Tom Armistead

Gulf Island Fabrication: Value with Deepwater Exposure

Devon Shire and Harry W,

I went back to the original article and as you have said the debt issue is covered in detail. Congratulations on a good call, a multi-bagger from where you wrote it up.

As a value investor I have had mixed results on high debt cases, two for five and lost more than I made, so with the amount of tech cases that were trading at discounts and had plenty of cash and no debt, I have been staying away from debt cases and perhaps have become excessively negative on the issue.

Going over the presentations at ATPG's website, most of the recent ones make a point of the PV-10 compared to the share value. Early presentations are careful to distinguish proven from probable and state the pricing used, typically a three year strip. The most recent presentation does not make these distinctions. This leaves me concerned in attempting to reconcile management's recent claims on value back to the material included on the 10-K. Of course oil prices have increased from the 12/30 level and natural gas is a wild card.

David Einhorn was long the stock at the end of the 2nd quarter, he is well known as a value investor and has enjoyed some success. I also saw where Cam Hui who I follow mentioned it as a Phoenix stock, I went with the strategy but used other selections.

If the 75 number you suggested in the April article can be realized then this still has a way to go. Backing away from my original negative impression I would say this stock is interesting from the point of view of having a large but indefinite upward potential.

For energy plays right now I am long COP and XOM, using options for leverage. That way I have the possibility of large returns from energy without doing heavy analytical work on debt where I have had poor results. It's about what works for me.

Tom

Gulf Island Fabrication: Value with Deepwater Exposure

Harry, I was not trying to imply that GIFI contemplates litigation against ATPG, or indeed that they have any legal claims against them. My concern was about the quality of GIFI's assets, the point being that if they have any WIP on MinDOCII that is posted as an asset I am not aware of any reason to suspect they may have to take a write-down.

As I recall in discussing a dry dock they had built specifically for the MinDOCII at a cost of 17 million GIFI said they could put it to other uses. In any event, I expect the management of any company where I own shares to asset any legal rights they may have to protect my interests.

I just read an article by Devon Shire on ATPG, very enthusiastic although not very careful in discussing the balance sheet and creative financing. Also not very specific in defining the types of cash flow discussed or the claims various parties may have on the cash. Devon Shire has not written anything on any other company.

I then went back over the financials and visited the website, noting as you do that Diamond Offshore is a strong player and has participated in the creative financing. I looked at a presentation ATPG gave recently, the main contention was that the NAV of their energy holdings is something like 114 per share, compared to where the share prices are.now.

My experience with other asset rich but over indebted companies suggests that the assets do get monetized, but all too often the shareholders see very little benefit. On the other hand, some of these highly leveraged energy ploys like KWK will do very well at times, they can have some pretty impressive runs, but you have to bail before they crash.

Personally I think there is still a lot of value in energy stocks but I would be very hesitant to take a position in a company with a history of backing themselves into a corner by excessive borrowing, solving the problem by diluting shareholders and engaging in creative financing, and very possibly making bad deals in monetizing assets that should have been retained unencumbered.

Tom


On Oct 08 12:29 AM HarryW wrote:

> Tom,
> Let me say, up front, that I am ATP shareholder and that is where
> I am coming from. I can certainly understand why you would have formed
> a negative impression of ATP from a cursory examination of its present
> balance sheet and revenues. However, the company is getting its house
> in order: it has recently raised new capital, monetarized its Gomez
> pipelines and paid down the 2011 tranche of its admittedly substantial
> debt burden. The future for ATP actually looks pretty good, but that
> future is crucially dependent on the successful deployment and anticipated
> performance of Minidoc I. If things pan out as expected, ATP's balance
> sheet and cash flows are going to be radically transformed in 2010.
> My point is that, in this particular case, "indefinite postponement"
> should not be automatically equated with cancellation. The recent
> discovery of addition pay at ATP's Telemark field also augers well
> for the future.
>
> I agree entirely that the deferred payment deals are creative financing.
> Is there something wrong with that? Innovative cash management solutions
> would seem to be just what is needed in the present environment.
> Anyway, I do accept that our respective interests would lead us to
> view this matter through very different prisms. I would just like
> to point out that some pretty hard-nosed suppliers have signed up
> for these deals, which suggests to me that they have a fair degree
> of confidence in ATP's ability to pay their bills going forward.
> Companies like Diamond Offshore don't keep working unless they believe
> they’re going to get paid. My understanding is that ATP continues
> to enjoy a good working relationship with its suppliers, GIFI included.
>
>
> On a more critical note, I was alarmed by the implication you made
> concerning GIFI's possible recourse to litigation. I assume that
> the juxtaposition of the specific reference to ATP and the general
> comment about normal contractual terms was not accidental. In light
> of what I have said above and your own admission that you have no
> knowledge of the contract between the two companies, you might want
> to correct the highly questionable impression that you have created.
> I am not the only reader who has interpreted that paragraph in the
> way I have described (reference available on request). To the best
> of my knowledge, there is no reason to believe that GIFI is contemplating
> legal action against ATP, so the question is begging to be asked
> - why did you imply that such a course of action is potentially in
> the offing?

Gulf Island Fabrication: Value with Deepwater Exposure

I don't have any information on the contract or potential litigation. The point in looking at ATP was to see if there was anything to suggest the order might be firmed up to where GIFI could include it in the backlog. Obviously if it is being deferred indefinitely that is the equivalent of a cancelation.

ATP operates with a fair amount of leverage and very generously permitted some of their suppliers to participate in the profits of ventures they had supplied the product for. That seemed like creative financing and if GIFI is to do business with them I can't see why they would want to get involved in some kind of share the profit if we make any, if no profit, oh well type arrangement.

The point is the MinDOC II is not in the backlog and it is unlikely to be resurrected.


On Oct 05 02:53 AM HarryW wrote:

> Tom,
> You wrote: "I looked at ATPG's operations and did not form a favorable
> impression." I'm curious to know why you thought it necessary to
> add that seemingly irrelevant criticism. Is ATP not an important
> current customer of GIFI, who in all probability will be receiving
> orders from ATP again in the future. You go on to say that: "Normal
> contractual terms allow GIFI to recover the cost of canceled projects
> and in some cases provide for penalties." You seem to be implying
> that GIFI has a claim against ATP specifically. Do you have any specific
> knowledge of the contract between the two companies or the likelihood
> of future litigation?

Gulf Island Fabrication: Value with Deepwater Exposure

Don, comparing the two strictly on valuation, CRR is now above its midpoint based on historical average earnings, while GIFI is well below the same relative target. Of course the past does not necessarily predict the future, but mean reversion works often enough you have to respect it.

Natural Gas seems to be developing with abundant supply in shale, horizontal drilling, etc., and to judge by how share prices are moving I think CRR has established a place in the new scenario. As such it shoule be more stable in price.

Deepwater drilling particularly in the Gulf of Mexico is uncertain, there is some encouraging work by Arthur Weglein on improving sonic imaging that may make the proportion of dry holes less troublesome. Meanwhile higher oil prices should eventually make deepwater bigger than it is. So GIFI could just sit there for months or years before making a big move when it can demonstrate a meaningful backlog.

If that was one or more big orders they would issue a press release, leading to a quick pop. Otherwise, it might come out with the earnings, again an increase in backlog to acceptable levels would generate a quick pop.

Tom