January 8, 2018 12:25 PM

US Bankruptcy can be a very rewarding process for a company. Unprofitable contracts are eliminated and debt is reduced. For a cyclical, capital intensive and commodity industry, bankruptcy can be a godsend.

Look at Tidewater (TDW – USA), an operator of Offshore Service Vessels (OSVs) used in oil production. Through bankruptcy, it’s eliminated all of its in-chartered vessels, reducing expenditures on leases at a time when industry utilization is at generational lows. Even more importantly, it’s substantially reduced its debt. Heck, it has net cash on the balance sheet at this point.

In a commodity industry that normally operates with high levels of financial debt, reducing most of your interest expense, gives you a massive competitive advantage, as does eliminating contracts that were incurred when oil prices were higher and are no longer economic. This lower cost structure allows TDW to out-bid competitors and increase utilization at a time when demand is weak. However, that’s only one reason to like TDW.

During bankruptcy, TDW dramatically impaired the value of its vessel fleet of OSVs. $3.5 billion of vessels were written down to under $900 million. This means that at current prices, you can buy one of the newer, most geographically diversified and largest fleets in the industry for about 22% of previous depreciated value (which already included some impairments), on a net cash balance sheet. Sure, there are many offshore operators with fleets at a discount to fair value, but they also have substantial net debt. Only TDW gives you the net cash necessary to see the recovery out.

What is the correct value for TDW’s fleet? I want to start by saying that with TDW at roughly cash-flow breakeven; it’s no longer a melting ice cube. That means the fleet shouldn’t be worth 22% of book. My hunch is that on a moderate recovery in OSV demand, this fleet is worth something more like 50% to 70% of depreciated value, or between $64 and $87 a share. For a point of reference, the shares traded for between 1 and 1.5 times depreciated value for most of its history until 2014 when oil prices hit the skids.


Let’s face it; I have no idea if oil gets back to 2014 levels, nor do I know what future demand for drilling rigs will be. However, you don’t need crazy assumptions to make money on TDW. All you need, is for a marginal recovery in the number of active drill rigs while the number of active OSVs sort of trails off—leading to more of a balance than exists today. How do we get there?

On the demand side, at the peak in 2014, there were roughly 700 operating rigs. Today, roughly 420 are operating and this number has now stabilized and even started to recover slightly from the lows. I believe that the number of operating rigs will ultimately stabilize at around 500 if oil stabilizes at current levels. This is due to offshore costs still dropping rapidly, while onshore shale pricing is seeing cost inflation, which should get both sectors to normalize costs in the same range. If anything; offshore is actually cheaper now per full cost of a barrel produced, offset by the need for substantial upfront capital which shale doesn’t need.

In the immediate term, the reason for the collapse in the OSV sector is that the number of active rigs dropped by about 40% over 2 years. However, that isn’t the whole story. The other half is that OSV operators ordered a substantial number of new vessels to match the expected increase in new rigs and the total number of global OSV is now roughly 3500. The industry is considered in balance if there’s around 2.5 OSVs per active rig after subtracting the 1000 or so that are involved in production activities that will be employed no matter what happens to the oil price as lifting costs are so low offshore. So at the peak, we were at 2500 OSV involved in drilling (3500 global OSV – 1000 production OSV). At 700 rigs, that’s 3.6 OSV per active rig, which is higher than the last decade average of 2.5-3.0 but deep water rigs tend to need more OSVs so the average per rig has been shifting higher. Unfortunately today, we’re at 6.0 OSV per rig (2,500/420) and there’s a glut.

If we return to an average of 3.0 OSV per active rig (moderate OSV surplus) at today’s level of 420 rigs, we need 1260 OSV (3.0 X 420) on drilling, plus 1000 in production activities or 2260, which means that either 1240 active OSV need to retire or drilling needs to increase or a combination. Fortunately, both are happening, which is gradually bringing equilibrium back.


