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Steinway Capital Inc is a New York based proprietary investment research firm with a focus on opportunistic long-term investments. The firm focuses on spin-off related investment strategies, distressed and post distressed investments, and event driven special situation investments. Steinway... More
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  • Quick Take On Spin-Off: Murphy Oil (MUR) / Murphy USA (MUSA)

    The growth platform for Murphy USA appears to be one of organic store addition at Wal-Marts. 200 or so stores. EBITDA should over time go from around 350 MM to 420-450 million. I estimate the short term price target of spinoff close to 50 bucks. 45-50 if I had to guess for a 12 month price band. I use about an 8x EBITDA multiple.

    As to Murphy Oil, I have done a lot of work on Malaysia some of which can be glimpsed through my comments including an Instablog post on MISC Berhad which stands for the Malaysian International Shipping Company.. MISC which trades in Malaysia participates in the Malaysian oil sector opportunities in a slightly different way than Murphy Oil does. MISC supplies floating production storage and offloading platforms (FPSO) including the Gumusut-Kakap FPSO that will be used by the operators of the Gumusut-Kakap oilfields where Murphy participates in Kakap development. Gumusut-Kakap is the second deepwater offshore field in Malaysia after Murphy's Kikeh field. MISC also participates with a 50% interest in the FPSO that serves the Kikeh field which currently produces around 70,000 barrels of oil per day.

    we know from upgrading work at Fpso Kikeh that output of Kikeh will go to 120,000 barrels per day. Gumusut-Kakap has another 120-140,000 per day capacity of which 50,000 is dedicated to Kakap.. All in all and subject to the risks of actually extracting the added hydrocarbon quantities near term production in Murphy fields in Malaysia is set to double from a not small base number.

    Admittedly, there is bigger risk with something in hydrocarbons extraction going wrong or off plan than say in the steady eddy Murphy USA business.

    The reserve life of Murphy Oil isn't that great but they have had a very decent run of the last couple of decades. I give them the benefit of the doubt that they can reinvent themselves, especially if Malaysia production plans are on target.

    Having reviewed both names, I feel most comfortable to assume here both risks. MUR should have more earnings variability than MUSA, albeit I can foresee a distinct case where MUR surprises on the upside. I wouldn't bet against them. I am exposed to them through CET, MUR and now MUSA. CET is the longest holder of MUR known to me other than the founding family itself. Its a very well managed closed end fund in its own right for whatever it is worth.

    Although I take notice that Third Point has exited its position being happy with the short term gain they have made. I believe both post spin investments created by Murphy have the characteristics of decent long term holdings. Murphy Oil wasn't an expensive one to being with with respect to its tangible book value and while I am not an expert on their abilities to reinvent their reserve book, I understand the near term value of book value. Murphy Oil on that basis trades a little bit like a liquidation, ludicrous as that sounds for a company that is labeled by Morgan Stanley as a mini-major or part of that sub-group. The valuation characteristics are not too dissimilar from a Talisman Energy.. But when you look at Anadarko (NYSE:APC) or Encana (NYSE:ECA) you have very different multiples and just of the top of the head Nexen (NXY) fetched a very different multiple. Marathon Oil (NYSE:MRO) provides a different reference point for a company with sluggish international growth profile at about 1.3x book and some amount of restructuring charges diminishing earnings. The multiple at 15-16 x earnings is probably what it is because of some lack of confidence in them... spinoff Marathon Petroleum (NYSE:MPC) more than doubled and has at times had a bigger market cap than the parent co MRO itself.

    MPC now trades at 2x book value. Its had a great run for sure boosted by shale bonanza and great refining profits. Profits have quintupled since spinoff and there is a view that this may not last forever. The growth profile of MUSA should be more subdued given the different nature of their retailing and marketing operations. MUSA has some similarities with the Sunoco business that was bought by Energy Transfer last year. At least in its retailing aspects. Different animal though as SUN had lots of pipeline assets in addition to 4900 gasoline stations. Valero spinoff CST looks most similar in nature. The final disaggregation of these constituent assets into E&P producers, transporters (pipelines), refiners and retailers of end product is the surprising part.

