilities, less around $80 million potentially earned during Q4, for an estimated current enterprise value of $1.5 billion. </p><p>Assuming the recent level of $80 million of quarterly free cash flow, the FCF/EV yield would now be about 21%. Amazingly, this is higher than the FCF yield of the coal miners, who have to reinvest a significant portion of their cash flows back into production as capital expenditures. It is surprising that the royalty, which is the senior security in the capital structure of the mine, seems cheaper than the producers' equities. </p><p>There is a slide in NRP's <a href="https://s202.q4cdn.com/992946663/files/doc_presentations/2023/Nov/10/investor-deck-3q-23_final.pdf">investor presentation</a> showing annual free cash flow figures for NRP since 2015. For the year 2016, which was when the coal market crashed and most of the miners in the industry went <a href="http://www.creditbubblestocks.com/2015/07/walter-energy-files-for-bankruptcy.html">bankrupt</a>, the partnership still had free cash flow of $76 million. If that were to happen again (a 75% decline from current level), the FCF/EV on the current valuation would still be 5%.</p><p>Recently, the producers' cash cost per ton of met coal has been around $100 per ton, with Arch at $97/ton and Warrior at $114/ton. In 2016, the cash cost of met for Arch was only $53/t. With the producers' costs per ton having doubled since 2016, it <i>ought </i>to be difficult for the market-clearing price to drop as low as it did in 2016 (at least for a protracted length of time), and hence it ought to be difficult for free cash flow to drop that much again. <br /></p><p>Then there is Pardee, which has a market capitalization of $164 million at $250 per share. Factoring in the end of year special dividend and estimated fourth quarter free cash flow, their enterprise value is probably now around $130 million. (That's $830 per acre of surface.) Pardee generated around $7.6 million of EBITDA in Q3, so that would be an annualized yield of 23% on the enterprise value.</p><p>The edge perhaps goes to Pardee at this point based on valuation, as well as the fact that it is "two-pillar" since it is trading (arguably) below the value of the surface. In fact, one thought experiment would be to consider that Pardee could theoretically sell the surface and timber for an amount in excess of the current enterprise value, while retaining the mineral rights (meaning coal royalties) as well as other assets. (Pardee is very unlikely to actually do this; it is just a thought experiment.) Not to say that the land is of exactly the same quality, but Weyerhaeuser just <a href="https://www.prnewswire.com/news-releases/weyerhaeuser-to-enhance-southern-timberlands-portfolio-302002587.html ">bought</a> land for $2,685/acre in the southeastern U.S.. It is very difficult to find any land with timber in the U.S. for less than $1,000 per acre. Land prices of three digits per acre tend to be swamp or desert. <br /></p><p>4/5.<br /></p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-11299279795726830782023-12-29T14:00:00.024-07:002023-12-29T14:00:00.416-07:00Books - Q4 2023<ul style="text-align: left;"><li><a href="https://www.amazon.com/Elon-Musk-Walter-Isaacson/dp/1982181281">Elon Musk</a> (3/5) Walter Isaacson's new biography of Musk is a lot like his biography of Steve Jobs from <a href="https://www.amazon.com/Steve-Jobs-Walter-Isaacson/dp/1451648537/">2011</a>. His formula is to celebrate a business titan while conceding that the titan has an enormous personal weakness, yet positing that the weakness is paradoxically also responsible for his huge success. So, Steve Jobs is a "jerk" (really, a sociopath) in that biography. In this one, Musk is "intense," with Asperger's traits (sociopathic). One review <a href="https://www.theverge.com/2023/10/1/23895069/walter-isaacson-biography-musk-review">says</a>: "Isaacson does have time for a lot of Steve Jobs comparisons, which, after a while, begin to feel like product placement for his other book. In the index, Jobs is listed as showing up on 20 pages. You’d be forgiven for thinking Jobs was an important part of Musk’s rise, based on the index alone." Even when Musk offends the left, Isaacson's criticism is pretty mild: "At around 3 a.m., he impulsively tweeted it out: 'My pronouns are prosecute/Fauci.' It made little sense, wasn't funny, and managed, in just five words, to mock transgender people, conjure up conspiracies about the eighty-one-year-old public health official Anthony Fauci, scare off more advertisers, and create a new handful of enemies who would now never buy Teslas." The reason we read this new biography is that Musk's behavior has changed recently. He's tackling the <a href="https://twitter.com/elonmusk/status/1707525800830828619">border</a> <a href="https://twitter.com/elonmusk/status/1705296645468877068">crisis</a>, criticizing the Ukraine <a href="https://twitter.com/elonmusk/status/1707557290008584345">war</a>, pointing out that the empire is in <a href="https://twitter.com/elonmusk/status/1706124467414385148">decline</a>, going after <a href="https://twitter.com/elonmusk/status/1694439520517624064">Soros</a>, mentioning <a href="https://twitter.com/elonmusk/status/1686037774510497792">white genocide</a>, and taking on the <a href="https://twitter.com/elonmusk/status/1700063748910891444">ADL</a>. People are asking whether Musk wants to be the "Red Caesar". It has to be either him or <a href="https://twitter.com/GraduatedBen/status/1709314492532768830">Erik Prince</a>. Trump is too old and weak and has no conception of power; only money. (And even that, he's bad at.) Consider that Musk is now the first person to successfully <a href="https://twitter.com/elonmusk/status/1709614034058711109">turn the tables</a> on the ADL. So who cares if he did a little accounting and securities <a href="http://www.creditbubblestocks.com/2018/12/nine-problems-with-tesla.html">fraud</a> along the way? (As Shylock Holmes <a href="http://shylockholmes.blogspot.com/2023/02/the-french-revolution-and-inertia-of.html">says</a>, "it’s not nearly as obvious as you might think where exactly the next competent authoritarian might come from.") I realize that I underestimated some of his abilities and accomplishments while I was a Tesla bear. For example, Musk has something called the "idiot index," which is the ratio of the cost of a finished product to its bill of materials. The idea is, "if a product has a high idiot index, its cost could be reduced significantly by devising more efficient manufacturing techniques." The idea <a href="https://www.creditbubblestocks.com/2023/07/review-of-crude-volatility-history-and.html">just occurred to me</a> over the summer ("when a manufactured item costs much more than its bill of materials, it seems <i>more </i>likely that the final cost will continue to decline due to learning curve effects") only to find out that Musk already put the concept into use a decade ago. Musk has something called <a href=" https://twitter.com/SteadyCompound/status/1708067430675963939">The Algorithm</a> for making manufacturing processes more efficient: question every requirement, delete any part or process you can, simplify and optimize (only after deleting), accelerate cycle time (only after doing the first three steps), automate (last). It sounds like he read <a href="https://www.amazon.com/Goal-Process-Ongoing-Improvement/dp/0884271951">The Goal</a> (which we <a href="http://www.creditbubblestocks.com/2020/02/credit-bubble-stocks-2019-book-review.html">read</a> in 2019) and improved on it. Musk's personal life is highly disordered, consistent with the sociopathy. Divorced three times including twice from the same woman. Something like thirteen children with five different mothers (carried via surrogates, in some cases). Is Musk working with <a href="https://www.dwarkeshpatel.com/p/steve-hsu">Steve Hsu</a> for embryo selection on these IVF babies? There is an instance where two of Musk's pregnant babymommas are in the hospital at the same time and he doesn't think to mention the coincidence to either of them. This is a guy that, a hundred years ago, would have left his wife and kids to "go buy a pack of cigarettes" and then never returned. Musk's life sounds like a Tom Wolfe novel sometimes: "He was at the VIP room in the Miami Marlins' stadium attending a listening party hosted by Kanye West, known as Ye, for his new album, Donda 2. He was standing with rappers French Montana and Rick Ross, eating tacos and talking about cryptocurrency, when he got a text from Omead Afshar reminding him about the 9 p.m. Optimus meeting." It makes perfect sense - Musk thinks that we might be living in a simulation, and we have wondered in the past whether Tom Wolfe is the author of the simulation.</li><li><a href="https://www.amazon.com/Cavaliers-Roundheads-English-Civil-1642-1649/dp/0246136324">Cavaliers & Roundheads</a> (3/5) The English Civil War is worth knowing more about. Watch this <a href="https://www.youtube.com/watch?v=bx27wa0SpN4">clip</a> from the 1970 film Cromwell (starring Alec Guinness and Richard Harris) and consider that we are coming up on 400 years of Puritans smashing and destroying things that upset their feelings. Are they the original "antifa"? A big question is why the opposition to Charles I was able to defeat him. Remember one of our Q3 <a href="http://www.creditbubblestocks.com/2023/09/books-q3-2023.html">reads</a>, <a href="https://www.amazon.com/gp/product/1922602442/">The Populist Delusion</a>, stands against the idea that "if conditions get bad enough, if the plebians become too disgruntled with their leaders, then the people will rise up and overthrow them." Charles was not <a href="https://en.wikipedia.org/wiki/Personal_Rule">so bad</a> - nothing compared with Stalin or Mao, for example. It goes to show <a href="https://www.econlib.org/library/Columns/y2019/Lemieuxonpower.html">Jouvenel</a>'s claim that "revolution is the consequence of a weakness in Power which is liquidated by a stronger one." And Charles was quite weak. He seemed to think that a monarch's power was bestowed automatically thanks to divine right and not thanks to the formation and organization of alliances that could deliver superior force against opponents. Late in the Civil War, after his spectacular defeat at Naseby and while staying at <a href="https://en.wikipedia.org/wiki/Raglan_Castle">Raglan Castle</a>, someone in Charles' court described the mood: "We were all lulled asleep with sport and entertainments as if no crown had been at stake or in danger to be lost." Charles refused to come to a deal with the Scottish to accept the Presbyterian system in exchange for their help. However, rule by the religious kooks and heretics was so unstable that after only eleven years of Interregnum, the monarchy was restored. Conclusion: "the thousands of men who had died in the Civil Wars had given their lives to little discernible effect".<br /></li><li><a href="https://www.amazon.com/Turtles-All-Way-Down-Vaccine/dp/9655981045">Turtles All the Way Down</a> (4/5) We have gotten interested in the "vaccine question". We should have written about it more at the time, but the proper, game-theoretic decision with regard to the covid vaccine was to abstain when it came out... and to continue abstaining. The question now is whether it was an accident - a horrific botch out of panic - or whether it was deliberately made to be a slow-acting depopulation tool. Something very telling about covid and the covid vaccine is that people don't want to know where covid came from or whether the vaccine is harmful. Investigation and study of these subjects is prohibited in any institutions that would actually have the power to do so. An information blackout in true communist style. (Covid might be America's Chernobyl.) One wonders whether the dangers are unique to the covid vaccine. Are the childhood vaccines questionable too? Prior to covid, we would have brushed off such concerns. This book asks: "Can we entrust our babies to vaccines produced, tested, and marketed by the same agencies and corporations, doctors and government officials, researchers and high-tech moguls that failed us?" So here is something that we didn't know: pediatric vaccines are never and have never been tested against true placebos! The control groups in the trial of a new vaccine actually receives either an earlier, approved vaccine for that disease or a solution that is not inert. As an example, when the Hep A vaccine was tested, the "placebo" that was used as a control contained the aluminum adjuvant and mercury-based preservative that the vaccine contained, which obviously precludes the trial from determining whether those ingredients have adverse effects. As the authors say, "no logical explanation can be found for the ubiquitous practice of administering bioactive compounds to control groups in trials of new vaccines other than a desire to conceal the true rate of adverse events." Since none of the vaccines have ever been tested against true placebos there is no basis for claiming that they are free of adverse effects. Not only are the vaccine trials deficient (seemingly by design) but so are the adverse event reporting systems. We saw with covid that reporting an adverse reaction to the vaccine was low status and something that could easily cause you to be shunned or fired from your job in the health care system. But even if a physician felt himself able to report an adverse event related to the covid vaccine, the problem would be that he would have to keep recommencing and giving it to people since that it the current standard of care. There was a researcher who wanted to upgrade the vaccine reporting system to automate adverse event detection by monitoring patients’ electronic records for new diagnoses, changes in laboratory values, and new allergies for up to 6 weeks following vaccinations. It would have automatically contacted the clinician when a suggestive event was detected, and reported an AE automatically if no response was received. Apparently, the CDC quashed the idea. They clearly do not want the public to know whether the vaccines have adverse effects. So that again raises two possibilities. The vaccines could be a weapon against ordinary people, for slow-acting depopulation. It could also be that the vaccines work but have a significant risk of adverse events, and the powers that be know that people would not take them if they thought there was any downside to doing so.<br /></li><li><a href="https://www.amazon.com/Vaccine-Friendly-Plan-Effective-Health-Pregnancy/dp/1101884231">The Vaccine Friendly Plan</a> (4/5) This is an interesting one - by a pediatrician who was practicing in the 1990s and noticed a rise in autism as well as other chronic diseases in children. "Since safety is tested vaccine by vaccine, no one from the CDC had ever calculated the cumulative amounts of mercury in the childhood vaccine schedule at the time." He points out that the current CDC-recommended vaccine schedule exceeds the toxic limits of safe aluminum exposure! During the lifetime of a typical millennial, the number of shots has gone from eleven to fifty or so - an enormous increase. He thinks it may be especially bad to give children acetaminophen after giving them one of the pediatric vaccines that provokes a fever (such as MMR). This book goes beyond vaccination advice to general pediatric health topics. Here's something based: "I can no longer remain neutral about an entirely cosmetic procedure when it might be linked to something as devastating as autism. I now discourage parents in my practice from circumcising their sons. Moms and dads, we need to protect our babies from physical pain and stress as much as we can. Whether you have a son or a daughter, circumcision is not a medically indicated procedure." The worst childhood illnesses are rare and the common ones are not too dangerous. (At least not yet - that will be changing with our completely open borders, worsening sanitation and hygiene due to falling intelligence and corruption, and potentially also as more people opt out of vaccination.) So this author (Paul Thomas) says there is no reason for an American two-month-old to get the polio vaccine. He points out that Scandinavian babies don't get any vaccines until three months and that breastfeeding is more important (for immunity) than vaccination. He says no to Hep B, polio, and rotavirus, and is more open to the DTaP, Hib, and the Prevnar vaccines. It is important to realize that vaccines are a major profit center for pediatricians and they also drive a lot of the office visits. Paul Thomas has another intelligent suggestion - consider reducing the baby's exposure to disease threats by "cocooning" - being around fewer people. My impression is that small children pick up tons of infections at daycare. </li><li><a href="https://www.amazon.com/gp/product/1733186956/">The Wolfberry Chronicle: And Other Permian Basin Tales From The Henry Oil Company</a> (4/5) The story of Jim Henry, a petroleum engineer who started out with a small consulting firm in Midland and who <a href="https://www.hartenergy.com/exclusives/henry-resources-jim-henry-permian-basin-wildcatter-dies-89-206881">ended up</a> as an oil baron. The book is written by a geologist and engineer who worked for Henry, so it is much more detailed than it would be if it were written by some journalism major who had not worked for the company. His third chapter "Permian Basin Rocks for Jocks" is an excellent briefing on the history and geology of this important area. Incentives explain everything: in the early, conventional drilling days of Henry, he "never sold properties" because "the operating fees charged to the partners on a per-well basis were essential to pay the company's overhead in the Spraberry business model. As a result, Henry always wanted to increase and preserve well count." Before fracking, Henry evolved into the "waterflood kings": recovery of oil from fields that had already been drilled a first time. This was picking up crumbs from bigger companies; a time-honored way for a small company to start. Shales: "Most of the world's high-pressure, high-permeability fields have been discovered and developed, and almost all of today's reservoirs - shales in particular - do not produce naturally but require some form of stimulation." Three components were necessary for the shale revolution to work: finding the shale reservoir, drilling horizontally, and a slickwater frac.