To start with, 600 global OSV are over 25 years old. An additional 400 OSV are between 25 and 15 years old. With day rates often not covering operating costs, these assets are increasingly marginalized and retired due to the much higher upkeep and operating costs for older vessels. Once a vessel is stacked, it’s unlikely to return to work due to the roughly $1 million cost of a special survey to return it to work. So once these are gone, they’re gone. Simply sidelining these vessels will create an equilibrium moment and that moment is happening as I write this, especially as smaller operators go bankrupt and cannot pay for recurring surveys and upkeep. Additionally, since most offshore work is contracted by super majors and NOCs, they are demanding newer equipment in tendering, due to lower insurance costs and less perceived environmental and operational risk. It will just take some more time to wind through this older supply.

Unfortunately, roughly 300 new OSVs are still on order from when times were good. Fortunately, many of these vessels will continue to get deferred as their purchasers do not have the capital to acquire them. Even with them coming to market over the next few years, as older vessels are scrapped, it will still lead to a rough equilibrium for the market. If you include all the vessels on order, there are 1560 too many vessels today (1240 currently + 300 on order). If the industry scraps the 1000 that are older than 15 years and add in 80 more active rigs (500 total active rigs), you only have about 320 too many OSV—which isn’t a crisis—especially with other offshore activities like wind turbines taking up additional slack. Fortunately, those 300 on order are only going to trickle into the market, giving more time for equilibrium.

In summary, I do not expect any heroics here in the short term. I expect a few more quarters of awful utilization levels and roughly break-even cash results, with a gradual recovery into 2019 as older vessels are scrapped and demand increases slightly. This should eventually increase utilization and give TDW a bit of pricing power to earn sub-par returns on capital. If that happens, I believe the company is worth 50-70% of net depreciated fleet value and potentially a whole lot more if oil prices increase about $10 or $20 from here and drilling activity picks up.


Disclosure: Funds I manage are long TDW and TDW warrants

Categories: Current Investments
Positions Mentioned: TDW
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TOO Much Of A Klusterfuk...

January 1, 2018 1:27 PM

Every once in a while a stock simply goes into the “too hard pile,” which creates opportunities.

Honestly, I don’t blame investors for sometimes giving up on the analytical side. I mean, Teekay Offshore Partners (TOO – USA) really is a klusterfuk for the ages. It was meant as a drop-down Ponzi vehicle (I wrote about those 2 years ago as the whole MLP Ponzi sector was imploding Part I, Part 2, Part 3), except it failed in its Ponzi implementation and the IDRs went too far out of the money for anyone upstairs at the parent to care about it anymore—except that the parent lent globs of money to the daughter, with guarantees and all that nonsense. Then, TOO went over-budget on projects—so far over-budget that the parent winced—at the same time that the whole offshore oil services sector imploded. With many hundreds of millions in vessels that were partly built and struggling to be financed, the parent panicked. In came Brookfield (BBU-U – Canada) with $610 million of cash to purchase new equity and bail out TOO.

If that had been the end of it, TOO would be at a higher price today. Unfortunately, BBU-U stepped into a mess. On one hand, you have floating production storage and offloading (FPSO) assets not getting renewed, while new-build FPSO assets are hopelessly over budget. On the other hand, this offshore oil services vehicle still has in-chartered conventional crude tankers that are losing money.

If TOO was meant to be easy to comprehend, management has done nothing to help the process. It would help if corporate disclosures on contract terms were complete, but transparency is only slightly better than a Soviet edition of Pravda. There isn’t even any forward guidance—then again given TOO’s recent track record, I wouldn’t have any faith in such guidance anyway. Is it any wonder that investors have given up? It’s just too hard. I’ve spoken with many smart people who follow this stock. Their estimates for normalized run-rate distributable cash flow (DCF) come in anywhere between 30 and 60 cents per share. You can tow an FPSO through that range of estimate—unfortunately, their towing sector is bleeding money as well.

Basically, this is a klusterfuk for the ages. When speaking of TOO, there are very few things that I’m confident in, excluding the fact that; there will be some huge impairment charges in the year-end financials and that everyone who’s ever bought shares of this company is underwater and hates management. In my mind, that also creates a lot of opportunity.




Look, I don’t know what will happen going forward—no one does. However, a whole slug of new assets that TOO has been spending money on will come online at some point between now and Q2/2018. These assets have contracts that were struck back when oil was at $100 and day-rates were quite high. This, in theory, should dramatically increase DCF. While the offshore oil services sector has yet to experience any uptick, with WTI back at $60, it’s unlikely to get incrementally worse and may begin to improve. Meanwhile, the shuttle tanker sector, which makes up about 40% of TOO’s business, is quite strong (more in future posts), which may lead to higher day rates going forward.

