Douglas E. Johnston

Long/short equity, hedge fund manager
Douglas E. Johnston
Long/short equity, hedge fund manager
Contributor since: 2012
I'm surprised they didn't just announce another over
CA - That sounds about right. I was hoping the author was willing to share some of their analysis other than debt to ebitda will increase when ebitda your point, however, yes it would appear that the senior leverage ratio, which is the one that matters for the next few years, will actually decline
How much free cash, after dividend and capex, do u expect DNR to generate in 2015?
It's always fun to go back and read an old article, especially one where the call was good. Teekay Tankers (TNK) has had a great run over the last few year's and followers will note we've written articles annually to update our views which have remained the same: Bullish.
Our last article, written in back in Feb. estimated that TNK would earn 75c-$1/share this year. But, with the strength in the global crude tanker market, we've increased out estimate to 90c-$1.20/share in net income and $1.40-$1.50 in cash flow for 2015. Q2 will likely show quite good numbers with cash flow coming in just under Q1 at about 40-45c and net income at about 30c. This is impressive since Q2 is usually the beginning of the seasonally low period but, with mid-east oil production running high (longer ton-miles) and refiners cranking, the spot shipping rates have been impressive. We would note that we are assuming a significant drop in rates both for Q3 (-25% from H1) and the H2 (-20%) to be conservative given we should see some pick up in fleet supply and refiner drop-off. So, our estimates could end up being pessimistic. That said, even with net earnings of $1/share, the multiple looks quite low and we foresee a $10 share price before year-end. Short-term, the price may be range-bound given the potential for ATM equity issuance (up to $80mn) but proceeds will go to continued balance sheet strengthening and potential asset purchases. This should lead, ultimately, to a stronger share price.
Over the last few years, TNK has made the right moves. And they should continue to benefit over the next two+ years as fleet growth remains modest. While 2016 will see some supply growth, leaning toward clean tankers, 2017 should remain in check. All in, we see spot rates moving up to 27k/day and 30k/day, respectively. This will lead to continued growth in free cash flow, allowing debt pay downs and organic fleet growth. This is important to note because at $24k/day or above our analysis indicates that TNK can not only pay down its required debt but also organically grow its fleet to maintain fleet age. The new potential equity issuance is not dilutive; it will increase shareholder value.
TK, TNK's parent, own 20+% of the equity providing a nice backstop and TK's CEO recently rejoined TNK's board - a welcome sign, in our opinion. We look for TNK to cautiously increase its dividend over the next few years (~4c/annual increase) and with earnings moving up towards $1.5 over the next couple of years, TNK should trade in the mid-teens by 2017, particularly if oil production remains high/prices low. So far, TNK has rewarded us handsomely over the last few years and we look for more to come.
the cost to short and fear of squeeze is the only thing that keeps price up
they typically have issued around this time every year, last year excepted. It is the seasonally strong season so the street takes down the paper and then runs it up into June and dumps. Might be worth a short-term piggy back as the they'll probably defend share price here...
In the past, they issued to buy more "production" now it is to reduce leverage. Depending on results and how quickly they want to get leverage down, they should/will? issue another 7 next spring. I'm still not convinced these guys have their act together (anchor and SOS is going to be bad)
They finally issued equity. I guess they figured leverage a over 5x is not too smart for a supposed income vehicle. And they do it right as the seasonal strength peaks so that the street can run it up on Q1 results and dump on yield investors for a tidy profit....and the wheel goes round
I'd also mention, they amended the credit facility so that the 7.25 leverage covenant is in effect for the next year. With the facility down to $140mn out after prefereds, target is 20mn adj EBITDA min. The '14 run rate was 40 with another 15 in cost savings that are "locked" in. Revenue should be $1bn and with 8% margin, target is, call it, $50-75mn in adj EBITDA for '15 (NI any 100% reserve collected). Take mid and 13 multiple with a bit more debt paydown, I see a $7 price fully diluted. There is a big IF in there
yes - feeling a bit humbled at the moment, although we did keep powder dry given the likelihood of a poor Q4. The capital raise of $82.5mn, IMO, improves the chances of success and reduces the debt load to call it $350mn. It will add about 20mn shares fully dilutive assuming rights are fully subscribed. We'd note the preferred has a convert of $5.17 and warrants (10y) are struck at 5.30 and 6.60 so all OTM at the moment. Previously, the market put about a 15x multiple on $50mn EBITDA (~6.5/share mid trade range). Using a similar metric full dilution would put at $5.9/share. If we use say $5 for pre-issuance, then cap raise/debt paydown implies a drop to $4.75. So seems like Mr. Market is putting a decent risk-premium into recent announcements - clearly the CFO was whacked because of not being clean with the bad receivables. Either one believes that the bones are out of the closet and the new board and (possibly new) management get the gig or not. The issue I am grappling with now is are the rights a better buy or the equity given current price.