<br /></li><li><a href="https://www.amazon.com/Economic-Causes-English-Civil-War/dp/0367189232">The Economic Causes of the English Civil War: Freedom of Trade and the English Revolution</a> (3/5) My take on the ECW after reading this: the upper middle class tricked the <a href="https://www.amazon.com/Radical-Religion-Cromwells-England-International/dp/1845117654">religious lunatics</a> into helping to depose the king, and then discarded them. The Parliamentarians were strongly pro-property rights and anti-taxation. The king and his government did nothing for them - the merchants in London had their own standing militia and the king was just a parasite on the country. (For example, English kings did not provide for the defense of their citizens. During the reign of Charles I and during the surrounding centuries, raiders from north Africa -- <a href="https://www.historic-uk.com/HistoryUK/HistoryofEngland/Barbary-Pirates-English-Slaves/">Barbary pirates</a> -- would kidnap and enslave English people from the coast. When they gained power, Cromwell and Parliament actually did something about it.) When they brought back Charles II after the Interregnum, he was reinstalled subject to all the economic victories that Parliament and the middle class had demanded. ("Even in the relatively pro-monarchial atmosphere of the Cavalier Parliament, it did not prove an easy matter to turn things back.") The king’s alliance was the highest nobility and the poor: a classic top and bottom against the middle fight! Thus, the ECW is similar to the American Revolution playbook, wherein the rebellious colonial elite of merchants tricked lower the classes into supporting a regime change with talk of freedom and liberty, then had a counter-revolution once they won. The efforts by the Tudor monarchs to reduce the power of great magnates shifted it towards the middle ranks of society, which set Charles I up to be deposed. "The Interregnum decades [mark] a transformation in the status of enclosure..." And coal and textiles were undergoing great progress during the 17th century as well. "The concept of freedom of trade was finding broad reception throughout the growing national economy," but Charles I made very clumsy efforts to regulate and tax. Interesting point about James I: "he had no concept of an objectively defined national interest." "The only active military campaign that Charles I undertook outside his English kingdom in the 1630s arose unexpectedly as a consequence of his attempt to impose a new order of worship on the church of his other kingdom of Scotland. This affronted the clear and powerful religious preferences of the Scottish people, and also met with condemnation from his English subjects, who perceived that it contradicted their national interest by fomenting a gratuitous conflict between the two kingdoms. Paradoxically, this needless provocation of his peoples on both fronts arose from Charles's dominant desire to reinforce the principles of hierarchy. It resulted in another humiliating reversal, which demonstrated in graphic fashion [his] fundamental weakness." Revolution is the consequence of a weakness in Power which is liquidated by a stronger one! The two radical measures of 1641 (which took revenue powers away from Charles) mark the inception of the English Revolution. "By these constitutional changes, Charles I had lost his position as an independent monarch and would need to use force of some kind if he were to recover it." And the parliamentary control of customs dues was <i>not</i> reversed upon the restoration in 1660. Merchants: "just as the trading perspective was central to the parliamentarian agenda, so all the great ports and market towns displayed a positive commitment to parliament." "The towns now operated in an exceptionally open and well-coordinated interregional market, the force of which encouraged a demand for commercial freedoms, to which parliament alone was committed. [...] They turned to parliament as a public authority because it served their economic imperatives." Something funny about the Puritans - they really liked sermons and would leave their home parishes to find a preacher that they preferred, an offense called "sermon-gadding." They also refused to kneel for communion - which was also an offense.</li><li><a href="https://www.amazon.com/Lenins-Tomb-Last-Soviet-Empire/dp/0679751254">Lenin's Tomb: The Last Days of the Soviet Empire</a> (4/5) David Remnick was the Moscow correspondent for The Washington Post during the final years of the Soviet Union, and his book about it won the Pulitzer Prize in 1994. Remnick was a <a href="https://journalism.princeton.edu/2020/03/24/john-mcphees-legendary-course-meets-the-moment/">student</a> of John McPhee at Princeton, and is now his <a href="https://journalism.princeton.edu/2020/03/24/john-mcphees-legendary-course-meets-the-moment/">editor</a> at The New Yorker. The book opens with the excavation of the corpses of Poles killed in the Katyn massacre, and the book is surprisingly forthright (for our era) about the crimes of Soviet Communism. I would be surprised if Remnick would write the same book today or even be interested in the topic. (See his recent <a href="https://www.newyorker.com/news/daily-comment/trumps-bloody-campaign-promises">work</a>.) Remnick's view on the USSR collapse is that the state was sclerotic but still chugging along in the 1980s, but what cause the collapse was a sudden loss of legitimacy brought about by Gorbachev's discussions of the crimes of Stalin (which made it for other people to do so). For the 70th anniversary of the October Revolution of 1917 Gorbachev gave a speech at Kremlin Palace of Congresses which criticized Stalin: his "cult of personality" and "violations of the law, arbitrariness, and repressions." Remnick says that the speech was a critical beginning to undermining the Stalinist system, "intellectually, politically, and morally." Gorbachev was stuck in the middle between true believing commies and reformers. The reformers thought that the way to get rid of Communism and bring down the Union was to make a full accounting of the oppression under the Soviet era. Example: "I thought that what had to be done at the start in order to dismantle the system was to tell people how many victims there had been, to plant the idea that monuments should be erected to those who had perished, archives should be published. This is the real start of perestroika. The truth. And with that, the process can become irreversible. Without that, without everyone acknowledging that the system is discredited and guilty, a crackdown can always succeed." Stalin believed in movies ("the greatest means of mass agitation") and Gorbachev believed in television. (Stalin co-opted the Russian Church during WWII and want back to oppressing it afterwards. When Napoleon met Alexander in East Prussia, Napoleon said, “I see that
you are an emperor and a pope at the same time. How useful.”) His propagandist <a href="https://en.wikipedia.org/wiki/Alexander_Yakovlev">said</a>, "the television image is everything." How Soviet Communism worked in practice: "The structure of state [was] itself a mafia. The Communist Party's dispensation of power and property was unchallenged by election or by law. Administrators of 'socialist justice' were duplicitous props intended by the Party to give the appearance of a civil society. These judges, police captains, and prosecutors were generally well fed and not meant to stand up for anything more than their share of the booty." By February 1990, there were a quarter-million people marching toward the Kremlin carrying signs like: "Party Bureaucrats, Remember Romania" (which was <a href="https://en.wikipedia.org/wiki/Trial_and_execution_of_Nicolae_and_Elena_Ceau%C8%99escu">fresh</a> in everyone's minds). Pressures like this caused Gorbachev to continue moving away from Communism. The problem for him was that you can't have "half-communism." An amazing scene he recounts is being at the Moscow Higher Party School while the students watched Michael Douglas and Charlie Sheen in Wall Street. (Apparently the would-be apparatchiks loved the contrast cuffs and collars on the shirts that Gordon Gekko wore.) The May Day parade in 1990 had more <span><span><a href="https://www.youtube.com/watch?v=XkZZWcecGik">Ceaușescu</a> references by demonstrators. Certain aspects of present day America seem late Soviet. <br /></span></span></li></ul>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-38300121423625076332023-12-07T15:00:00.039-07:002023-12-07T15:00:00.251-07:00Thursday Night Links<ul style="text-align: left;"><li>It seems like Philip Morris knows they are outgunned in vaping which is why they are trying for something that would have a stronger "razor & razorblade" model: heated tobacco. Big tobacco investors have been conditioned to be complacent. We have a mutual on Twitter who says, "I've seen doomsday proclamations for going on 20 years now despite ever higher earnings and dividends." The companies - quite ingeniously - settled the 1990s litigation in a way that resulted in very profitable competitive dynamics. That does not mean that selling nicotine is inherently profitable. If the cigarette businesses go away and the replacement risk market is fragmented, some of the tobacco enterprises values may be smaller than the outstanding liabilities. [<a href="https://www.creditbubblestocks.com/2023/05/e-cigarette-summit-uk-2022.html">CBS</a>] </li><li>The
maker of Lucky Strike and Dunhill cigarettes pointed to economic
challenges in the United States, where some inflation-weary consumers
are downgrading to cheaper brands, and the rise of illicit disposable
vapes. BAT
said these factors combined with the broader move away from smoking
meant it would adjust the way some of its U.S. brands are treated on its
balance sheet, shifting their value to a finite lifetime of 30 years. [<a href="https://www.reuters.com/business/retail-consumer/bat-takes-315-bln-charge-us-cigarette-brands-2023-12-06/">Reuters</a>]</li><li>The ideal strategy in such situations is constant percentage betting, specifically the Kelly criterion, a formula deriving from information theory well-known to professional gamblers that also happens to specify the ideal amount of money to bet when one has an advantage over the house. For even money payoffs, the “Kelly” sized bet is simply the odds of winning minus the odds of losing, so for our 60% coin, this is 0.6 - 0.4 = 0.2, or 20% of the bankroll on each 60/40 even-money bet. The Kelly bet is mathematically certain, on average across repeated trials, to grow wealth the fastest on a percentage basis. In practice, most professional gamblers bet “half Kelly,” or 10% in this scenario, and indeed when most people are shown the matrix of outcomes, good and bad, they are most comfortable giving up a relatively small amount of return to smooth out runs of bad luck. The full Kelly betting level is optimal in the same way a stripped-down Corvette with a roll cage and no passenger seat is optimal. [<a href="https://tomowens.substack.com/p/the-missing-billionaires">The Tom File</a>]<br /></li><li>He began his oil exploration career as a bottom-rung roustabout in the rough-and-tumble Louisiana oil fields by lugging pipe, unclogging pumps and digging ditches. By 1969, he formed an exploration company with two partners, W. K. McWilliams, Jr. and B.M. Rankin, Jr. They took the first two letters of each of their last name and called it the McMoRan Oil & Gas Co. In 1981, with Jim Bob as Chairman and CEO, McMoRan Oil & Gas merged with Freeport Minerals Co. to form Freeport-McMoRan Inc., a Fortune 500 company. At the time it was one of the largest mergers in Wall Street history. In 1988, under Jim Bob's leadership, Freeport-McMoRan discovered the Grasberg mine in Indonesia, which is considered one of the largest copper and gold mines in the world. Jim Bob's longtime Oil Patch buddy, billionaire T. Boone Pickens said, "Moffett's oilfield exploits rank him in the top five of any list of U.S. wildcatters". [<a href="https://obits.theadvocate.com/us/obituaries/theadvocate/name/james-moffett-obituary?id=7725200">James Robert "Jim Bob" Moffett Sr.</a>]</li><li>If you go to a store to buy vitamin E, unlike some other vitamins, 90% of the vitamin would be TOCOPHEROL, which means that you don’t want it. You have enough tocopherol from your food. So you want to look for the word tocotrienol and 10%, which means one in every ten bottle of vitamin E would be that. And then further, you want to distinguish it. There’s only three sources of tocotrienol. In all three I have discovered over my 30 years career like that. What, from Rice, from Palm and from Annatto? From Rice and from Palm about 25 to 50% of the vitamin E is TOCOPHEROL. So they’re good, but they’re not good enough. And then in Annatto is the only source in my entire life of studying these that it is free of tocopherol. It contains vitamin E only tocotrienol. Hence, in the last 25 years we have committed to do 20 over clinical trials on tocotrienol so I don’t have to waste time on including tocopherol when tocopherol does not work. [<a href="https://www.llamapodcast.com/barrie-tan/">Dr. Barrie Tan</a>]</li><li>Natural vitamin E includes eight chemically distinct molecules: α-, β-,
γ- and δ-tocopherol; and α-, β-, γ- and δ-tocotrienol. In the current
literature, more than 95% of all studies on vitamin E are directed
towards the specific study of α-tocopherol. The other forms of natural
vitamin E remain poorly understood. The abundance of α-tocopherol in the
human body and the comparable efficiency of all vitamin E molecules as
antioxidants, led biologists to neglect the non-tocopherol vitamin E
molecules as topics for basic and clinical research. Recent developments
warrant a serious reconsideration of this conventional wisdom. The
tocotrienol subfamily of natural vitamin E possesses powerful
neuroprotective, anti-cancer and cholesterol lowering properties that
are often not exhibited by tocopherols. Current developments in vitamin E
research clearly indicate that members of the vitamin E family are not
redundant with respect to their biological functions. α-Tocotrienol,
γ-tocopherol, and δ-tocotrienol have emerged as vitamin E molecules with
functions in health and disease that are clearly distinct from that of
α-tocopherol. [<a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3681510/">Tocotrienols: The Emerging Face of Natural Vitamin E</a>] </li><li>If those of us who uphold the spirit of high-tech groups fail to reproduce, we are wasting that progress. If we allow the world to slide back into low-tech mode, the very painful and costly process of social evolution toward higher levels of technology development will have to be repeated. That is both wasteful and will cost immense human suffering, just as it did last time it was done. The very reason for people in high-tech groups to have more children is to avoid such a rerun of history. What was achieved by our societies during the last couple of hundred years is immensely valuable and was immensely costly to achieve. Wasting that progress through not defending our civilization is, I dare to say, deeply unethical. [<a href="https://woodfromeden.substack.com/p/pronatalism-is-inherently-groupish">Wood from Eden</a>]</li><li>The continuation of life, as Ayn Rand famously explained, is contingent. It requires choices, every moment of every day, correct choices that avoid harm and achieve value. In the absence of animalistic instinct, making correct choices requires rationality, e.g. the use of reason to achieve one’s values. Because they are insane, the Neo-Marxist capitalist ruling class is no longer capable of rationality. As such, they are no longer capable of making rational choices that will sustain their own — or our! — existence. Indeed, they won’t even try to sustain our existence because they do not value it. Their insanity is such that they willingly will choose course of actions that are self-destructive. I am not the first to point this out, of course. (I never am!) James Burnham’s 1964 book Suicide of the West foresaw what was to come, though the full fruit of the evil tree had not yet ripened. [<a href="https://treeofwoe.substack.com/p/know-your-enemy">Tree of Woe</a>]<br /></li><li>Simultaneous invention makes biographies of inventors philosophically uninteresting. Who cares about the idiosyncrasies of somebody who discovered something at the same time as two other people? Note that the oldest of the three official Black-Scholes discoverers was Fischer who was born in 1938 and the youngest was Robert Merton who was born in 1944. Right place, right time; like Aubrey McClendon and Tom Ward who were born three days apart in Oklahoma. Similarly, J.S. Bach and G.F. Handel were both born in 1685. [<a href="https://www.creditbubblestocks.com/2015/07/review-of-fischer-black-and.html">CBS</a>]</li><li>One meta-lesson that was learned was that the Federal Aviation Administration was too politically compromised to run crash investigations disinterestedly. So in 1974, during the paranoid Watergate era, the National Transportation Safety Board was made independent of the Department of Transportation on the grounds that “no federal agency can properly perform such [investigatory] functions unless it is totally separate and independent from any other...agency of the United States.” Paranoia has paid off in fourteen years without a major crash. Unfortunately, we haven’t applied the lesson of the NTSB to other functions of government, such as immigration. For example, in Ireland a Muslim madman recently stabbed multiple small children. The Irish government has since been trying to hush up its malfeasance in not deporting the criminal twenty years ago after his first arrest. It always strikes me that countries need their own National Immigration Safety Board to investigate egregious cases like this and issue recommendations to keep them from happening again. But that doesn’t seem to occur to anyone else. [<a href="https://www.takimag.com/article/die-in-the-air/">Steve Sailer</a>]</li><li>Unless you can have reason to believe that the decline in customer losses is about to stop, there does not seem to be a margin of safety in the unsecured debt. If 13% of customers (net - more after figuring churn) left over the past two years, they probably went somewhere, since they are not likely just canceling their internet entirely. There must be competitors in Frontier's markets that are better or cheaper and are eating their lunch. For all we know, the most alert or savvy customers are the ones who just left and it is the beginning of an S-curve of the slower to react customers leaving too. [<a href="http://www.creditbubblestocks.com/2019/12/frontier-communications-inc-distressed.html ">CBS</a>]</li></ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-2255368566067135482023-11-21T04:30:00.001-07:002023-11-21T04:30:00.141-07:00Tuesday Morning Links<ul style="text-align: left;"><li>"[H]e who is the most bullish on the market, or has the lowest cost of
capital, or has some other personal motivation for doing a deal, or
ideally all three, wins the ship. Everyone else does nothing but talk
about the very good and rational reasons they have for not doing deals.