    The weakness of any of these businesses so created is in their supply agreements. In the case of Murphy USA there appears to have been no special relationship with the parent co on supplying the refined gasoline goods. Unlike with Valero and CST. This reduces the specter of nasty earnings surprises at Murphy USA because more likely than not things have already been conducted on an arms length basis going into the spinoff. A spinoff that clearly wasn't separated on an arms length basis is Travel Centers of America (NYSE:TA). The contractual issues there reside not so much in gasoline supplies but in the rents they have to pay to their landlord under sale leaseback arrangements entered with parent. TA wasn't set up to enrich shareholders but more so to let the parentco feast high on the hog. I suspect no such evil intentions on the side of Murphy that lead to their spinoff of MUSA. Just some of the shades of spinoff gray to consider.

    My thesis for now is that MUSA will outgrow to prosperity to make up for any diseconomies of scale felt in the short term. Some of the store count additions of 200 are part of that game plan. They have a very nice captive client base as a Wal-Mart centric business. Their business model very much reflects that everyday low pricing philosophy for which they are compensated with much higher volume.. Lower margins per unit but more overall bang for the buck. That is what I like having made very good experiences with other Wal-Mart centric but more esoteric businesses such as DVLN (DVL Inc), an original landlord to Wal-Mart in the days where Wal-Mart didn't own all its real estate. National Vision (formerly NVI, and today owned by Berkshire Partners) is also a good example of the good operational things that can happen in symbiosis with Wal-Mart. Each DVLN and NVI fell on tough times for reasons unrelated to Wal-Mart and become interesting value investments for someone like me who wasn't around when these firms even had their heydays.. if it wasn't for Wal-Mart, NVI would never have grown to its scale in the early to mid nineties. I am not an expert on the capex aspects that come with adding 200 stores at MUSA. This will in all likelihood drain decent cash. Folks like NVI have been adding 250 stores in 1993 and 400 in 1994, but the presumption is that these eyewear centers anchored within existing Wal-Marts were less capex intensive to begin with. Time will tell how many stores will be added per annum. I'd be happy if the 200 stores can be added over the next 3-4 years. That would in and of itself be a significant acceleration of their business providing some margin of safety to whatever else might happen in their biz.

    Disclosure: I am long MUSA, MUR, OTCPK:DVLN.

    Sep 04 9:31 PM | Link | 3 Comments
  • Contrarian M&A: A Deal That Falls Apart For The Right Reasons Is A Good Deal To Buy

    Last time I participated in a deal that fell apart was Primero Mining.

    A small synopsis for the motives of engaging in contrarian M&A investment was provided here:

    seekingalpha.com/article/291587-primero-...-opportunity

    As it turned out, Primero Mining survived the arbitrage related carnage unscathed. Participation in arbitrage sell-off to levels of $3.25 and even lower in the following months allowed a decent entry point to participate in the solid operations of Primero which would propel the stock later to levels of $7 and beyond. There was an added twist with Primero inasmuch you could invest in warrants that post deal carnage were traded at 40 cents. Luckily we were able to dispose the Warrants about 1 year later at $1.60 for 3 fold gains. This was a lucky opportunity as the existence of warrants in such contrarian M&A situation is not always a given. In this case though it was a nice low cost turbo charger.

    A very different contrarian M&A opportunity is now provided with MISC Berhad in Malaysia. This security trades in Kuala Lumpur under MISC MK or 3816.KL (on yahoo finance). It is a 63% controlled entity of Petronas, the state oil and gas company of Malaysia. Historically, MISC Bhd and Petronas have evolved as separate organizations, MISC Bhd was founded 4 years before Petronas. Petronas on January 31 of 2013 announced a takeover bid to take over the rest of MISC Bhd at a price that the market didn`t like. They didn`t like it to such a degree that not even a deal sweetener of 4% made a difference. Accordingly the deal got voted down by minorities for what appears the right reasons, namely valuation. In the ordinary course of business, this would be a reason to jubilate as shareholder democracy has prevailed and a bad deal was thwarted.

