Skip Olinger

Long only, value, special situations, contrarian
Skip Olinger
Long only, value, special situations, contrarian
Contributor since: 2009
Thanks for the reply. I agree that things today are not as bad as the GR but there may have been some extravagant auto lending. But subprime exposure appears low here. I agree the company will survive. Hope you are right about the stock price.
Best regards
I too am intrigued with Ally due to its cheapness and its turn around. I own it as it was bought by one of our managers. My interest increased when it sold off over 20%. My big concern was credit quality. Much of the recent strength in auto sales has been a result of easy/subprime financing. It would appear that Ally's loan book is actually much higher quality than I expected. I am also impressed with their franchises in auto dealers and retail deposits.
That said, don't you think their reserves are light? Take a look at the Financial Supplement. You seem quite unconcerned about losses going to only 2-2.5% from 0.7% now. At 12/31, their ALLL was only 0.9% of their loan book or $1,054. Their write offs were $194 in 4Q and they provisioned $240 so they are not increasing the allowance very rapidly. If losses went to 2.5%, their peak in the recession, that would amount to $1.2B additional NCO's. That's more than the allowance now and its wipes out all earnings of the bank ($1,289M for '15). I don't think that is trivial.
I suspect they will tell you that car loans are well collateralized and they are able to realize good resale values on their sale. But defaults come in waves so they would be flooding the market with used cars.
What would cause this upturn in defaults? Perhaps the US joining the rest of the world in recession causing job losses. Or the aging of a big bubble of easy credit loans that finally default.
I am not selling here and I agree its a much better credit story than I had anticipated. Management seems genuine and has really improved the efficiency ratio and NIM. And the stock is really cheap and may start to pay a dividend and repurchase shares. But their low loss allowance concerns me.
Good thinking. I looked at the $38 puts which are approx 11% out of the money and you get $2.80 vs the $37 calls which are 9% out and you get only $2.14. Much better to sell the puts. Makes sense as people are trying to buy downside insurance in this market.
Pendragon is also correct. One gets a better % premium if you sell shorter term options.
The author has a good point but not the greatest analysis. Nothing about why EMR will recover or is cheap.
Your analysis is spot on, much of which was missed in the article. I note that credit facility comes due in 2018, not 2020. It will be interesting to see how and if the facility is renewed.
An excellent question. The answer boils down to do you believe the company's operations will continue unaffected by prolonged low oil prices. Right now the company's customers are paying as agreed, as far as I know. I suspect they will continue to do so oil companies need to maintain production from existing wells to generate revenue to stay in business. But who knows what Brazil and Petrobras will do. You also need to believe that the company's banks will refinance a fair amount of expiring credit. Again I expect they will. That is why I am holding and not selling.
There is a fair amount of upside if all stays well with the operations. At $6.19 this AM, the stock trades very close to book value so you are not paying a premium for the assets. There is also a very good likelihood that the distribution will be raised in a couple of years after management determines that it has retained a sufficient amount of earnings. It has every incentive to do so. Per the example I give above there could be a fair amount of upside. You also have a pretty good upside vs downside. Unless there are operational or financing issues, there is not much down side here and you are getting paid 7% to wait. Not bad.
I would also look closely at TGP as they have longer term contracts on their ships and do not have redeployment risk as does TOO.
Remember these are "junk" credits and no one loves junk today. There is a risk you get zeroed but it does have attractive upside and would make a good speculative position. Good luck. Let me know what you do. Best regards.
I agree management is capable operationally. They know how to run a shipping business. But their job is to not get caught without financing to fund committed projects. They also appeared to be unaware of the situation they were in. Don't you think it a bit strange they would raise the dividend, then drastically cut is about a month later????
What came clear to me is that this business has an inherent risk in it that I did not appreciate which is that the long lead time on new-builds makes it difficult and costly to arrange the financing of a project at the time they commit to it. Most of the time it is not a problem. This time it was. It's a risk of the model.