The simple fact is that you must take a view on the market." [<a href="https://www.amazon.com/Shipping-Man-Matthew-McCleery/dp/0983716307">The Shipping Man</a>]</li><li>"[E]vangelicals, who were already a lower status group in the
country, are now increasingly viewed with hostility and as the leading
threat to the new public moral order and even to the republic itself.
The various attacks against 'Christian nationalism' are an expression of
this. In this environment, support from evangelicals will perhaps
ultimately become more of a liability than an asset to Israel." [<a href="https://www.aaronrenn.com/p/will-evangelical-support-hurt-israel">Aaron Renn</a>]</li><li>The rise of the internet has a historical parallel in the invention of the printing press in the West. Moderns don’t think about this too much, but the printing press was cataclysmic to the powers that existed in Europe in 1450. It was the end of the medieval era, the end of the rule of Kings by force and Church by fear of the fires of hell, and the beginning of the devolution of power to …. people who controlled the printing press. This was recognized by the powers of the time and various attempts at censorship were made. Censorship before this era was trivial: the Church had a near monopoly on literate people and books and the powers that be employed the rest of the literate people to keep an eye on each other. After the printing press, all kinds of local elites grew up around distribution of information: Martin Luther probably would have been leader of some obscure sect like the Waldensians or other proto-protestant heretics who originated before the printing press. There probably wouldn’t have been a thirty years war, to say nothing of the eighty years war and the Dutch Republic (they were espanich before), no Switzerland, and the Pope might still have an army. The type of country we typically think of as “democratic” (aka pluralistic merchant Republics) came about from the Dutch Republic, which means the political organization most of the world pretends to use today took its shape in part because of the printing press. [<a href="https://scottlocklin.wordpress.com/2023/08/19/historical-censorship-attempts/">Scott Locklin</a>]</li><li>It’s my impression the average American person was more angry with the Japanese, since they were the ones who actually attacked Americans. It brings to mind the weird hysteria about Germans in post-WW-1 among physicists like Hale (who if you recall didn’t want to allow any German physicists to visit America post WW-1; including Einstein who was a Swiss Jew). Before WW-1, German was the most common spoken language in the US, and Germans had substantial parallel social institutions; there were over 500 German language newspapers in the US in 1910 and thousands of high schools were taught exclusively in German. This is something which fundamentally changed American society, but is little remarked upon today, and seemed to be entirely top-down elite driven. Some huge fraction of Mencken’s less popular writing from 1917 to the 1930s is his grousing about this: this is more or less unintelligible to contemporary readers without this historical context. Ordinary people were made uncomfortable enough by this moral panic, they’d change their names. There should be a history book: imagine if, say, all Spanish speakers and Spanish speaking institutions disappeared in the next decade, and Latinos changed their last names en-masse. That would be pretty noteworthy, and I bet someone would write a book about it. I’m pretty sure there were more German-Americans in 1910 than there are Latinos in the US today, at least as a fraction of the population, and their influence and institutions were much greater. Some of this change was coordinated by British intelligence and propaganda, but it was more complicated than that. Probably it was a moral panic the same way the last couple of years have demonized Russian people and culture in the US. [<a href="https://scottlocklin.wordpress.com/2023/10/30/some-more-books-mostly-optics/">Scott Locklin</a>]</li><li>Let me take you inside Amazon for a moment. During my tenure, company leaders used words like “fluff” and “puffery” to describe disciplines like design and copywriting. The site was bare-bones on purpose, so customers could shop without wading through slow-loading pages or annoying pop-ups. Our copy was also functional to the extreme. The vendors who paid for promoted ‘co-op’ weren’t thrilled with our austerity. Other online retailers provided them with beautiful custom campaigns, while at Amazon even a holiday graphic was just a regular product shot with a sprig of holly slapped on it. [<a href="https://www.bigtechnology.com/p/disorder-and-improvisation-how-amazons">Big Technology</a>]</li><li>I've been predicting the demise of inflation for at least a year now, and today's CPI report makes it official—there's no denying that inflation has fallen to within spitting distance of the Fed's target. Not coincidentally, the market has finally acknowledged what I've been expecting for many months: the chances of another Fed tightening at this point are zero. The only issue now is when the Fed starts to cut rates; the market thinks the first cut comes at the May 1st FOMC meeting, while I think it happens much earlier. [<a href="http://scottgrannis.blogspot.com/2023/11/inflation-rip.html ">Scott Grannis</a>]</li><li>Some sources claim rather vaguely that triangulation was acquired by the Europeans from the Arab mathematicians during the Renaissance but fail to give any source for these claims or to reference any Arabic works on the subject. More directly some sources claim that the great Islamic scholar al-Biruni, who wrote extensively on geography and geodesy, used triangulation. This claim is simply false. He used geometrical methods to determine the longitude and latitude of various cities but his calculations did not just use triangles and he had no measured base line and made no sightings. He merely constructed geometrical models of the positions of the towns respective to each other based on travellers’ tales of the scale of their separations. Historically there is very little doubt that the technique of triangulation emerged once and once only in a pamphlet written and published by Gemma Frisius in 1533. It is a strange fact that relatively insignificant scientific discoveries and inventions proudly carry the names of their discoverers and inventors but most people, including the people who write books about it, never stop to consider who invented triangulation, which until the invention of GPS, was the only tool, and a very powerful one, capable of producing accurate maps with their incredible economic, political, military and scientific significance. Gemma Frisius belongs in the pantheon of great modern scholars for his invention and not forgotten and ignored even by those who earn money writing about the incredible applications that this invention made possible. [<a href="https://thonyc.wordpress.com/2012/05/25/mapping-the-history-of-triangulation/">The Renaissance Mathematicus</a>]</li><li>Certain invading ethnic groups were more successful than others, with
Germans and Czechs being the most effective, Scandinavians an
intermediate category, and old Colonial Americans being eager to sell
and leave. The same process of invasion took place in Nebraska, in
Minnesota, even in the Texas Hill Country. In the struggle for living
space the German farmer always won, because from his point of view to
sell his land was to rob his children. "When the German comes in, the Yankee goes out" was the proverb, Kathleen Conzeen says. [<a href="https://threadreaderapp.com/thread/1605746438532567041.html">Uriah</a>]</li><li>Uranus was the first planet to be added to the seven ‘wanderers’ that had been known since antiquity. In order to determine the orbit of a planet it is not enough to simply discover it, one has to observe it systematically over many years or even decades carefully measuring and recording its positions. In the decades following Herschel’s discovery this is exactly what happened to Uranus; however in the course of time it became clear that the orbit of Uranus displayed several perturbations (irregularities) that were not compatible with its theoretical orbit as determined through Newton’s law of gravity. This meant that either Newton was wrong or that some unknown gravitational factor was affecting the orbit of Uranus. Both Le Verrier and the British astronomer John Couch Adams determined that the perturbations must be the result of a relatively large planet and calculated the theoretical orbit of it. Armed with Le Verrier’s calculations Galle and Heinrich d’Arrest discovered the planet Neptune only one degree away from the position predicted by Le Verrier on the day that they had received the information. This was a stunning confirmation of Newton’s theory and remains till this day one of the greatest triumphs of science. [<a href="https://thonyc.wordpress.com/2009/09/23/he-said-it-would-be-there-and-it-was/">The Renaissance Mathematicus</a>] </li></ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-63098396033370251002023-11-14T15:00:00.008-07:002023-11-14T15:00:00.135-07:00Tuesday Night Links<ul style="text-align: left;"><li>Suncor shares are valued at 3.6-times 2024 EV/Debt-adjusted cash flow, assuming $80 per barrel WTI, versus its pre-2020 average of more than 6.0-times. Before 2020, the company was considered a “best-in-class” operator and as such, its shares traded at a significant premium multiple relative to peers. Today, Suncor's halo is gone, but its Q3 results increase our confidence that it can return to its former top-tier performance. If it can, good things lie in store for its stock price. For context, today’s top operator, Canadian Natural Resources (CNQ), trades at 5.4-times 2024 EV/DACF. At that valuation, Suncor shares would trade at $64 per share. Suncor's shares will gain added benefit from the company's relatively clean balance sheet and its commitment to delivering capital to shareholders, both of which have improved dramatically relative to the pre-2020 timeframe. [<a href="https://hfir.substack.com/p/suncors-turnaround-is-underway-and ">HFI Research</a>]<br /></li><li>It all had to do with the people living between the two walls. They were... hill people who had perfected the art of not being governed. They managed to be so thoroughly intractable, so impossible to control or corral, so very unpleasant to be around, that the Romans eventually threw up their hands in disgust and left them alone. It’s important to understand that this means they must have been true outliers, because the Roman Empire had “unit economics” like an enterprise SaaS business, where “customer acquisition costs” are financed on the assumption that they’ll be paid back in the distant future. Every Roman bureaucrat understood that newly conquered territories would be a drain on fiscal and military resources for a while, until a generations-long process of pacification and Romanization slowly made them net contributors in both departments. But in the case of the lands between the two walls, the payback timeline was so long, and the implied interest rates so high, that even a people as meticulous and relentless as the Romans decided there were better opportunities elsewhere. I count this as a serious victory for the theory of defensive barbarism. [<a href="https://www.thepsmiths.com/p/review-the-grand-strategy-of-the">Mr. and Mrs. Psmith’s Bookshelf]</a></li><li>As part of our search for "royalty-like" businesses that are good at converting revenue to free cash flow that can be distributed to shareholders (like Lamar Advertising), we recently did a screen of the companies in the S&P 500 index. Now while our royalty partnerships and trusts convert 90-100% of revenue to free cash flow, we are interested in finding other businesses that are royalty-like (accepting lower margins than true royalties) for two reasons. First, to diversify away from commodity price exposure and volatility. (Nobody said it is easy being an oil man.) Second, because mineral properties are depleting while some types of royalty-like or "tollboth" businesses can exist almost in perpetuity. As long as there is human activity and commerce, there is the possibility that Visa will be getting a cut of it, whether the energy for it is coming from fossil fuels or from the sun. [<a href="http://www.creditbubblestocks.com/2023/11/free-cash-flow-conversion-marriott.html">CBS</a>]</li><li>I rely on a study from--I believe his name's Hendrick Bessembinder from Arizona State University-- and what he did is he looked at every single public company from 1926 to 2016. So he covered a 90 year period. There were a total of 26,000 companies. And of the 26,000 companies, 25 of the 26,000 companies produced returns that are T-bill returns or less. So in other words, there was only 1000 companies that could create excess returns above risk-free T-bills returns. Now you look at public companies, and you realize that companies can come public and because there's a lot of incentives in the market, from whoever the constituent is, that their shareholders, their private equity holders, the investment bankers, whatever, you bring the companies public, but how many of them are exceptional companies? How many of them--and the reality is, most of them end up falling into that bucket that Professor Kay said, That's the gray bucket. That's the bucket of which, essentially, it's the efficient market bucket. And so, there's only a tiny number of exceptional companies. And you understand that there's some very specific things that permit exceptional companies to be sustainable decade after decade after decade. And many, many of them have to do with getting to the point where your customers are fanatically reliant, whether it's a consumer product or whether it's a business product, but your customers are fanatically reliant on what you deliver to them. If it's a consumer product, it's somebody is hooked on Coke, and they're gonna drink coke come hell or high water. If it's a business product, it gets locked into the workflow of the business, it's something that your customers are ecstatic about. And that just essentially codified to us that what we needed to do, if we were going to have concentrated positions, we basically had to have super, super high confidence. And you had to find exceptional companies. [<a href="https://aletteraday.substack.com/p/letter-137-reece-duca-and-bob-casey">Reece Duca</a>]</li><li>The likely N. American successor culture will be a truly new thing. The origin story will be a "Triple Founding." With Jamestown, Cortes, and the Native cultures receiving approximately equal foundational status. Most people will have at least some ancestry from all three founding cultures, but N. Euro will probably remain predominant. So the result won't just be like current Latin America by any means. Language will remain mostly English, which is of course rapidly becoming the global language. Religion will be one of the biggest changes from 20th century America. The Mainline protestant churches of the founders (and their associated culture) will be nearly extinct, with most people being Secular, Catholic or increasingly exotic forms of Evangelical/Pentecostal. Details of culture