    In the context of arbitrage investments the opposite is true. Even a bad deal ought to pass shareholder approval, if the purpose is to make some short term gain of a few basis points, or so the thinking goes. Certainly you would not expect arbitrageurs to contribute to the worthy cause of investing in the democratization of societies in the way that George Soros does.

    I would thus not be surprised if an investor such as George Soros might be a contrarian arbitrage investor. It could very much suit his style, while for 90% of arbitrage investors it clearly would not fit their style.

    Brief arbitrage comments on the MISC Berhad deal now falling apart are provided below. All things look very scary since Friday. Another deal is falling apart and woe thee if you are holding the short end of the stick.. I already like the usage of the word "plunging" by Reuters or the word "revolt" used by Bloomberg in below articles. In reality, shareholder groups revolting and looking at a plunging stock now wanted higher value and they will have to be patient for a little while to get it.

    Investors reading this are encouraged to be likewise patient on this name and on this evolving story. Before continuing with the story, here are the enclosed journalistic sound-bites, irrelevant as they are for the further elaboration of the thesis underlying an investment in MISC Berhad.

    www.bloomberg.com/news/2013-04-19/petron...?cmpid=yhoo

    www.reuters.com/article/2013/04/22/malay...;rpc=43

    The prima facie reason why MISC Berhad shareholders have been revolting against a deal engineered by an omnipotent controller is that it wasn't enough and they didn't like the scaring tactics employed by Petronas who painted a bleak picture on MISC Bhd suggesting that the stock could plunge to MYR 2 without a Petronas deal. At the time of this writing, the MISC Bhd stock only plunged to 4.75.. Thus, the fear-mongering rethoric of Petronas has been proven wrong and this in and of itself could be reason to treat this story very serious as it promises to be a strong source of lucre, just as the last such deal that I had a chance to witness which was Primero through its warrants.

    The superficial reasons for looking for higher value were among others that shareholders in MISC Bhd are generally a very patient pension fund oriented crowd. In fact the impatient folks are only believed to account for 10% of outstanding shares, or less. The shareholders in MISC Bhd have been strong believers in their company for well over 25 years. The business exists for 43 years. In fact they were so loyal to their company that they willingly participated in a capital raising exercise in early 2010 at MYR 7. This capital raising exercise raised in excess of 5 billion ringit and was broadly subscribed by all shareholders with no meaningful exception. As a result of the rights offering, Petronas did not increase its ownership position further but it remained at 63%. Thus for very legitimate reasons, loyal shareholders of MISC did not feel like they should be parting with their shares at levels of 5.30 or 5.50 if they just recently paid MYR 7, when the stock was trading at 8.50. This is a very logical argument and we do not wish to argue with long term shareholders who know the company better than we do. They have their good and valid reasons for rejecting a bad deal and its safe that we just want to sense this and acknowledge it rather than swimming against the shareholder sentiment. As contrarian arbitrageurs we can never be unhappy with a democratic shareholder vote. It would be a lot worse if the deal fell apart as a result of an earthquake, tsunami, breaching of a MAC or something similar. A shareholder votum is the last thing we want to worry about. Acknowledging that it can happen is the first step towards lucre realization. Fighting it and having a hissy fit over it would lead to almost certain realization of loss.

    The story of MISC as contrarian arbitrage gets even better as the independent financial advisor opinion on the deal has declared not just one time but two times that the deal is "not fair" to shareholders, from a financial perspective, but nevertheless they declared it as reasonable, given that it apparently is not advisable to fight Petronas as dominant shareholders. However, since Petronas was not the founder of the company to begin with, lets just say, that shareholder logic prevailed.

    I like in that context the opinion of DBS Vickers who advised shareholders not to tender, two times. That is a lot of backbone to show for a regional brokerage firm and investment bank. Their price target for MISC Berhad is much higher. IN fact, most of the 14 international and regional brokerage firms covering the name had much higher price targets on this name going back all the way to 2008.. IN the time period 2003 to 2008, the stock traded at a multiple reaching as much as 2.3x book value.. Prior to the deal being announced the stock had fallen to 0.8x book value, despite it being a company with USD 8 billion in equity..