Yes I think 8% is a reasonable number. I think MLPs trade 400-600 over 3 yr T's.
Understand that even with the dividend cuts, the company still has to refinance a lot of bank debt. I believe they can pull it off but it's not certain till its done.
I am not sure where you get $70m projected DCF for 4Q15? DCF for 3Q was $63.6m and their 3Q presentation says 4Q will be in line with 3Q.
It is not really growth that is needed to reduce dependence on bank financing. They need to be able to raise equity at a reasonable cost. Bank debt is generally favorably priced. The issue is that bank debt is shorter term and the company needs to fix its financing to approximately the life of its vessels or their charters. Even if you swap fix for floating on the bank debt, it term is generally 2-3 years.
Lastly, if you think the company will survive, I would think the common would be the way to go as you have more appreciation potential. If the company has trouble I don't think the preferred will provide that much more safety. I am holding my existing position; not adding to it here. But I am a chicken.
As I recollect an analyst on the dividend cut call asked the same question about selling assets. Management was very vague. I don't think there are a lot of non-core assets to sell in TOO. Maybe an off lease tanker but very small in my opinion.
I agree management has a lot of work to do to regain credibility. But I think the underlying business has not changed. It is just that their financing fell apart. I suspect they will pull out of this. But the risk of customer default is real.
the tankers are in TNK. The ones in TOO are on charter generally for shuttle purposes. Storage use is not really relevant in TOO
Great question, I will check it out.
The problem with the business is that they have to order new ships with 1-2 year lead times. I don't know how they raise equity that far in advance and have to pay distributions on the new shares without revenues. It's tough but I agree it should not have happened.
Jack,
Apologies for not getting back to you earlier on this. I have just spent the better part of an hour reviewing company filings and presentations. There is almost nothing mentioned about this operation. The reason why appears to be in the following from the company's 2014 10K:
"In the second half of 2014, Occidental
commenced winding down its Phibro commodity trading operations.
As of year-end there was no material exposure related to Phibro’s
remaining activities."
Wow. So that's what happened to them. Remember Solomon Bros and how big Phibro was?
Think I have that right?
Merry Christmas and best regards,
S
The counter to your argument is that if they shut in these expensive off shore wells, all revenue stops. They have to have revenues to run the company so they actually need to pump more oil not less. Now they certainly would not drill new expensive wells and they would look to cut capex but they have to keep pumping. I am not an oil guy but I think it is not so easy to shut in an off shore well.
The risk is that Petrobras, their largest customer and represents 25% of their revenues, could be unable to pay or more likely goes to the company and says we want a rate reduction. If you don't, all your equipment comes back at the end of its lease and we use someone else. I don't know how much leverage Petrobras actually has here, but Evensen acknowledged that customers have approached him looking to renegotiate rates. He said he was not sympathetic to their cause. But that's the other big risk to the company.
Good morning Ms. Qureshi,
I don't disagree with any of your numbers but I think you may be a bit rash in your conclusion that OXY's dividend is in immediate jeopardy. Unlike so many of the smaller E&P companies, Oxy has a very strong balance sheet. Total debt is $8.4b compared with equity of $29.9b. For the 3 mos ended 9/30/15, pretax earnings with the asset impairment charge added back were $300m vs interest expense of $48m. It has substantial unsecured borrowing capacity. It also has $1.8b in restricted cash that can only be used to pay dividends or repurchase stock, which amounts to 3 quarters of dividend payments.
While I could not find any cap ex or cash flow guidance for '16, in their Bernstein presentation, they state that cap ex for 4Q15 would be at a $4m annualized run rate. If they maintain that in '16, they would have a shortfall based on the 9mos CFO. However, that number contains a use of WC of $938m which is related to '14 expenditures paid in '15 so I doubt it will continue at that rate. Therefore, they should be able to cover cap ex even in this low energy environment.