are hard to predict. But multiple trends, including fertility rates, indicate a notably more extroverted, less inhibited culture. Perhaps we could say that more and more of the country will start to feel something like today's Texas. This new culture will obviously diverge farther and farther from it's European roots, perhaps most notably by remaining much younger and more dynamic than the hyper-aging nations of Europe. [<a href="https://twitter.com/Empty_America/status/1724135411981693177">Empty America</a>]</li><li>Isaacson is a popular biographer who tries to cash in on topics that are timely and will sell books at the moment. The moment though is probably not the time to write a serious biography of Musk since the jury is still out on whether he will be successful or not. He and many of his businesses are very heavily leveraged and could easily go bankrupt in which case he would be some sort of footnote in US business history. Twitter at the moment seems like an investment disaster though perhaps Peter Thiele will be proved right that it is not a good idea to bet against Elon. Apart from the engineering stuff, Elon’s ideas that he is quite eager to share with all and sundry typically lack historical perspective and seem puerile — at about the level of Lex Fridman, A lot more time will needed to tell whether he was someone worth paying attention to or just an oddity. [<a href="https://philip.greenspun.com/blog/2023/11/11/more-from-elon-musk-the-book/ ">link</a>]</li><li>A friend’s son is a high school senior. If he were “of color”, his test scores, grades, and athletics would guarantee him admission to any of America’s most elite universities. As a white kid, however, he is likely to be rejected by the usual elite suspects. I told him that he is likely to get a better education from professors whose actual job is teaching undergraduates. In other words, instead of a research university he should look at the four-year liberal arts colleges. Amherst, Swarthmore, and Williams, for example. He doesn’t want to get tangled up in rainbow flags, BLM, and pro-Palestinian demonstrations, though. He has some unacceptable political points of view, e.g., that civilians should be able to own guns as an aspect of self-reliance. His career interest is software engineering (so actually the most sensible plan would be to get a job as a software developer and do an online bachelor’s in the evenings) and, therefore, his most likely major is computer science (which he will be dismayed to learn has very little to do with software engineering!). On the plus side, nearly every college or university in the U.S. now has a substantial CS department. [<a href="https://philip.greenspun.com/blog/2023/11/08/are-there-good-four-year-liberal-arts-colleges-that-arent-liberal/">Phil G</a>]</li><li>Back in the day when science was progressing, and scientists didn’t have time to make podcasts, smoking the tobacco pipe seemed to work a lot better. I’d love a real performance enhancing drug for my noggin, but so far nicotine seems to be the closest legal thing there is which doesn’t make you insane or ill with long term use. Note I said nicotine here; smoking cigarettes definitely has big downsides. Vaping: almost certainly does also. Safest ways to take nicotine in descending order: gum or pills, snuff (unfermented, in your nose), snus (unfermented). Below that in safety maybe smoke the occasional pipe or cigar. Putting smoke (or “vape juice”) in your lungs is guaranteed to be bad for you. It’s not the nicotine though which is bad for you. Nicotine causes a slight increase in blood pressure, generally more than made up for by giant prophylaxis against Parkinsons disease and the increase in mental performance. [<a href="https://scottlocklin.wordpress.com/2023/10/24/the-supplement-industry-winning-big/ ">Scott Locklin</a>]<br /></li><li>There are lots of progressive Protestant churches, which seem to confirm this thesis. There are also plenty of counter-examples, though, especially among conservative evangelicalism. These differences aren’t limited to Protestantism – if you read a few Ross Douthat columns, it seems there are plenty of conservative and non-conservative factions with Catholicism. Relatedly, Protestantism largely embraces modernity, and many right-leaning intellectuals are decidedly against it. In Protestantism, family sizes are often smaller, ministers can get married, democracy is ok, individuals can interpret the Bible themselves rather than needing the church to do it, transubstantiation doesn’t happen, and more. Catholicism, by contrast, often involves significant changes in opposition to modern culture on all of those fronts (though not on every single front; they have often encouraged innovations like workers’ rights). [<a href="https://justifications.substack.com/p/why-dont-intellectuals-convert-to">Fergus McCullough</a>]</li></ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-62065689076172309342023-11-12T15:00:00.011-07:002023-11-12T15:00:00.173-07:00Sunday Night Links<ul style="text-align: left;"><li>It is no accident that the American military is in a recruiting crisis. Who in their right mind would want to fight for a regime regarding which the primary controversy is whether it is merely stupid or actively evil, and of which it is not controversial at all that the stupid and/or evil people managing it hate you? [<a href="https://barsoom.substack.com/p/the-bud-light-military">Postcards From Barsoom</a>]</li><li>Whenever addictive and destructive neuro-chemical pathways are introduced to a society it takes generations for said society to learn how to adapt to these temptations. China has learned the hard lesson of opiates at least twice, and I think that has some influence on their cultural (in)tolerance of those substances. With the invention of distillation in the 18th century, 19th century America was drowning in hard liquor, 9 gallons per person annually of 80 proof. It took a century and the temperance movement (largely driven by women sick of their deadbeat husbands) to help us regulate to a point, but alcohol is still many’s greatest demon. The same process must happen with screens. I’m pretty sure it won’t just be with screens though. All invasive technology will have to be rejected (on a personal and moral basis just like other substances which activate dopamine artificially). We must see that screens (and their connection to the internet) are like cigarettes for our soul, rotting us from the inside, making us less capable of interacting with the real world. [<a href="https://jonathanhaidt.substack.com/p/where-are-your-kids-schlott">Chaos Ordered</a>]</li><li>Like Scott, I do not want to preach radical skepticism. I want to preach scientific reasoning. If you’re interested in the research on $topic_x, you should familiarize yourself with the methods of that field, and especially with the field’s most critical voices. You should know what’s right and what’s wrong and be able to recognize all of the issues that are common enough for the field’s researchers to see them with a sideways glance. Most people are not equipped to do this. When they are, they may not know they’re capable; when they’re not, they may wrongly believe they’re capable. Scott’s recommendation to decrease your confidence in claims is good, avoiding biased people’s conclusions is also good, although I would like to add that biased people are good to read to understand flaws in the arguments of the people they oppose, and the need to look at all of the evidence is still quite obvious. I want to add that thinking about causal inference by focusing on designs is necessary to build a proper understanding of science in general. One well-designed, high-powered study is often much more valuable than a vast number of more poorly-identified and lower-power studies. This is so true that the man of one study who knows he’s the man of one study because the rest are garbage is often much less wrong than his peer men of many studies. <br />[<a href="https://www.cremieux.xyz/p/beware-the-man-of-many-studies ">Cremieux Recueil</a>]</li><li>When humans observe a task, mirror neurons simulate the feeling of physically performing that same task. Musicians in the audience are playing their instruments in their mind, and if all we could see was their synaptic activity, we would struggle to differentiate between the performers on stage and their fans. Likewise with literature. When we look upon this ancient text, our neurons fire in a particular way that no human brain has experienced since the last reader carefully wrapped the scroll and returned it to its alcove, minutes or years before looking out the window and noticing that the volcano had come to life. Recovery of ancient writing is cognitive archaeology. [<a href="https://caseyhandmer.wordpress.com/2023/11/10/time-to-read-all-the-scrolls/">Casey Handmer</a>]</li><li>Sovereign finance should be viewed simply as a form of banking. Sovereigns raise funds for unspecified purposes and promise risk-free returns they may be unable to provide in real terms. When things go wrong, bondholders think taxpayers should be on the hook, and taxpayers think bondholders should pay. As usual, everyone has a patsy, someone else was supposed to take the hit. Ex ante everyone was assured they have nothing to fear. [<a href="https://www.interfluidity.com/v2/2669.html">Interfluidity</a>]</li><li>Looked at the right way, this last decade was essentially about copying China without admitting it, from the Atlantic pushing for China-style censorship to NYT calling for China-style industrial policy. All of that is precedent for what a Democrat/Communist pact might look like. Think about how Hollywood came to rely on Chinese money, preaching civil rights while practicing selective censorship…but at country scale. A Democrat/Communist pact could be a return to Obama-era Chimerica, but on different terms, where China becomes at least an equal partner and perhaps eventually the unofficial driver. With that said — yes, the silver lining of such a rapprochement is that we could avoid WW3. But it’s a monkey’s paw outcome, because detente would allow Democrats and Communists to focus on their many other enemies within and without — from American conservatives to Chinese liberals, from India to the Internet. And so the implications for everyone that isn’t a Democrat or Communist are ominous. [<a href="https://balajis.com/p/only-newsom-can-go-to-china">Balajis</a>]</li><li>These bond losses remain “unrealized” so long as people don’t come looking for their money. But when they do — like during a bank run when banks must pay out, or during hurricane season when insurance companies must fork over cash — then bad assets are sold and losses become “realized.” And then we all “realize” that the poor dumb institutions that bought US government bonds in 2021 are actually insolvent — unless the Fed prints to paper over a bond crisis the Fed itself caused. Which it will do, over and over again, until the crisis devalues the dollar itself. Anyway, this is what happened in March 2023 when five huge banks died in quick succession, followed by a quick print called BTFP to cover up the Fed’s failure. [<a href="https://balajis.com/p/bond-villain">Balajis</a>]</li><li>Not a single corporate journalist, politician, regulator, or policeman thought to investigate SBF until Erik Voorhees smelled a rat and Ian Allison found the rat. In fact, even the least self-aware corporate journalist in modern history admitted that citizen journalists “outshine traditional media on coverage of FTX implosion.” So: yes, the only reason SBF was even exposed, let alone convicted was because of people posting on Twitter. Twitter is important! That’s why the regime didn’t want Trump to post on there, doesn’t want you to post on there, and doesn’t want Elon to let you post on there. [<a href="https://balajis.com/p/crypto-twitter-found-sbfs-fraud">Balajis</a>]</li><li>Because digital glasnost is upon us. We now have truly free speech. And so millions of people have now been able to match up their individual observations with each other in public, thereby discovering that much of what the US establishment says is manipulated, misleading, or erroneous in some fashion — in a word, fake. Of course that doesn’t mean the US establishment is always lying. Sometimes they’re in error. Sometimes their data is merely noisy, or quietly revised. Sometimes they are telling the truth, but spinning it. Sometimes they are taking a position for tribal political reasons. And sometimes they are, of course, outright faking it. [<a href="https://balajis.com/p/too-fake-to-tell">Balajis</a>]</li><li>It is important to emphasize the word available because poor credit is obviously not in itself a cause of poor loss experience. In this sense, it is analogous to territory. Presumably credit is predictive because it reflects varying levels of "stress", planning and organization, and/or degrees of risk-taking that cannot be directly measured by insurers. These specific conjectures have been offered many times and they are intuitively plausible. However it is less conjectural to say that whatever credit might be a proxy for, it is not a proxy for any other variable (or combination of variables) practically available to insurers. In our data mining projects we explicitly set out to generate the most comprehensive universe of predictive variables possible. In this sense, we therefore use credit in the "ultimate" kind of multivariate analysis. Even in this truly multivariate<br />setting, credit is indicated to have significant predictive power in our models. It is beyond the scope of this paper to comment on the societal fairness of using credit for insurance pricing and underwriting. From a statistical and actuarial point of view, it seems to us that the matter is settled: credit does bear a real relationship to insurance<br />losses. [<a href="https://www.casact.org/sites/default/files/database/forum_03wforum_03wf113.pdf ">Cheng-Sheng Peter Wu</a>]</li></ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-89088650053276462292023-11-09T17:00:00.010-07:002023-11-09T17:29:01.951-07:00Canadian Oil Producer Earnings ($SU $CVE $CNQ)<p><i>[Previously regarding <a href="http://www.creditbubblestocks.com/search/label/SU">Suncor Energy</a>, <a href="http://www.creditbubblestocks.com/search/label/CVE">Cenovus Energy</a>, and <a href="http://www.creditbubblestocks.com/search/label/CNQ">Canadian Natural Resources Limited</a>.]</i></p>