    To the best of my knowledge, the company has grown book value since 2008.. There is a rights offering the clouds the picture a little bit but not very much.. The rights offer raised around $1.7 billion. In the not too distant future, MISC will potentially sell one of its assets on its balance sheet, or a 50% portion of it for $1.7 billion. We expect this event to further surface book value and at a minimum reduce the gearing ratio from a net debt to equity of around 30% to about 10%. This upcoming transaction or divestiture is to be approved by shareholders of MISC in upcoming June 2013 AGM. It is definitely what you could call a catalyst embedded into the investment thesis.

    Apart from the deal with Petronas having fallen apart because of democratic shareholder vote through a tender, the same shareholders get now to vote, whether they want to sell a 50% interest in a nice and very modern floating oil and gas processing asset to the same Petronas who wanted to stiff them out of their ownership interest..

    And what would happen if MISC Bhd shareholders came back to Petronas and told them in June to forget about it? How would that feel to Petronas. After all, this floating oil and gas processing platform can be deployed profitably in any number of geographies at any number of dayrates. Its completely ludicrous for Petronas to assume that MISC can have no other customers than Petronas, But I am pretty sure that it wont get to this level of shareholder acrimony. I think one slap in the face of Petronas CEO is enough. For all we know and after many strategic blunders he may be on his way out of the door by the time the next parliamentary elections are over in Malaysia. There is a very high likelihood that his days will be counted and as a result, MISC shareholders can get to enjoy once again their company without having to fear that someone will steal it from them at the wrong price with a coercive offer.

    Companies like MISC Bhd who ship LNG globally generally are valued by the market at a premium. IN fact, Golar LNG backed by John Fredrickson trades at 3x book value, versus a current valuation for MISC Bhd of less than 1x book value. MISC Bhd incidentally is the second largest LNG shipper with 27 vessels owned or leased and since Fukushima the dayrates have tripled. From a strict sum of the parts valuation perspective, parts of MISC`s business ought to be valued at a very strong premium to book value and not at a doggish value as the Petronas CEO seems to be suggesting in his scare tactics.

    There are of course the assets that are no longer part of MISC such as the passenger liner business and container shipping business. All that was recently known about these businesses was that they contributed to cumulative USD losses of 789 in the years 2009 to 2011 and that is quite some amount that would readily be believed to mask operating profitability of the remaining businesses. All these businesses have now been fully divested with the last 400 million Ringit writedown occurring in 1H 2012. As of June 30, 2012, all divestitures and vessel scrappings have been completed.

    In fact the operational profitability and after tax profitability have been nicely progressing in year to year comparisons over the past 3-4 quarters and even more impressively over the past 2 quarters.

    The sad thing of the ill-motivated Petronas bid is that when it was published in January 31, 2013, it was published before the very impressive Q4 2012 results were presented. These were presented in February 2013 and reported a tripling of operational results. However with a bid in for the company, this put a lid on potential price appreciation. Which consequently didn't happen. One can only wonder how MISC stock would have reacted with no bid being in the market and with a tripling of earnings being reported. We have to wait now to see how the market will react to stellar Q1 2013 earnings, soon to be announced.

    The typical reaction of most brokers is to stop covering a name adequately, once a valid and or irresistible bid has been tabled. Most brokers indeed recommended to their customers to accept the offer, even though it was widely acknowledged to be a low-ball offer that Petronas had tabled.

    Now that shareholders have voted with their feet, I guess the brokerage community will be back to covering this name and before long may even raise the price target on this name.

    There are a number of catalyst here and I am right now at a loss to even describe all the different categories.

    There will be a deleveraging catalyst once gearing goes from 30% to 10% and Moody`s has already pre-announced that this would be a positive development on the credit.

    There will be earnings fireworks ahead.