And, yes, that means their dividend is totally uncovered by CFO's. So they will spend their restricted cash for the next 3 quarters and borrow thereafter. Using their 3Q numbers they have pretax earnings of $300 + $48 in interest exp. Looks to me that their effective interest rate on the $8.4b in debt is 2.3% so call it 3%. That means the could cover about $11.6b in debt. Subtract existing debt and you get about $3.2b in additional debt or 1.4 years worth of dividends on top of the the 9 mos of restricted cash. Is 2.25 years of dividend coverage OK? Your call. but I doubt you will see a dividend cut any time soon. I suspect you have gone through their Bernstein presentation where you can see they spend a lot of time talking about dividend growth. They also state in their 3Q10Q that, "As of September 30, 2015, Occidental was in compliance with all covenants of its financing agreements and had substantial capacity for additional
unsecured borrowings, the payment of cash dividends and other distributions on, or acquisitions of, Occidental stock." But, I agree they can't keep paying dividends forever at today's energy prices. And, I have no idea when they will go up.
Is Oxy a buy now? I would not commit new money to it due to its valuation being close to fair value. I have not done a DCF on the company but looking at Morningstar and Valuentum, they assign FV's of $72 and $81. Valuentum has a low range of $53 on their FV. I also think energy stocks could sell off further as could the whole market for that matter. However I do not think their dividend is in any risk for the next couple of years. I have owned the company since 2012. It is less than a 1% position and don't plan to sell it now. I think it is highly likely they will weather this storm but the stock could get cheaper.
Thanks for your article
Very well done and thorough analysis.
If the asset values were so impaired before the mergers, why do you suppose the banks agreed to put off adjusting the BB? They must have believed their position would be improved.
When the BB is redetermined it turns out that the company is upside down, I would expect the lenders to require all CF to be directed to line debt reduction. All other distributions would be stopped. Would they still be required to pay interest on the senior unsecured debt?
thanks again
thanks. I really respect Valuentum and their modeling but I think they are missing a key point here.
Relo:
I apologize but I am having difficulty understanding your points. Yes, I agree with you that they are looking to lower their operating costs but no target given.
My main point is about their increased cost of capital. If you read the question from Peter Ehret, he is making the point that with the stock priced where it is today, they cannot issue new equity. They have existing commitments that need to be funded. He asks a very specific question if the charter rates are above the WACC. He gets an evasive answer. Mr. Hvid just talks about the stability of the shuttle tanker rates. Mr. Evensen does say that even with a high cost of equity he believes the projects makes sense. But no specifics. He also says that they will be able to get secured amortizing financing but they will have to increase leverage to 80% financing, which he admits is high. And, he admits that he does not have access to public debt now. The presentation talks about future projects and says they have specific term loans arranged from them but does not mention the term, rate or equity required. All pretty key points. And nowhere do they discuss how they will refinance the CP LTD of $460m, which is about 35% of total debt. I think that's relevant.
I also think management if very good and will see their way through this. But the company is very complex. Their charters are much shorter than the useful life of the assets so you have redeployment risk. And there is credit risk.
My point is that the company is not being very clear about how it will finance its cap ex commitments or the overall cost. They say they can get it done and I believe them but to the extent it is higher than anticipated cost, it will destroy value for shareholders.
As to your mortgage, I am glad that you are no longer paying 13%. I don't see any relevance to TOO. I hope that you are not suggesting they finance floating rate and hope rates will go lower. Chartering fixed and funding floating is not a good strategy. Generally, you want to lock in a fixed spread and not speculate on rates.
What else would you like to discuss?
Hi Brian,
Have to say this one is a bit long and a tad confusing. I do not understand your Raw Cash Flow Bridge chart. 5 year CFO is $1674 then you show cap ex of $772 as a positive, why? Then you show net cash as a positive, which it isn't, why?