<p><b>Canadian Natural Resources Limited</b><br />Once again, an outstanding result from the titan of the Canadian energy industry. Third quarter capital expenditures were up only 2.3% with liquids production up 5.2% year-over-year. Their production volume of 1.4 million BOE/d was the highest quarterly volume in the history of the Company.</p><p>Management said that "with current strong production volumes and expected free cash flow in Q4/23 and beyond, based on current strip pricing, we are quickly approaching a net debt level of $10 billion, which we forecast to achieve in Q1/24, at which time we target to increase returns to shareholders to 100% of free cash flow." The <a href="https://www.macrotrends.net/stocks/charts/CNQ/canadian-natural-resources/shares-outstanding">share count</a> was down 2.4% year-over-year at the end of the third quarter - it would be nice to see the repurchases accelerate.<br /></p><p>The current market capitalization of <a href="https://finance.yahoo.com/quote/CNQ/">CNQ</a> (at a $67 share price) is $73 billion, and the enterprise value is $82 billion. Cash from operations for the third quarter was $2.6 billion and the company spent $875 million on capital expenditures. The remaining free cash flow for the quarter was $1.7 billion, of which $534 million was used for debt repayment, $718 million was used for dividends, and $434 million was used for share repurchases. The free cash flow yield on the enterprise value was 8.3% based on the quarter's results. </p><p>This was during a quarter with an average WTI price of $82 and an averaged realized price for liquids by CNQ of $64. In its latest investor <a href="https://www.cnrl.com/content/uploads/2023/10/V_Corp_Pres_Oct.pdf">presentation</a>, CNQ says that free cash flow per share would be 30% higher at $100 WTI than at $85 WTI. (Notice also on slide 8 of the presentation, CNQ management points out that oil sands mining and upgrading requires much less capital expenditure to maintain production than shale.)</p><p>On the CNQ conference call, management was asked (by the Goldman Sachs analyst Neil Mehta) whether they were interested in M&A in Canada. The CEO said that "we have a huge reserve base... we don’t have to do any acquisitions to create or find more reserves, so we have that part in the bag."</p><p><b>Suncor Energy Inc.</b><br />The current market capitalization of <a href="https://finance.yahoo.com/quote/su/">SU</a> (at a $32.50 share price) is $42 billion, and the enterprise value is $51 billion. Cash from operations for the third quarter was $3 billion and the company spent $1.1 billion on capital expenditures. The remaining free cash flow for the quarter was $1.9 billion, of which $1.3 billion was used for debt repayment, $489 million was used for dividends, and $217 million was used for share repurchases. The free cash flow yield on the enterprise value was 14.9% based on the third quarter's (annualized) results. The shareholder returns (repurchases and dividends) for the quarter are a 6.7% shareholder yield. The company has bought back 3.5% of shares outstanding YTD. Suncor's earnings per share were 86 cents, so a P/E of 9x. </p><p>Funds from operations were down versus the third quarter of last year, but up significantly from the second quarter of this year. One key performance metric was that refinery utilization was 99% for the quarter instead of 85% the prior quarter. <br /></p><p>Some highlights from the conference call:</p><p><i>*On October 3, we announced a revised deal to acquire Total Canada for $1.468 billion. This is an improved deal versus the original deal. Specifically, we no longer have a contingent payment provision in the acquisition. Similar headline valuation to the earlier Teck deal, but we’ve got additional benefits. Commercial patience and persistence were key here, and we’re pleased with the deal. We’re on track to close the transaction later this month. It addresses long-term bitumen supply uncertainty associated with our upgraders, fills our upgraders for the long-term, but also enables additional value creation, value creation through regional synergies, with mobile equipment deployment, value creation through directing higher yield PFT from Fort Hills to our upgraders, a number of incentives and, as I said, we’re quite pleased with the deal.<br /><br />*Let me move on to mining fleet performance for context. The cost of physically moving ore from the face of a mine to a crusher for the start of extraction, that’s our single highest cost component in the production of bitumen. Today, we move about 1.3 billion tons of earth per year to support production, and we’ve got a competitive cost gap versus best-in-class, comprehensive efforts to lower our cost per ton. The winning formula, fewer trucks, bigger trucks, more efficient trucks, and, of course, companion or compatible shovels, that’s our mining improvement strategy in a nutshell. So, this year and throughout 2024, we will add via a combination of purchase and lease 55 ultra-class 400-ton trucks to our total fleet, displacing nearly twice as many smaller third-party, less efficient, higher cost vehicles. Each truck will be pre-equipped for ultimate driverless or autonomous operation. The cost for these acquisitions and leases are in our guidance for this year, as well as our guidance that we’ll issue shortly for 2024. Once in place, this action alone is expected to lower our overall corporate breakeven by $1 a barrel.<br /><br />*I suspect you’ve noticed a few references today in terms of per barrel. This reflects a new and evolving vocabulary within the company, thinking about and communicating the impact of our actions, plans, and improvements in unit per barrel terms. In addition, a subset of us similarly talk about the impact in per share terms. Our vocabulary is part of creating clarity and focus, developing a results-oriented, high-performance culture.</i> <br /></p><p>The oil sands segment generated funds from operations for the third quarter of $1.27 billion, with a sales volume of 656 thousand barrels per day and an average crude price realization of $74/bbl. <br /><br />The refining and marketing segment generated funds from operations of $1.1 billion, processing 463 thousand barrels per day and making a gross margin (LIFO) of $31 per barrel.<br /></p><p><b>Cenovus Energy Inc.</b><br />The market capitalization of Cenovus (<a href="https://finance.yahoo.com/quote/CVE/">CVE</a>) is now $33 billion (at a $17.5 share price) and the enterprise value is $40 billion. The upstream segment earned $2.5 billion of operating margin during the third quarter (compared with $2.1 billion the prior year quarter) and the downstream (refining) segment earned $673 million (compared with $358 million).</p><p>Their free cash flow (as we define it, CFO less capex) was $1.24 billion for the quarter, which gives a free cash flow yield on the enterprise value of 12.4%.<br /></p><p>In the third quarter, the company returned $876 million to shareholders by way of $438 million for the partial payment of the common share warrants obligation, the repurchase of 13.8 million shares for $264 million, and $193 million of common dividends. The shareholder yield on the market cap was 10.6% (annualized).<br /></p><p>The company also repaid $973 million of debt. Cenovus’s shareholder returns framework has a target of returning 50% of excess free funds flow to shareholders for quarters where the ending net debt is between $6.5 billion and $2.9 billion. (Net debt is down to $4.3 billion as of the end of the third quarter.)</p><p>Capital expenditures for the third quarter in their upstream segment
were up 74% year-over-year while production of crude oil was up only 3%.
For the current year-to-date, the upstream capital expenditures are up
68% while crude oil production is up only 1% compared to the first nine
months of last year. <br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-42070755982332064842023-11-09T14:00:00.049-07:002023-11-09T14:00:00.135-07:00Thursday Night Links<ul style="text-align: left;"><li>One way to look at the Sexual Revolution is as a powerful poison designed to eradicate human beings like bacteria in a petri dish by interrupting their natural reproductive ecology. Like an antibiotic, if the dose is insufficient to uniformly kill the entire population, any surviving members become resistant. Dutton then simply identifies the two populations who have successfully resisted the poison: highly religious, intentionally fertile families who reject the Sexual Revolution explicitly, and those who lack the self-control or conscientiousness to make use of its technologies to prevent unintentional pregnancies. [<a href="https://tomowens.substack.com/p/review-the-past-is-a-future-country?">The Tom File</a>]</li><li>The ability to resist leftist-induced dysphoria is the new crucible of evolution. Where once the crucible of evolution was child mortality it is now Woke morality. Where evolution was formerly selecting for resistance to genetically-based diseases, the emphasis has now switched to ‘memetically’ based diseases; ideological mind viruses that induce infertility in their nonimmune hosts. Those who resist leftist ideology, and its direct and indirect inducements not to procreate, are those who survive. In significant part, this will be those who are, for mainly genetic reasons, religious and conservative. [<a href="https://www.amazon.com/Past-Future-Country-Conservative-Demographic/dp/1788360753/">The Past is a Future Country</a>]</li><li>Nowadays, if I see a book that interests me, I always just buy it. The upside of interesting and useful new information vastly outweighs the downside of being out $20 or $30 dollars. Sometimes I buy books and they turn out to be uninteresting or fail to hold my attention. I place it in a pile. Every couple of months, once the stack reaches around 6-10 books, I’ll then donate them to a local used book seller. He allows me to trade them for 1 or 2 used books from the store. [<a href="https://www.robkhenderson.com/p/how-i-read">Rob Henderson</a>]<br /></li><li>Dorchester Minerals, L.P. (the “Partnership”) announced today the successful consummation of a notable lease transaction in the Midland Basin. On November 6, 2023, the Partnership leased 243 net acres in two tracts of land in Reagan County, Texas for $30,000 per acre and a 25% royalty. Additionally, the Partnership executed an amendment to an existing lease on two separate tracts of land also totaling 243 net acres in Reagan County, Texas for $18,750 per acre. The resulting payment of approximately $11.8 million will be included in the Partnership’s fourth quarter distribution to unitholders. [<a href="https://finance.yahoo.com/news/dorchester-minerals-l-p-announces-192000835.html">Dorchester Minerals, L.P.</a>] <br /></li><li>I was sent to Amarillo by BlimpDAO to find information about the auction of The National Helium Reserve. Who might buy it? For what price? Who will the buyer sell the helium to? Will China make a bid? What impacts will this have on efforts to bring blimps back? BlimpDAO is an Urbit-affiliated DAO. Nobody knows what either of these things are, and I’m not going to explain them now, but suffice to say both are Silicon Valley alt-darlings for similar reasons. Both seek to bring about a calmer, more pleasing, and more comfortable kind of human connection. Both work against the establishment by building networks of counter-elites. Both obsess over packets flying through the air. [<a href="https://mogmet-tadnem.urbit.studio/the-carousel/gaslands">Mogmet Tadnem</a>]</li><li>Air Products doesn’t want the system to be owned by a competitor or an unqualified operator, Kornbluth says. “On the other hand, they don’t want to buy it themselves, because it’s a messy, risky asset. The preferred state is the status quo.” The law doesn’t put a specific deadline on the sale of the government’s helium assets, so the system could run as is until the dome is empty, many in the industry argue. Proceeds from continued sale of the government’s helium stock could pay the operation’s bills until then. [<a href="https://cen.acs.org/materials/Air-Products-sues-block-auction/101/web/2023/09">Chemical & Engineering News</a>]</li><li>Some Tesla skeptics think that the S&P 500 selection committee can be talked out of adding Tesla to the index. I doubt it. The market cap is now $350 billion and growing. What are they going to do, not have a top ten (by market cap) company in the index? To exclude it on the basis of skepticism or suspicion would be an active choice of security selection. It would imply that the market could be hugely inefficient, that the entire philosophical predicate of indexation was wrong! No, the whole philosophy of the S&P 500 index is one of freeloading: the active participants in the market are supposed to set prices, which passive investors can then take as fair. So if the market says that Tesla is worth $350 billion, that is not something for index investors generally or the S&P committee to second guess. [<a href="https://www.creditbubblestocks.com/2020/08/the-biggest-heist-of-all-time-tesla.html">CBS</a>]</li><li>“My baby has been our $100 billion strategic plan that we will hit over the next three to five years. We’re unveiling that next week,” she said, casting it as an uphill battle to win support for riskier investments. “We will finally be in the $100 billion club when we unveil this, and the only way to pull that off will be to increase private equity. I won my battle with [Chief Investment Officer Marcus Frampton].” Monday’s special meeting of the Board of Trustees was a bucket of cold water. [<a href=" https://thealaskacurrent.com/2023/11/03/alaska-permanent-fund-board-backs-off-high-risk-investment-plan/">The Alaska Current</a>]</li><li>The spacious, beautiful and sustainably designed modern winery is carved into the hillside. It is gravity-fed, rather than using mechanised pumps to move the wine around and decorated in indigo, the colours of Florence’s football team Fiorentina. It is surrounded by freshly landscaped gardens designed to attract bees to its local flora. The flat roof, with its views of the nearby countryside, is covered with solidified lava imported from Etna, where the Ferrinis also make wine. (Maybe hauling this from Sicily to Tuscany wasn’t all that sustainable?) [<a href="https://www.ft.com/content/0c466461-0228-49b0-8c6a-94605b3b9867">Jancis Robinson</a>]</li><li>Investors appear to be ignoring the facts here and only seeing what they want to see. We believe GFL’s “stock story” has turned into an edition of the National Enquirer or People Magazine. Soon after the Company’s IPO, it was the target of a long short-selling report that effectively accused GFL’s founder and chief executive officer, Patrick Dovigi, of being Italian and in the mob and being a profligate spender because he owned a yacht. To be fair, we understand that Patrick grew up in a small town in Canada playing competitive hockey and bootstrapped this entire business from one single asset. [<a href="https://finance.yahoo.com/news/adw-capital-management-sends-letter-140000274.html">ADW Capital Management, LLC</a>]</li></ul>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-1262268214420721782023-11-08T21:00:00.001-07:002023-11-08T21:11:10.708-07:00Mineral Royalty Owner Earnings ($DMLP $NRP $STR $RGLD $TPL $PREKF)<p><b>Dorchester Minerals, L.P.</b><br />The market capitalization of <a href="https://finance.yahoo.com/quote/DMLP/">DMLP</a> is now $1.11 billion (at $28 per unit) and the enterprise value is $1.08 billion. For the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1172358/000143774923030024/dmlp20230930_10q.htm">10-Q</a>), the partnership earned $30 million of net income (compared with $34 million the prior year), generated $34 million of cash from operations (compared with $46 million the prior year), and distributed $26 million to unitholders. The CFO/EV yield is 12.6% based on the third quarter results, during which the average oil sales price was in the mid-$60s/bbl and the average natural gas sales price was around $2/mcf.