reserves for '14 were effective flat although PV-10 went down due to a wider differential (they use TTM average). Of course, with oil down considerable for '15 we will see reserves down and PV-10 by a decent amount i imagine.
true - they have floods that are baking that wil come on line but better to keep it in the ground if u do not have a lot of debt to service...unfortunately they have decent interest expense but fortunately no maturities until 2021
i agree plus they have a decent amount of mature fields that haven't undergone floods that have low declines...i am using about 10% at zero capex...might be a bit high but conservative
no plan to increase dividend in 2015 so still at 25c or 3%
Just to be clear. When we stated "...additional cost savings (with lag) down to the lower $30s/boe..." those are non-interest cash costs. When including interest ~6/boe and depletion ~22/boe, their "earnings" breakeven will be about $60-62/boe without hedges.
rates and earnings were a bit disappointing to me. Rates were below Clarkson average for Q4 and Q1 to date. Revised down my CAD to ~$1.25 for 2015 and earnings 65c/share. So currently trading at about 9-10x fwd PE. I am still using a 20% drop in TCEs for Q2/3 which may not occur with low crude price/tanker storage demand - so playing it conservative. Modestly cheap here still and still maintaining price target of $9 given '16 earnings in the $1+ range
i don't know. we're up 100% from the low so doesn't seem like a headache to me.
the seasonality is rough too and the street tries to shake people out during the summer doldrums...I think we are in a multi-year cycle but yes, there are many factors (macro included) that can burn this trade. I don't look for a divvy bump until 2016 as they continue to reinvest cash flow
i think we are more in the beginning of the cycle but agree its cyclical in nature. Not sure that the higher TCEs will lead to orders until people see them stick for a while (2-3years) - too many got burned during the last downturn - so I foresee, as many do, a fleet decline over the next few years. This has been and will be nice to own along with some crude names that are
thanks - interesting comments
"According to the company, every $10 decline in oil prices is likely to impact the company's cash flow by $200 million. I therefore believe that the company's revised OCF will be in the range of $600 to $700 million."
What about hedges? And impact of oil price on cash cost/boe? This "analysis" seems very superficial.
Thanks for comment. Yes, I recognized that HSP is a bit different - manufacturer vs delivery man. Mentioned it in the article but should have been clearer. That and size is why I think a 20 multiple (buyout) would be quite high for a BIOS type. Those two you mention are also a bit different than BIOS delivering care but a quick look one trades at 11x the other 20x EV/EBITDA (unverified). I guess my main point is if they can get their margins going in the right direction - which seems quite doable - then you could be looking at some serious gains. $100mn in EBITDA does not seem outlandish and at 15x that would be more than a double....thanks again
when i say "shenanigans" I don't mean to imply any misdeed. simply a stretching of the rules
well - a lot of activists are involved with this name so it seemed to me the poor integration of the acquisitions meant the sword for someone. Especially since guys like Shaffer and Gabelli have probably lost patience. Hai never impressed me on the CCs that i've listened to and his resume is not that impressive. He's had time to make this work and my sense is he was in over his head. I'm guessing that the new board wanted him gone. Could there be some accounting shenanigans in there too? Yes, would not surprise me, but in the end its about turning this ship in the right direction.
The deal by Rite-Aid buying EnvisionRX (PBM) for about 13x Enterprise value. That would put a $17/shr sticker on BIOS if they can straighten out their margins. I think Infusion should have a higher mult. than PBM as its growth. Seems their is big appetite out their for M&A in this sector if mgt. here can just get their act together. We'll see
We are still bullish on HOLX from our original article
Seems that $1bn in EBITDA is in the cards and a 15x multiple, 3bn debt reduction puts this at a low 40 buyout valuation minimum.
gotta love "the first law of holes"!....
serves them right for "stealing" KFN's energy assets last year
I wrote an article a while ago highlighting the unsustainable dividend and large, rather greedy, management incentive fees ( Not sure if anything has changed but my guess is not
i am trying to get more detailed info on their production costs. Hopefully, I will come up with something. I suspect they'll have lagged energy effects if nat gas stays down here but I'll bet labor cost will be the biggest factor and hard to negotiate than down.....anyway thanks for the interesting article
i don't think the economics would force the domestic price to $100 - it simply bars imports from being a direct issue. Just because the kid down the block can't make lemonade for less than $10 a glass doesn't mean any cars will stop at my stand for $9.99. CLF is still subject to supply and demand which is a function of (domestic) steel prices I guess. I wonder how much more they can do with their cost structure - can they get it down to $40 e.g.?