Moving on, I think your analysis misses something big. You determine FCF by subtracting all cap ex. Cap ex for TGP includes growth cap ex on new ships. New ships will be financed with new debt and equity. If TGP is growing in asset size, they have to raise new funding for new ships. They cannot fund new ships with FCF ever. To do a dividend safety model I think you need to use maintenance cap ex in your analysis.
Let's look at a very simple one ship analysis. Let's ignore the LP/GP structure. TGP buys one ship. They raise 20% in equity and they borrow 80% from a bank at a fixed rate for a term equal to the long term, fixed rate charter they have arranged for the ship, say 20 years. The loan is amortizing like a mortgage and is fully paid off after 20 years. The company would be leveraged 4/1, high but acceptable due to the long term, fixed rate charter. Let's assume that the charter rate is higher than the debt rate and provides a ROE of 10%. The ship purchase and charter is like any other capital project. You would do an IRR analysis on the total net cash flow from the ship over its life including maintenance cap ex and operating expenses. The IRR had better be greater than your WACC, otherwise you will be losing money on the venture. (Alternatively, you could do a NPV analysis) Now, this is important, they have to make a decision whether they will pay out the periodic cash flows to the equity or whether they will retain them in the businesss and reinvest them in another ship. TK obviously has chosen the former. Therefore, this 1 ship business is self-liquidating. At the end of the charter, the debt is repaid, the ship returned and sold for salvage, which is returned to the equity holders. Nothing is left. If all went well and the actual cash flows matched projections, the equity holders earned their planned IRR.
What this means is that every new ship added to the fleet will require additional equity and debt financing. So you can't include growth cap ex in your FCF or DCF analysis. And, this also means that all MLP's and REIT's are serial equity issuers and borrowers, an investment banker's dream. They have to have continual access to the public markets. And, that presents a large risk today.
From 1/2011 through 5/15, the stock price has traded around $36. It has yielded roughly 6.5% to 7.5%, which is bit less than its ROE over that period. However, today the stock trades at 12% yield meaning that if they have to issue new equity to fund their committed cap ex, the equity will be dilutive to existing shareholders. Not good. Non-investment grade yields have also risen. However, the company says it has access to favorable debt financing and should have adequate availability under its bank line to fund growth cap ex. But I have not looked at TGP in depth so be forewarned. But future access to cheap capital is essential to them in order to win bids on these long term charters and have them be accretive to existing shareholders.
Is the dividend safe? That is a function of 1) the company not entering into dilutive charters that do not cover their WACC 2) the redeployment of ships coming off charter timely and at favorable rates 3) no increase in operating expenses and unscheduled off hire periods beyond expectations 4) no credit defaults of their charter party. It is not a function of TOTAL cap ex being greater than CFO. You have to use maintenance cap ex. But the company had better have access to favorable financing to fund growth cap ex. Actual analysis of the company is complicated by the GP/LP structure. The company managed to get through the 2008 -2010 period without a dividend decrease.
I've owned this for a couples of years. Here is what I think we may be missing:
1) Increased cost of capital. They make a big point about having $2.6B in new revenues from growth projects. But they are a little unclear about how they are going to finance them. They list a new $1,395m of long term debt facilities but they don't tell us how much equity will be required, where it will come from. Nor do they tell us the interest rate and terms of these facilities. They are already leveraged at 3.4x their equity. The new debt brings them to 4.8x, that's high. They made a point of NOT telling us what the IRR is on the life time of owning their ships. What can happen is that their funding costs or cost of capital increases above what they earn on their assets. They can fudge it in the short term but long term it destroys value. We don't know how they will fully fund all their existing expansion projects, we don't know the cost of the debt facilities and there is a real question they can raise additional equity with the stock yielding 17%. They could be in a real bind.
2) Continuing on the subject of debt, $460M of the $3.4B is due within a year. Neither the author nor the company mention how this will be handled.
3) And there is all their exposure to Petrobras, by far its biggest customer. Plus a 40% owned sub of theirs, Seven, has been implicated in the bribery scandal.