<br /></p><p>Yesterday, Dorchester <a href="https://www.sec.gov/Archives/edgar/data/1172358/000143774923030623/ex_593004.htm">announced</a> that they had leased land in Reagan County, Texas for an $11.8 million bonus payment and a 25% royalty. That upfront payment amounts to $0.30 per unit, and the royalty payments will hopefully be substantial once the wells are drilled and go into production.<br /></p><p><b>Natural Resource Partners L.P.</b><br />The market capitalization of <a href="https://finance.yahoo.com/quote/NRP/key-statistics?p=NRP">NRP</a> is now $872 million (at $69 per unit). The capital structure is complicated so it is worth discussing the assumptions that go into the enterprise value calculation. The partnership has $60 million of current assets (mostly cash and accounts receivable) and $52 million of current liabilities. We add back all deferred revenue including $6.4 million of the current portion which is a current liability. The partnership has $171 million of long term debt, $6.8 million of other long term liabilities.<br /><br />After some significant repurchases of preferred stock and warrants during the quarter (see <a href="https://www.sec.gov/Archives/edgar/data/1171486/000143774923026590/nrp20230920_8k.htm">1</a>, <a href="https://www.sec.gov/Archives/edgar/data/1171486/000143774923028058/nrp20231006_8k.htm">2</a>, <a href="https://www.sec.gov/Archives/edgar/data/1171486/000143774923029545/nrp20231025_8k.htm">3</a>), there is now $72 million of preferred stock outstanding and warrants to buy 2.2 million shares. For our enterprise value calculation we use the difference between the current unit price and the warrants strike price of $34 to calculate a liability of $77 million. In the end it may cost more than this to settle them if the partnership unit price continues to appreciate.<br /><br />That gives an enterprise value of $1.1 billion for the partnership. For the third quarter of 2023 (10-Q), free cash flow was $80 million. (For the trailing twelve months, it has been $304 million.) That gives a FCF/EV yield of 29% using this quarter's annualized number. </p><p>There is a slide in the August 2023 <a href="https://investor.nrplp.com/Investor-relations/events-and-presentations/default.aspx">investor presentation</a> showing annual free cash flow figures since 2015. For the year 2016, which when the coal market crashed and most of the miners went bankrupt, NRP still had free cash flow of $76 million. If that were to happen again (a 75% decline from current level), the FCF/EV on the current valuation would be 6.9%.</p><p>Recently, the producers' cash cost per ton of met coal has been around $100 per ton, with Arch at $97/ton and Warrior at $114/ton. In 2016, the cash cost of met for Arch was only $53/t. With the producers' costs per ton having doubled since 2016, it ought to be difficult for the market-clearing price to drop as low as it did in 2016 (at least for a protracted length of time), and hence it ought to be difficult for free cash flow to drop that much again.<br /></p><p>If coal prices and production levels as well as earnings from the Sisecam (soda ash/trona) minority interest hold up, and if the unit price stays the same, then the partnership might be able to pay off its remaining $312 million of net liabilities by the end of Q4 2024. Paying off liabilities is management's stated intention. (Q3 2023 call: "We continue to believe that aggressive retirement of debt, preferred equity and settlement of warrants, while maintaining common unit distributions is the right strategy to maximize long-term common unitholder value.")</p><p>If they achieve that deleveraging, then the current level of free cash flow (~$320 million annualized) would be a 37% shareholder yield on a $872 million market cap. <br /></p>
<b>Sitio Royalties Corp.</b><br />The market capitalization of <a href="https://finance.yahoo.com/quote/STR/">STR</a> is now $3.7 billion (at $24 per share). Unlike many of the other oil & gas royalty investments, Sitio has a significant amount of debt: about $1 billion, consisting of $601 million on a revolving credit facility (floating interest rate, currently 8.42%) and $405 million of senior notes due 2026 (also floating rate, currently 11.29%). So the enterprise value is now $4.6 billion.<br /><p>In the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1949543/000095017023061129/str-20230930.htm">10-Q</a>), Sitio earned only $275 <i>thousand </i>of net income, thanks to a $24 million hedging loss. If you add back $81 million of depreciation, depletion, and amortization for the quarter, you get an "adjusted-CFO" yield of 7% on the current enterprise value, or a 9% yield if you assume the hedging loss is "one time" and add that back too.<br /><br />In addition to being highly leveraged (with expensive, floating rate debt), Sitio is the only royalty investment we follow that hedges. Sitio has a slide in their latest investor <a href="https://s201.q4cdn.com/966197541/files/doc_financials/2023/q3/11-23-Earnings-Deck-vF.pdf">presentation</a> that says "Sitio is able to drive down Cash G&A per boe with each large acquisition". It seems like their model is to use expensive debt to aggressively acquire properties and increase scale, and they then have to hedge the commodity price to reduce risk. Lots of moving parts, with the goal being to spread the overhead cost over more barrels.</p><p>Sitio reports their their G&A cost per BOE as $2.17 for this quarter. We might also look at it as $7.45 per barrel of crude oil. By comparison, Dorchester's G&A is $3 per BOE and only $4.57 per barrel of crude oil. Another way to look at it is that Sitio spent 7.6% of revenue on SG&A for the quarter and Dorchester spent 6.6%.</p><p>So, Dorchester is smaller yet operating more efficiently. Dorchester also managed not to bungle and blow the whole quarter's earnings with a hedging loss. The entire point (to us, at least) of owning royalties and the reason that they are <i>first class</i> assets is that you always make some money owning them. It may not be a lot some of the time, but you never lose money. Borrowing money at 11.3% and selling both puts and calls on commodity futures puts you in a position to lose money.<br /></p><p>
<b>Royal Gold, Inc.</b><br />The market capitalization of <a href="https://finance.yahoo.com/quote/RGLD/">RGLD</a> (at $105 per share) is now $7.1
billion. They have $236 million of net liabilities (excluding deferred taxes) so the enterprise
value is $7.3 billion. For the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/85535/000155837023017277/rgld-20230930x10q.htm">10-Q</a>) they reported
revenue of $139 million, operating cash flow of $98 million, and
earnings of $49 million. The company is trading
for 36x earnings (annualized) and an OCF/EV yield of 5.4%.<b> </b></p><p>Several developments negatively affected the quarter and made earnings and cash flows lower than they would have been. Newmont's Peñasquito mine in Mexico had a four month strike (although an <a href="https://www.reuters.com/markets/commodities/strike-ended-major-mexican-gold-mine-after-deal-reached-with-union-2023-10-06/">agreement</a> has been reached with the union), Centerra’s open pit Mount Milligan mine in British Columbia has also had some issues with ore quality resulting in guidance there being <a href="https://resourceworld.com/centerra-lowers-gold-target-for-mt-milligan-mine-in-b-c/">lowered</a>, and there was also a <a href="https://www.bnamericas.com/en/news/barrick-expects-gold-output-below-the-guidance-amid-slow-ramp-up-at-pueblo-viejo">delay</a> to the ramp-up of Barrick’s expansion of its Pueblo Viejo mine in the Dominican Republic. </p><p>There is upside to Royal Gold if those mines' issues can get fixed, as well as upside from mines that have already been funded but which have not gone into production. Something mentioned on the conference call is that their cash G&A costs remain are 5% of total revenue, which compares very favorably with Sitio and even Dorchester, as we noted above.<br /></p><p>
<b>Texas Pacific Land Corporation</b><br />The market capitalization of TPL (at $1,650 per share) is now $13.5 billion. The company has built up quite a cash pile during the shareholder activism dispute, so the current assets net of liabilities are $747 million and the enterprise value is $12.75 billion.</p><p>In the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1811074/000181107423000053/tpl-20230930.htm">10-Q</a>), Production volumes for TPL (in BOEs) were down 6.6% for Q3 2023 versus the prior year. Royalty revenue was down 33% because of the lower production volume as well as lower commodity prices. (The price of natural gas in particular was much lower than last summer. Revenue for easements and other surface-related income, land sales, water sales, and produced water royalties were all up year-over-year.<br /><br />Expenses were $27 million (excluding depreciation) versus $25 million the prior year. Thankfully legal fees were only $1.7 million this quarter and not the gigantic $17 million we saw one quarter earlier this year during the heat of the shareholder activist battle.<br /><br />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. <br /><br />Operating income was $127 million for the quarter, and if you add back $3.6 million of depreciation, depletion, and amortization, you get a cash flow-like number of $131 million, which would be an annualized yield of 4% on the current enterprise value.<br /><br />
<b>PrairieSky Royalty Ltd.</b><br />The market capitalization of <a href="https://www.otcmarkets.com/stock/PREKF/quote">PREKF</a> (at US$17.80 per share for the U.S.ADR) is $4.25 billion and the enterprise value (with $195 million of net debt) is $4.4 billion. <br /><br />For the third quarter of 2023 (<a href="https://www.prairiesky.com/wp-content/uploads/2023/10/2023-Q3-Management-Discussion-and-Analysis_SEDAR.pdf">MD&A</a>), PrairieSky's net earnings were $40 million (compared with $55 million the prior year) and earnings plus DD&A were $67 million (compared with $83 million the prior year). That's a "cash generation" yield of 6% on the current enterprise value.<br /><br />Royalty production volumes averaged 25,469 BOE per day, an increase of 8% over Q2 2023 and 2% over Q3 2022. Quarterly oil royalty production averaged 12,084 barrels per day, a 4% decrease from Q2 2023 and a 6% increase over Q3 2022. The average realized price for crude oil this quarter was $67.55/bbl compared with $75/bbl the prior year.<br /><br />With the cash generated from operations this quarter, the company spent $11 million on property acquisitions, $42 million on dividends (4% dividend yield), and $4 million on debt repayment. One odd thing disclosed was a "$13.3 million termination payment related to a leadership change in the quarter".<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-81366948799977486632023-11-06T15:00:00.002-07:002023-11-06T15:35:19.197-07:00Monday Night Links<p>Links</p><ul style="text-align: left;"><li>The regime is caught in quite a pickle as the tools it used to quash its domestic competition are now crippling it in the geopolitical struggle of great powers. Its policies of industrial outsourcing, regional military recruitment, becoming a service based economy, subsidizing mass college enrollment, mainstreaming white racial guilt and finally mass immigration, were either designed to or by chance weakened and neutered their only non patronage class "white working class and middle class Americans". While these policies solidified their hold on power, got them filthy rich and marginalized their political rivals, it also has greatly limited their capacity to compete with rival great powers. Countries rich with natural resources and national pride are chewing up US hegemony at a rapid pace and our leadership has no counter. Years of abandoning merit for identity quotas, risk averse safetyism, dumbing down academic standards, creating a cartelized command economy that stifles innovation, and zero accountability for failures has collapsed [their] ability to stop decline. In order to stave off a USSR style collapse, the regime would have to empower and economically reward its white conservative constituents who could then form a politically powerful bloc. It's the ultimate catch 22 for them. [<a href="https://twitter.com/prowrstlngstrng/status/1650911584628375552">Jim Sharp</a>]</li><li>They can't remain a superpower without rebuilding the country's manufacturing base and arms industry. But that means transferring a lot of wealth and power into the arms of the Red States and working class; their two main domestic political enemies. And a asset-light economic zone without strong military and industrial base to support that military is a target, not an empire. So yeah, they're screwed. [<a href="https://twitter.com/CarolinaLion2/status/1707774800842682411">Carolina Lion</a>] </li><li>[I]t’s an iron law of history that revolutions never, ever come out of popular uprisings. The wheels of history are turned by political entrepreneurs — individuals or close-knit groups who notice ahead of everybody else that the world has changed in some fundamental way. This unstable situation where material conditions have shifted but society keeps rolling in its groove creates a sort of potential energy, like a charged electric field or a boulder perched at the top of a cliff. In the world of business we call this a market opportunity, and we admire those with the gumption to seize them. In the world of war and politics, market opportunities often look more like a forest full of dry tinder, and the would-be entrepreneur needs an additional quality, fanaticism, that enables him to calmly light a match and flick it over his shoulder. [<a href="https://www.thepsmiths.com/p/review-85-days-in-slavyansk-by-aleksandr">Mr. and Mrs. Psmith’s Bookshelf</a>]</li><li>Holston Army Ammunition Plant is the *only* plant in the US producing high explosives. It was built in 1943, and has been barely modernized. Feast your eyes on the glory of HSAAP. Some more funny pics from the sole HE plant. That guy bagging? That's moving C-4 between work stations. [<a href="https://twitter.com/LTsarcasm/status/1597781961019641856">Tokyo Morose</a>]</li><li>In case you are wondering how bad the US bottleneck is when it comes to military production there is exactly one factory producing high explosives for the United States and it is very outdated when it comes to machinery. [<a href="https://twitter.com/CarolinaLion2/status/1650476253340745731">Carolina Lion</a>]</li><li>A pattern I've noticed is the New York Times' fear and loathing of prosperity in North Dakota. It's weird. The normal human reaction to a cold, emptying-out place finally getting a lucky break would be, "Oh, that's nice." But to the NYT, North Dakota is an endless horrorshow of cashiers making $24 per hour and other atrocities. [<a href="https://isteve.blogspot.com/2013/12/nyt-crime-in-dakota-oil-patch-its-trend.html">Steve Sailer</a>]<br /></li><li>Gender dysphoria has sailed up as the number one socially induced
psychological disease of our time. About a decade ago, apparently out of
nowhere, people started questioning their gender identity. Since gender
dysphoria is fashionable here and now, it is talked about as something
very particular. A book called Crazy Like Us: The Globalization of the
American Psyche (2011) by journalist Ethan Watters suggests it isn't.