    There will not be further blood on the streets.. other than today and the next couple of weeks till earnings are to be reported..

    There should be a resumption of dividends in due course pressurized by the pension fund holders owning this name.

    The last dividend declared dates back to calendar 2009 in the annual amount of 35 sen. At the time this represented a 4% yield relative to the 9 plus ringit stock price.

    Mean reversion in the price to book value multiple is a legit catalyst since not even during the asian crisis of 1998 did this name trade at below 1.5x book value and we see no reason that this name should be trading now at such levels, when financial turnaround of the business is well under way. IN fact, MISC management which is separate from Petronas, has stated that 2013 fiscal year should be better than adjusted 2012 fiscal year. Adjusted for the significant charges still taken in the earlier part of 2012 on the exit of business. Generally speaking even the doggish oil tanker business is expected to recover by late 2014, in a view that is also mirrored by Wilbur Ross who has heavily invested in that turnaround through his controlled entity Navigator Holdings..

    Nuff said about catalysts. The risks are worth pondering. I think they are those of a cyclical business. Or various different cyclical businesses. Fortunately, we have a diversified business with different overlapping cycles that are not in sync. The bad part of this is that MISC will never be valued at 3x book value, but it also should not be valued at 0.45x book value as the Petronas CEO has been suggesting in his scare tactics.

    There is the risk that Petronas will shun doing business with them which would be self defeating given their 63% interest. The most likely circumstance is that dividends will start flowing again and that there will be a peace and love fest at the next annual meeting or at the latest by 2014 annual meeting in June 2014.

    Could Petronas come back with another offer? Possible but given the slap in the face it may be unlikely in near term. This just shows the risk of operating a business with an emotionally insecure leadership. The best thing for Petronas would indeed be to offer 50 sen more and get it over with before the stock reverts to its historic mean of 1.5x book value. Something is telling me though that this is not likely to happen, even though it would be a good deal for Petronas and they probably would secure shareholders holdouts. Petronas wanted to get 90% acceptance rate, and they got 86%, aside from the 63% that they own, which are included in that number. Petronas was simply too greedy and this opens an opportunity for more opportunistic investors. Petronas essentially is telling us that this is money-good.

    The reason petronas could not accept the 23% of shares tendered to them is that this would have left only 14% shares out there and there is a legal requirement in Malaysia to leave a free float of 25% in a listed security at all times. Petronas could have accepted up to 12% of shares, but they didn't stipulate any pro-ration to that effect in the deal document and thus were not able to proceed with a partial uptake or shares. IN the end they got stiffed with all the costs of undertaking the tender offer. No doubt, the CEO will be hearing not so nice things at the next upcoming board meeting.. After all, Petronas is the biggest company in Malaysia at its most prominent figure just got a slap in the face from an irrelevant retail shareholder base..

    Imagine that this happened to the Exxon CEO.. priceless..

    Apr 22 12:32 AM | Link | 11 Comments
  • Primero Mining: Motivated Sellers Trashing the Stock
    T+ 3 days following the termination of the PPP and NXG tie-up, selling pressure on PPP still continues. The question is always for how long. The volumes have been now more on the buying front with stock recovering in USD terms from the USD 3.50 levels to 3.64. Gold is having a good day, of course. This looks like it has bottomed out and is building solid support level. If not to say looking for some excuse to move up higher. The reasons for liking Primero Mining are the same as before. Great executive team, stable and improving balance sheet, producing gold/silver mine and organic growth potential. The 2H of 2011 is supposed to be a half year with unhedged output. All this should make the company appear increadibly cheap compared to some other mining outfits. So far the market seems to disagree. Time will tell how thus tug of war between bulls and bears will end. As Cramer would say, Bulls, Bears, People from Connecticut....
    Tags: PPP, AUQ, GLD, GG, AUQ, IAG
    Sep 01 12:39 PM | Link | Comment!
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  • The real PPP is Primero Mining and not Pogo Producing. maybe time for Seeking Alpha to make those updates to a regular NYSE listed name.
    Sep 1, 2011
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