I suspect this will work itself out. But it is risky right now. I am not selling here but there is an issue whether the company will have access to equity and debt financing at a reasonable cost. Let me know if I missed anything here.
Floating production, storage and off-loading.
I don't mean to be contentious but I think you have missed a few things in your article. First, it appears that you really don't understand what the company does. Unlike traditional mREITS, BXMT does not own any commercial mortgage backed securities (CMBS) or any securities for that matter. It makes direct loans to commercial real estate projects, just like a bank. It loans to hotels, office buildings, multi tennat and retail. About 80% of their loan portfolio is floating rate. They don't have to worry about prepayment rates or trying to match fund a fixed rate mortgage portfolio thru extensive and complex hedging. It's a simpler business and it uses less leverage that traditional mREITS.
You seem quite preoccupied with the difference between GAAP and Core earnings. That difference was only $0.02 in 2Q. You also seem worried about dividend coverage going forward.
What did happen in 2Q that you may have missed was that BXMT bought a $4.9m loan portfolio from GE. That purchase closed around June 29, so not much earnings from the GE portfolio made it into 2Q results. However, the company did issue about $1.0B of new stock. They paid dividends on this new stock and the company certainly did not cover it in last quarter. Additionally, the company originated about $1.7B of new loans in the quarter. Not so bad.
Now let's look at what this might mean for the coverage of the new $0.62 dividend going forward. While I can't find it anywhere, let's assume that the GE portfolio yields about L+4%, conservative considering the floating portfolio yields an average of 4.59%. If Libor is 0.25%, that means the $4.9B would yield about 4.25% and earn about $208m per year. They funded $3.9B with Wells at L+1.94%, which would run about $85m per year. The rest of the portfolio was funded with equity, about $1.0B. On that equity the company would net about $123M or 12.3%. Not so bad. The $123M of earnings equates to about $1.32 per share or $0.33 per qtr.
In 2Q were $9.0M or $0.10 per share of closing costs that are non-reoccurring. If we add back those to the $0.38 of core earnings you get adjusted CE of $0.48 per share. And, this is without any earnings from the GE portfolio.
If you add the proforma GE earnings of $0.33 to the $0.48 you get $0.81 in pro forma earnings against the new $0.62 dividend. However, there was a drop of $9.7M in 2Q in compensation expense that related to the CT Legacy Portfolio, which would equate to $0.10 ps. I don't know if the drop is one-time but lets assume it is and we add back $0.10 ps in expenses. You still have $0.71 ps in quarterly core earnings. Looks like the dividend is covered to me. It even gives you a bit of a cushion to allow for the non-cash comp expense to which you strongly object being added back to core earnings.
I did this pretty fast so I may have missed something. But I think I am in the right church. I suspect GE was a pretty favorable purchase. It is an example of how BXMT can react quickly in a large way when opportunity presents itself. It may help explain why I don't mind paying 1.09x book. And, it still yields 8.4% on the $0.62. There may be some real bargains in the mREIT space right now but this company has a good credit portfolio and is largely match funded. I own the stock
Thanks and best regards
The thing that is truly astounding to me is that if you go back 10 years and look at revenues, they were only down 8% in '09, the year of the great recession. That is pretty resilient. They have grown in every other year. Who would have thought that an amusement park operator would have such strength.
FCF/Sales has varied from 11.3% to 17%. Source: Morningstar
Look at the cash flow statement
Compare FCF to dividend payment
thanks for this insight.
Who is better than Emerson?
How much competition does Emerson have in their big customers?
Why do they win deals over their competition?
Any other insights would be appreciated
Thanks and best regards,
You omitted the key fact in the following:
"The only requirement for the payout is that Core ROE over the trailing 12 months is greater than 7% and that Core Earnings over the last 3 years or "the period since the date of the first offering of our class A common stock following December 19, 2012, whichever is shorter."
You did not complete the sentence. It should say:
"provided that our Core Earnings over the prior three-year period (or the period since the date of the first offering of our class A common stock following December 19, 2012, whichever is shorter) is greater than zero."