Psychological disorders have always been sensitive to trends. Watters
presents the way Western-style anorexia reached Hong Kong as his main
example. [<a href="https://woodfromeden.substack.com/p/anorexia-was-the-gender-dysphoria?">Wood From Eden</a>]</li><li>Charles Taylor wrote a very long book about “disenchantment,” which is the secularizing process that made people stop thinking of the universe as being full of ghosts and demons and miracles and purposes, and start thinking of it as a collection of self-contained particles bouncing off each other. But he curiously underemphasizes the extent to which it was a scientific revolution that made that whole process intellectually plausible. We all know how that story ends — with quantum mechanics, Gödelian incompleteness, and the rest of it all filling the universe with ghosts again. But even the quantum universe and the relativistic universe are just elaborations on Newton’s “System of the World” and abide by its basic philosophical premise: that the universe is like a big computer that takes its current state, applies certain rules, and produces a next state. In fact this assumption is so pervasive, the revolution has been so thorough, most physicists cannot even form the thought that there could exist a conceptually well-defined alternative. [<a href="https://www.thepsmiths.com/p/review-the-variational-principles ">Mr. and Mrs. Psmith’s Bookshelf</a>]</li><li>[T]he welfare state requires an endless supply of young people to produce more, consume more, and generate ever more taxes for bureaucrats to distribute. A prolonged shortage of young bodies will stress the social safety net to the breaking point. Expensive retirement and health insurance schemes are likely to collapse. The marginal will slip into poverty—the poor will grow desperate—but government will lack the funds to do much about it. The political consequences are unfathomable. My guess is that crime and turbulence will be a constant background noise but not revolution, since the minimum levels of testosterone needed for that kind of venture will be lacking. Economically, a world dominated by the old will be less innovative, less dynamic, and more risk averse. The only way to compensate for a shriveled workforce will be through technology—but that’s just what you won’t get from the geezers in charge. [<a href="https://www.thefp.com/p/a-world-without-babies ">Martin Gurri</a>]<br /></li></ul><p>Earnings</p><ul style="text-align: left;"><li>In the U.S. & Canada, RevPAR rose more than 4 percent, with many urban markets showing outsized growth. Group and business transient saw mid-single digit hotel revenue gains in the quarter, largely driven by rate increases. Leisure transient demand in the region has also remained solid, leading to 4 percent hotel revenue growth for the segment compared to the year-ago quarter. [<a href="https://finance.yahoo.com/news/marriott-international-reports-third-quarter-103000160.html">Marriott International</a>]</li><li>Our world class assets delivered top tier operational and financial results in Q3/23 with average quarterly production volumes of approximately 1,394,000 BOE/d, which is the highest quarterly volumes in the history of the Company, including record quarterly production volumes for both liquids and natural gas of approximately 1,035,000 bbl/d and 2,151 MMcf/d respectively. Following the completion of planned turnarounds at our Oil Sands Mining and Upgrading assets, synthetic crude oil ("SCO") production was strong, averaging approximately 491,000 bbl/d during Q3/23, capturing robust SCO pricing at a premium to WTI. Additionally, as a result of strong execution in our thermal assets, production growth was ahead of plan, as Q3/23 average thermal production volumes increased by approximately 44,000 bbl/d to 287,000 bbl/d from Q3/22 levels. As a result of our focus on effective and efficient operations, the Company had strong liquid netbacks in Q3/23, similar to Q3/22 netback levels when commodity prices were much higher. This resulted in significant free cash flow for the Company. [<a href="https://finance.yahoo.com/news/canadian-natural-resources-limited-announces-090000500.html ">Canadian Natural Resources</a>]</li><li>"NRP had another robust quarter with $80 million of free cash flow generated in the third quarter of 2023 as a result of continued strong performance from our mineral rights assets and a significant cash distribution from our soda ash investment," said Craig Nunez, NRP's president and chief operating officer. "We also made noteworthy progress towards our goal of eliminating all preferred units and warrants by redeeming $50 million of preferred units at par with cash and repurchasing a total of 1.46 million warrants for $56 million in cash. I am proud of the NRP team for the continued strong performance and am confident our strategy to retire all outstanding debt, preferred equity, and warrants while maintaining common unit distributions will continue to maximize long-term unitholder value.” [<a href="https://www.businesswire.com/news/home/20231103376145/en/Natural-Resource-Partners-L.P.-Reports-Third-Quarter-2023-Results-and-Declares-Third-Quarter-2023-Distribution-of-0.75-per-Common-Unit">Natural Resource Partners LP</a>]</li><li>CVE currently trades at a debt-adjusted cash flow multiple of 5.1-times versus a 6.6-times multiple for CNQ and a peer group average of 6.3-times, according to RBC. CVE’s third-quarter results suggest its relatively low trading multiple discount is unwarranted. The shares are also cheap from a free cash flow perspective. Third-quarter results indicate that Cenouvs is capable of generating roughly $2 billion of free cash flow with WTI in the low-$80s per barrel and the WTI-WCS spread in the $12-$13 range. We believe the company is capable of generating $10 billion of free cash flow, or $5.30 per share, at $90 per barrel WTI, which is where we expect prices to trade over the coming years. At $40 per share, they would trade at a free cash flow yield of 13.3%. This share price is equivalent to $29.20 for the U.S.-listed shares. [<a href="https://hfir.substack.com/p/cenovus-energy-turns-the-corner">HFI Research</a>]</li></ul>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-1527840491496268397.post-17909835062509865812023-11-04T12:30:00.001-07:002023-11-04T12:30:07.283-07:00Free Cash Flow Conversion & Marriott International Inc (MAR)<p>As part of our search for "royalty-like" businesses that are good at converting revenue to free cash flow that can be distributed to shareholders (like <a href="http://www.creditbubblestocks.com/2023/11/lamar-advertising-company-q3-2023.html">Lamar Advertising</a>), we recently did a screen of the companies in the S&P 500 index.</p><p>Now while our royalty partnerships and trusts convert 90-100% of revenue to free cash flow, we are interested in finding other businesses that are royalty-like (accepting lower margins than true royalties) for two reasons. First, to diversify away from commodity price exposure and <a href="https://www.creditbubblestocks.com/2023/07/review-of-crude-volatility-history-and.html">volatility</a>. (Nobody said it is easy being an oil man.) Second, because mineral properties are depleting while some types of royalty-like or "tollboth" businesses can exist almost in perpetuity. As long as there is human activity and commerce, there is the possibility that Visa will be getting a cut of it, whether the energy for it is coming from fossil fuels or from the sun.</p><p>Speaking of Visa, in doing this screen we excluded the financials sector, so it does not include Visa (<a href="https://finance.yahoo.com/quote/V/">V</a>), even though that company's cash from operations of $21 billion over the past twelve months (ending <a href="https://www.sec.gov/Archives/edgar/data/1403161/000140316123000092/q42023earningsrelease.htm">Sept 2023</a>) was an astounding 64% of its total revenue of $33 billion. Visa has a market cap of $500 billion and returned $18 billion of capital to investors over the past twelve months (mostly via share repurchases). But if we could live off of a 3.6% shareholder yield, we wouldn't need this blog.</p><p>Which S&P 500 companies have royalty-like businesses at more attractive valuations? Historically, big tobacco companies were the epitome of this: very high gross margin businesses employing not much capital. Altria's free cash flow is north of 40% of its revenue. Unfortunately, they are being <a href="http://www.creditbubblestocks.com/2023/10/altria-shares-crushed-after-cigarette.html">crushed</a> by serious competition for the first time in a century and investors are only beginning to wake up.<br /></p><p>Another example of high gross margins and low capital expenditures is the pharmaceutical industry. The Abbott Labs spinoff AbbVie (<a href="https://finance.yahoo.com/quote/ABBV/">ABBV</a>) has the third highest free cash flow margin (43%) in the S&P 500, and a healthy 9% free cash flow yield on the enterprise value to boot. But their primary product is Humira (adalimumab) injections (comprising almost 40% of their total business) which are approved to treat autoimmune diseases such as rheumatoid arthritis, Crohn's disease, plaque psoriasis, and ulcerative colitis. The patent on Humira expired in 2016 and now (<a href="https://www.nytimes.com/2023/01/28/business/humira-abbvie-monopoly.html">finally</a>) at least eight biosimilar drugs are going to <a href="https://www.healio.com/news/gastroenterology/20230106/humira-exclusivity-expires-in-2023-will-biosimilar-boom-benefit-patients-or-industry">hit</a> the market. Some <a href="https://www.barrons.com/articles/buy-abbvie-stock-price-humira-sales-51669938888">think</a> that other AbbVie products will be able to compensate, but for us it goes in the "too hard" pile.</p><p>A "tech" company is at the very top of the entire S&P 500 index: Verisign (<a href="https://finance.yahoo.com/quote/VRSN/">VRSN</a>). It bought Network Solutions in 2000 and it operates two of the 13 global internet root servers and provides authoritative resolution for the <i>.com</i> and <i>.net</i> top-level domains. This is Verisign's primary business, and there were 174 million of those registrations at the end of 2022, which was a 5% increase over the prior year. Verisign has an agreement with the Internet Corporation for Assigned Names and Numbers (“ICANN”) that allows them to raise their wholesale price of <i>.com</i> domain name registrations by 7% per annum. The gross margin on this business is 86%. <br /><br />Verisign's total revenue of $1.4 billion in 2022 translated to $831 million of cash from operations in 2022 (<a href="https://www.sec.gov/Archives/edgar/data/1014473/000101447323000005/vrsn-20221231.htm">10-K</a>). There was only $27 million of capital expenditure for the entire year, so the company bought back $1 billion of its own shares. There is no technology in this "tech business" - certainly nothing compared to
deep sea oil exploration. Verisign has a cozy monopoly running a simple
database. Their free cash flow for the year was $804 million, which was 57% of revenue. A great business, but the enterprise value of $21 billion means the free cash flow yield is only a 3.8% yield since everyone knows it's a great business. <br /></p><p>We see two birds of a feather near the top of the screen: Hilton Worldwide Holdings (<a href="https://finance.yahoo.com/quote/HLT/">HLT</a>) and Marriott International (<a href="https://finance.yahoo.com/quote/mar/">MAR</a>). That might be puzzling. How can the labor intensive hotel business be as high margin as charging people $10 to add their domain name and IP address to a database? The answer is that these companies pivoted their businesses. The hotel properties are owned by third parties such as <a href="http://www.creditbubblestocks.com/2021/03/hotel-reits.html">hotel REITs</a>. See how Marriott <a href=" https://www.sec.gov/Archives/edgar/data/1048286/000162828023003485/mar-20221231.htm">describes</a> its business:</p><p><i>Terms of our management agreements vary, but <u>we earn a management fee that is typically composed of a base management fee, which is a percentage of the revenues of the hotel, and an incentive management fee, which is based on the profits of the hotel</u>. Our <u>management agreements also typically include reimbursement of costs of operations (both direct and indirect)</u>. Such agreements are generally for initial periods of 20 to 30 years, with options for us to renew for up to 10 or more additional years. </i></p><p>This is an "asset-light" business <a href=" https://www.edisongroup.com/insight/the-hotel-asset-light-model/">model</a>:</p><p><i>Marriott led the way in 1993 by spinning off its real estate into an investment trust (Host Marriott). Not only did this free Marriott from the burden of debt during the industry downturn of the late 1980s, but it spurred the company’s aggressive growth into the largest lodging business in the world, from 500 properties to around 7,000.<br /><br />Other hotel groups followed, notably IHG, whose sale of the landmark InterContinental Hong Kong in 2015 completed the disposal of its major owned assets and thus the release of almost $8bn in gross proceeds from around 200 hotels since 2003 and the return of over $10bn to shareholders.<br /><br />More recently, in early 2017 Hilton focused its model on its capital-efficient fee business by completing spin-offs of a portfolio of hotels and its timeshare business into two independent, publicly traded companies: Park Hotels & Resorts and Hilton Grand Vacations.</i></p><p>If you don't need a lot of capital to run a business, or if you do (hotels) but you get other people to make the capital investments yet still benefit from them, you can have very high free cash flow conversion.</p><p>In 2022, Marriott had $5.6 billion of net revenue (excluding $15 billion of cost reimbursement), earned $2.4 billion of net income, and generated about $2 billion of cash from operations net of stock-based compensation. So that's 36% conversion of net revenue to operating cash flow. Almost as high as selling cigarettes. Marriott had only $330 million of capital expenditures, so they paid $321 million of dividends and bought back $2.6 billion of stock. That gives a shareholder yield of 5.1% based on 2022 shareholder returns and the current market capitalization of $57 billion. </p><p>Looking at this quarter's <a href="https://www.sec.gov/Archives/edgar/data/1048286/000162828023036166/mar-2023q3xearningsrelease.htm">results</a>:</p><ul style="text-align: left;"><li><i>With the operating leverage inherent in our business, adjusted EBITDA rose 16% to $1.14 billion. <u>After another quarter of meaningful share buybacks, diluted adjusted EPS grew 25% year-over-year to $2.11</u>.</i></li><li><i><u>Our powerful asset-light business model continues to generate a large amount of cash. And our capital allocation philosophy has not changed</u>. We're committed to our investment-grade rating, investing in growth that is accretive to shareholder value, while returning excess capital to shareholders through a combination of a modest cash dividend and share repurchases. In the first nine months of this year, we returned $3.4 billion to shareholders. Over the last seven years, which included two years of no share repurchases as a result of COVID, we have reduced our outstanding share count by 23%.</i></li><li><i><u>Over the next few years, our net rooms growth is anticipated to be squarely in the mid-single digit range</u>. During the quarter our pipeline reached a new record high of nearly 557,000 rooms, a record even excluding the MGM rooms. Strong interest in conversions continues, including multi-unit opportunities.</i></li></ul><p>For Q3 2023, Marriott's net fee revenues were $1.17 billion, up 13% year-over-year. Cash from operations was $881 million and free cash flow was $757 million (65% of revenue). During the quarter they repurchased $942 million of stock and paid $154 million in dividends.</p><p></p><p>Something to emphasize about the model: the number of rooms in the Marriott system keeps growing without Marriott shareholders needing to pay for them. In the third quarter, their room count was up 5% year-over-year. Their ecosystem has 1.5 million rooms (around a quarter of the worldwide <a href="https://www.statista.com/statistics/197859/total-number-of-guestrooms-of-us-hotel-companies-worldwide/">total</a>), but since third parties own and pay for 99% of them, cash is available for distribution to shareholders.<br /></p><p>The business is royalty-like, because other investors are building the hotels and Marriott is getting percentages of revenue (and profits) to manage them. That is what allows Marriott to be in the top 2% of free cash flow margin in the S&P 500. </p>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-1527840491496268397.post-57727576072163807332023-11-03T16:30:00.001-07:002023-11-03T16:39:42.397-07:00Lamar Advertising Company - Q3 2023 Earnings ($LAMR)<p><i>[Previously: <a href="http://www.creditbubblestocks.com/2023/05/lamar-advertising-company-q1-2023.html">Lamar Advertising Company - Q1 2023 Earnings</a> and <a href="http://www.creditbubblestocks.com/2022/08/lamar-advertising-company.html">Lamar Advertising Company (August 2022)</a>.]</i></p><p>One of the things that initially attracted us to Lamar Advertising Company (<a href="https://finance.yahoo.com/quote/LAMR/">LAMR</a>) was its high free cash flow margins - the signature feature of a "royalty-like" business.</p><p>The market capitalization of Lamar at $95 per share is $9.7 billion and the enterprise value is $14 billion. During the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1090425/000162828023036183/lamr-20230930xexx991.htm">release</a>, <a href="https://www.sec.gov/Archives/edgar/data/1090425/000162828023036253/lamr-20230930.htm">10-Q</a>), the company reported free cash flow of $181 million, which was up 2.9% from the prior year quarter. This quarter's free cash flow yield on the enterprise value (FCF/EV) annualizes to 5.2%.</p><p>Revenue for the quarter was $543 million, which was up 2.9% from the prior year. Notice the very healthy free cash flow margin of 33%. The quarterly dividend of $1.25 per common share was a total of $128 million returned to shareholders, a 5.3% dividend yield. (As a REIT, Lamar is required to distribute 90% of earnings to shareholders.)<br /><br />So far this year-to-date, using $529 million of cash generated from operations as well as additional borrowings of $90 million, the company has reinvested $246 million in acquisitions and capital expenditures and paid $383 million in distributions to shareholders. Notice too that cash from operations is almost equal to revenue. <br /></p><p>Let's compare Lamar's <a href="https://www.sec.gov/Archives/edgar/data/1090425/000162828023036253/lamr-20230930.htm">results</a> for the first nine months of 2023 compared with <a href="https://www.sec.gov/Archives/edgar/data/1090425/000156459018028512/lamr-10q_20180930.htm">2018</a> (five years ago). Their <a href="https://www.macrotrends.net/stocks/charts/LAMR/lamar-advertising/shares-outstanding">shares outstanding</a> have grown only 3% in five years, revenue has grown 30% (exactly equal to <a href="https://fred.stlouisfed.org/series/PPIACO">PPI</a> inflation), and cash from operations has grown 43% - better than inflation.<br /></p><p>So, cash from operations per share went from $3.73 to $5.19, an increase of 39%. Obviously, CFO is different than free cash flow because it ignores both maintenance and growth capital expenditures, but by using CFO we normalize for the different levels of <i>growth</i> expenditures over time.<br /></p><p>Lamar is not as cheap as Natural Resource Partners, but it is a "royalty-like" business with a healthy free cash flow margin and strong cash generation. As we have observed in the past, most of the world's businesses are crappy. They have to advertise to remind people that they exist. Even McDonald's franchisees have to hire Lamar for this, essentially paying them a royalty on their business.<br /></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-1527840491496268397.post-11660926609418734062023-11-02T11:30:00.001-07:002023-11-02T11:31:58.919-07:00Coal & Steel Producer Earnings - Q3 2023 ($BTU $ARCH $AMR $HCC $X)<p><i>[Previously: <a href="http://www.creditbubblestocks.com/2023/08/coal-earnings-btu-arch-amr-hcc-x.html">Coal Earnings (Q2 2023)</a>, <a href="http://www.creditbubblestocks.com/2023/05/coal-producer-earnings-btu-arch-amr-x.html">Coal Producer Earnings for Q1 2023</a>, <a href="http://www.creditbubblestocks.com/2023/05/warrior-met-coal-inc-hcc.html">Warrior Met Coal</a>, <a href="http://www.creditbubblestocks.com/2022/08/peabody-energy-corp-q2-2022-results-btu.html">Peabody Energy</a>.]</i></p><p>
<b>Peabody Energy</b>
<br />The market capitalization of <a href="https://www.peabodyenergy.com/">Peabody</a> (<a href="https://finance.yahoo.com/quote/BTU/">BTU</a>, <a href="https://www.sec.gov/Archives/edgar/data/1064728/000106472823000141/btu8k20231026ex991.htm">10-Q</a>) is now $3.3 billion versus $2.8 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 $276 million, and current assets exceed current liabilities plus long term debt by almost a billion dollars.</p><p>We would put the enterprise value at $3.6 billion now. For the third quarter of 2023, adjusted EBITDA was $270 million, down from $358 million in the second quarter. That puts the EV/EBITDA at 3.3x using this quarter or 2.7x based on the first nine months of this year.<br /><br />
During the third quarter, Peabody's seaborne thermal coal sold for $71 per ton with a $44 cost per ton; seaborne met coal for $160 per ton with a $110 cost per ton; PRB coal for $14 per ton with an $11 cost per ton; and other U.S. thermal coal for $54 per ton with a $42 cost per ton. Once again, seaborne thermal coal was the most profitable segment in Q3, earning $116 million of adjusted EBITDA, with seaborne met right behind, earning $79 million in adjusted EBITDA. The U.S. thermal coal (PRB & other) together earned $103 million of EBITDA for the quarter.<br /><br />
Peabody's "Available Free Cash Flow" (AFCF) for the first nine months of the year has been $648 million. From the start of 2023 through October 20, 2023, the Company has returned $307.4 million to shareholders, including a fixed dividend of $20.7 million and share repurchases of $286.7 million. The Company has repurchased 13.4 million shares, or 9.3% of shares outstanding.</p><p>Notice that the EBITDA/EV yield of Peabody is now pretty similar to <a href="https://www.creditbubblestocks.com/2023/05/natural-resource-partners-lp-nrp.html">Natural Resource Partners</a>, but practically all of NRP's EBITDA is free cash flow and is available for distribution to shareholders, while Peabody has spent about $200 million on capital expenditures so far this year. Also, as a royalty owner, NRP's cost of production is zero, while Peabody's operating costs and expenses are two-thirds of total revenue. <br /></p><p><b>
Arch Resources</b><br />
The market capitalization of <a href="https://www.archrsc.com/">Arch Resources</a> (<a href="https://finance.yahoo.com/quote/ARCH/">ARCH</a>, <a href="https://www.sec.gov/Archives/edgar/data/1037676/000155837023016831/arch-20230930x10q.htm">10-Q</a>) is $2.8 billion versus $2.5 billion last quarter. Their total liabilities less current assets are now $164 million, and current assets exceed current liabilities plus long term debt by several hundred million dollars. We would put the enterprise value at $3 billion now. </p><p>For the third quarter of 2023, adjusted EBITDA was $126 million, down from $130 million in the second quarter. That puts the EV/EBITDA at 6x using this quarter's results.<br /><br />
They sold 2.3 million tons of met coal (versus 2.5 million the prior quarter) and 16.8 million tons of thermal coal (versus 16.3 million) this quarter. The price of met coal was slightly higher but the net effect with the lower production quantities was that EBITDA was down slightly.<br /><br />Arch reported "discretionary cash flow" of $87 million for the quarter, which was the difference between their cash from operations of $131 million and $44 million of capital expenditures. They returned $100 million to shareholders via a dividend of $72 million and $28 million spent repurchasing stock.</p><p>
<b>AMR</b><br />
Alpha Metallurgical Resources (<a href="https://finance.yahoo.com/quote/AMR/">AMR</a>) is the largest U.S. met coal producer, representing about one-fifth of total U.S. production. According to their recent investor <a href="https://www.sec.gov/Archives/edgar/data/1704715/000170471523000067/amrinvestorpresentation1.htm">presentation</a>, between two-thirds and three-quarter's of AMR's met coal is exported, with India accounting for a third of their export sales over the past five years.<br /></p><p>The market capitalization of AMR is $3 billion, up from $2.6 billion last quarter. AMR stock has really been on a tear since they are allocating lots of cash to share repurchases. Their current assets less total liabilities (ignoring deferred taxes) are now $289 million, so we would put the enterprise value at $2.7 billion.</p><p>For the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1704715/000170471523000065/pressrelease9302023.htm">release</a>, <a href="https://www.sec.gov/Archives/edgar/data/1704715/000170471523000066/amr-20230930.htm">10-Q</a>), AMR's adjusted EBITDA was $154 million, down from $259 million in the second quarter. That puts the EV/EBITDA at 4.4x using this quarter or 2.6x based on the first nine months of this year.</p><p>They sold 4.1 million tons of met coal in Q3, the same as in Q2. They got $155/t for met coal versus $173/t the previous quarter. Their cost of met coal sales was up slightly to $110 per ton from $106 per ton the prior quarter.<br /><br />AMR has said that they are going to cease paying a dividend after the fourth quarter and focus their cash on share repurchases:</p><p><i>Following the dividend payment for this quarter, we will consolidate our capital return efforts to focus on share repurchases and expect to continue with that approach as long as buybacks make sense from a market, trading price, and valuation perspective.</i></p><p>Cash from operations was $157 million and capital expenditures were $55 million for the quarter. They paid $7 million of dividends and bought back $102 million of stock during the quarter, for a shareholder yield of 14.5% (annualized) on the current market capitalization. <br /> <br />
<b>Warrior</b><br />The market capitalization of Warrior Met Coal (<a href="https://finance.yahoo.com/quote/HCC/">HCC</a>) is $2.6 billion, up 24% from when we wrote about them last quarter. Their net current assets (ignoring deferred income taxes) are $705 million, so the enterprise value is $1.88 billion.<br /><br />For the third quarter of 2023 (<a href="https://www.sec.gov/Archives/edgar/data/1691303/000169130323000037/exhibit-99109302023.htm">release</a>, <a href="https://www.sec.gov/Archives/edgar/data/1691303/000169130323000039/hcc-20230930.htm">10-Q</a>), Warrior's adjusted EBITDA was $146 million, up from $130 million in the second quarter. That puts the EV/EBITDA at 3.2x using this quarter or 2.6x using the last nine months' results (annualized).<br /><br />They sold 2.3 million tons versus 1.8 million in the second quarter. The average price fell from $208/t to $185/t but the cash cost declined from $129/t to $114/t. Cash from operations was $139 million and they spent $112 million on capital expenditures. Very little free cash flow or shareholder returns right now because they are spending it on their Blue Creek project [<a href="https://investors.warriormetcoal.com/~/media/Files/W/Warrior-IR/documents/blue-creek-presentation.pdf">pdf</a>].</p><p>It is a mystery why they are expanding capacity when the met coal price is already showing. Why not just return cash to shareholders? They could also invest in Natural Resource Partners units! In fact, it is kind of comical to be spending money expanding production instead of buying <a href="https://www.creditbubblestocks.com/2023/08/natural-resource-partners-lp-nrp-q2.html">NRP</a> or their own stock.<br /></p><p>Maybe Blue Creek will turn out to be a smart investment, if the coal price holds up for the next decade, but the market is already saying (through the royalty owners' and producers' valuations) that it does not believe that the met coal price will hold up for even a couple years.<br /><br />
<b>U.S. Steel</b><br />
The market capitalization of U.S. Steel (<a href="https://finance.yahoo.com/quote/X">X</a>) is $7.6 billion, up from $5.5 billion when we wrote about them last quarter. The reason for the substantial increase is that in August, U.S. Steel received an <a href="https://www.clevelandcliffs.com/news/news-releases/detail/600/cleveland-cliffs-proposes-to-acquire-u-s-steel">unsolicited bid</a> of $35 per share (cash and stock) from competitor Cleveland-Cliffs Inc. Their total liabilities (excluding deferred income taxes) less current assets are $1.2 billion, so we would put the enterprise value at $8.8 billion. </p><p>For the third quarter of 2023 (<a href="https://www.sec.gov//Archives/edgar/data/1163302/000116330223000097/ex99p1er231026.htm">release</a>, <a href="https://www.sec.gov/Archives/edgar/data/1163302/000116330223000101/x-20230930.htm">10-Q</a>), adjusted EBITDA was $578 million, udown from $804 million in the prior quarter. That puts the EV/EBITDA at 3.8x using this quarter or 3.6x using the last nine months' results (annualized). </p><p>For the current year-to-date, the company has generated cash from operations of $1.7 billion but has spent $1.9 billion on capital expenditures. They have borrowed $172 million, repurchased $175 million of stock, and drawn down cash by $280 million. <br /><br />As we mentioned last quarter, it does not seem great to spend more than 100% of cash from operations on capital expenditures when your company is valued at less than 4x EBITDA and your market capitalization is two-thirds of book value. Those are strong signals from the market not to be investing in capacity. <br /><br />One interesting commonality to notice is that whether you look at U.S. Steel or <a href="http://www.creditbubblestocks.com/2023/10/enterprise-products-partners-epd-q3-2023.html">Enterprise Products Partners</a>, they are telling us - claiming - that the current investment cycles are not going to last forever. This is from the U.S. steel conference call:</p><p><i>We've been climbing a mountain of strategic CapEx. And now that we're coming down the other side of the mountain, we're not surprised so many see it won't be long before these new world-class assets generate strong free cash flow. </i><br /></p><p>Another interesting comment was about the "tailwinds for American steel":<br /></p><p><i>I mentioned the 3 global megatrends that will provide tailwinds for American steel and our business in the months and years to come. One is accelerating deglobalization. In a world impacted by conflicts like those in the Middle East and Ukraine and emerging from a global pandemic that stretched supply chains to the limit, <u>we are witnessing a stark reversal after decades of globalization</u>. The upshot enabled by legislation like the Bipartisan Infrastructure Law, the CHIPS Act and the Inflation Reduction Act, what we like to call the Manufacturing Renaissance Act. The United States is experienced once in a generation onshoring boom. The deglobalization boom means U.S. Steel's nearly 123-year history of producing steel that is mined, melted and made in the U.S.A. is paying significant dividends, with more to come and significant room for continued growth in North American steel demand. Fundamental to the deglobalization trend is the U.S.A.'s achievement of energy independence. Between our strong segment in tubular steel and our line pipe products coming out of North America and flat-rolled, we are seeing and we will continue to see a robust order book supporting America's energy markets. Another megatrend is decarbonization. There is a strong global commitment to reducing greenhouse gas emissions. With our electrical steels that are empowering the transition to EVs plus our exposure to sustainable steelmaking at Big River, U.S. Steel is well positioned to harness the decarbonization trend.</i></p><p>We are skeptical of big capital expenditures at companies with depressed valuations, but that is our outsider, generalist view. Perhaps our friends at Enterprise Products, Warrior, and U.S. Steel look around and see that no one else is making significant investments in coal, steel, and pipeline capacity. Maybe these investments are a cinch?<br /></p>Unknownnoreply@blogger.com1