This would mean that the Manager can't take an incentive fee if there were losses in previous years that offset earnings in a current year.
The incentive formula would seem to encourage management to grow equity (more equity = more management fees) and to leverage (higher leverage = higher ROE).
I agree the floor in incentive fee seems a little weak.
thanks Bruce
I did not go back several years looking at the average amount of WC requirements but just noted that it was a big increase compared to previous year. AR, INV and AP can move temporarliy and cause a drop (or increase) in CFFO.
Anyway, it is a very high quality company with a big moat. However, I expect they might be in for a lower, longer period in the world economy. But if this market keeps dropping we may get an opportunity to lock in a very nice yield with long term growth.
While I agree with your numbers on FCF, I disagree with your contention that the dividend may be compromised. You missed a few things. Not only was CFFO down due to declining sales and EBIT, it was reduced due to an increase in working capital of $380 more than the previous year. Inventories were up and payables down. That may be a larger than usual change. More importantly, the company has also been repurchasing stock. That increased to $2041 from $783 or $1258. Proceeds came from divestiture proceeds. That gives management quite a lot of room to cut that before cutting the dividend. Management has increased the dividend every year for at least 10 years. They are dedicated to maintaining it.
The company is also undergoing a reorganization and divestiture program spinning off its lower margin Network Power division. This will have the effect of significantly increasing ROC of the remaining business. The company has been earning high returns on capital for years. They are a premiere player in their businesses worldwide. It is hard to find this company on sale. It has typically traded at a PE of 17-20x over the past ten years. Its trading around 14.2x now. The yield is 3.9%. This compares to a PE low of 9x in Mar '09 and a yield of 5.4%. So there may be more temporary downside. But is very hard to judge a turnaround. This is a quality company and worth holding for the long term. I sure would not delete it from my watch list.
That said, the drop is sales is bad and is a great indication of the poor condition of the world economy. All areas except the Mid East and Africa were down, especially China and Lat Am. Low energy prices significantly affected sales as did the decline in China. The world could be in for a "lower, longer" economic decline. Yep, that will affect their fair value and earnings for a couple of years. The price may go lower. But EMR will be a survivor and the dividend is safe. There should be good opportunities to add to this position.
I have owned EMR for several years and plan to add a bit. It is a core holding.
Thanks and best regards.
Yes there is a risk of real dilution here. But as management said even if they have to raise equity at today's low prices, the overall effect on their WACC will be small.
The company is generating a leveraged ROE north of 15% as I recollect if you use adjusted net income. So, its earning is cost of capital
Would you be kind enough to elaborate on this? How do oil prices affect TOO contracts. If you are worried about prices staying low until '17, the company should be in pretty good shape with their average contract going out 5 years. This equipment is used in production not exploration so the risk is that Petrobras becomes insolvent.
As to the dividend, the increase was announced quarters ago based on the lease-up of the Knar that went on a 13? year lease. The cash flows of this company are pretty solid with generally good credits. They are not subject to cancellation.
How do you see this differently?
people that think that the average lease rates will fall and demand will slacken. This will cause pressure on cash flow and force a reduction in the dividend. The container industry has been in pretty good shape since '10. Things are starting to slow down now in China and world trade. I have no idea how much further the shares can fall but I doubt we have seen the bottom.
No it is not
All your comments are true but you are missing the math. All these companies are growing each year. That means they buy and lease more boxes than is required to maintain the fleet at a constant level. They pay for a box upfront then get that money paid back plus a return by leasing it over its useful life of ~15 years. What matters is their ROIC. As long as they are making more than their WACC, its a good business (long term). Short term the industry is very cyclical. Box prices and lease rates go all over the place. Right now rates are heading down, which will constrain cash flow and put pressure on the dividend.
I bet you are now asking yourself why would these companies pay a dividend at all if they have negative FCF. And, that is a good question!!
See my comments above.