In summary, I understand why investors hate this stock—they cannot build a financial model for future cash flow. Investors cannot understand future contract risks. Investors are shell shocked, under water and hopelessly diluted. It would make almost anyone want to sell at year end and take his tax loss.

At the same time, Brookfield has a record for intelligence in their investments—if nothing else, they’re going to add some much needed adult supervision on the financial side. The assets themselves are good—particularly the shuttle tankers, and after Brookfield’s investment, the liquidity situation has finally stabilized. My financial model has a range that is embarrassingly imprecise, but I believe that normalized DCF will be at least 40 cents a share exiting 2018. It likely gets better in 2019 as high interest rate debt is paid off or refinanced at more normal rates under Brookfield's imprimatur. In the end, Brookfield paid about $2 per share (including their warrants). TOO is now trading 15% higher than what Brookfield paid in a recap at the bottom of the cycle and it’s been six months since the deal was announced. Additionally, their warrants only vest if the shares trade for over $4.00 a share. I suspect that since they were the only ones willing to bail out TOO, they only agreed to these terms because they believed that $4.00 a share was pretty certain. Why wouldn’t it be, as that’s only ten times the low-end of my DCF range.  In fact, after a few years of debt pay-down, I wouldn’t be surprised if DCF was a good deal higher. In any case, I believe that I’m paying something between 4 and 6 times normalized 2019 DCF, with DCF set to increase as debt is paid down. This works out to between 2 and 4 times current cash flow (DCF being something of an abstract metric and all). Despite long-dated contracts on most assets, I cannot give you tighter ranges for any financial metric—which is a function of multiple moving pieces and abysmal disclosure. This uncertainty creates the opportunity.

adredal spirit

Anyone wanna rent me?


I suspect that going forward; everything will normalize to the “Brookfield Standard” where all disclosure is targeted at the least sophisticated Canadian pensioner seeking out a stabilized 5% dividend yield. Meanwhile, I'm coming into this at something between a 25 and 50% cash flow yield. After some debt pay-down, Brookfield will ensure that their Canadian clientele are endowed with their yields—but first, Brookfield will get a good chunk of equity appreciation on the 64% of the fully diluted shares that they own. Fortunately, I'll get to go along for the ride as a minority owner.

After the fourth quarter impairments, I think that 2018 starts looking VERY normalized, with optimistic forward guidance and lots of new disclosure, at which point institutional investors will come back in. Let’s just say, that during tax loss season, I’ve made this into a decent sized position. I know it has issues.  As they get sorted, I expect appreciation. Caveat Emptor.


Disclosure: Funds I manage are long TOO

Categories: Current Investments
Positions Mentioned: TOO
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Xmass Comes Early From OCC

December 20, 2017 10:52 AM

Two months back, I clearly made my case for why Tesla (TSLA – USA) will eventually implode. Of course, the timing of that implosion is difficult to guess at—hence my use of a bear put spread. Now, thanks to OCC, I can go out much further in time. While, I suspect that TSLA’s share price is much lower by January 2019, by January 2020, it will have blown through over $10 billion in additional operating losses, working capital needs and worthless cap-ex, and the shares are almost CERTAINLY much lower, though the migration from TSLA to TSLAQ probably takes another year or three.

In any case, I’ve been adding to my position using the Jan 2020 200/100 bear put spread and this has now become a pretty large position for me (as far as options positions go). At a ~15 debit, I can’t help it. Every time I come back from grabbing a coffee or a sandwich, I add a few more. Nothing on my screen at today’s prices seems as attractive. Even if I’m wrong, at a 15 debit, I can re-load again in 2 years and play it out again while still making huge % returns on the spread--even at my increased overall cost. I simply don’t see how a cash incinerating vanity project can sport the current market cap at a time when newer and better products are coming to the market from well-funded competitors—while TSLA will be forced to constantly issue equity to buy itself time. At some point, the market will eventually choke on all of this new equity. On a side note, I find Elon Musk’s twitter feed to be increasingly rambling and delirious. It would seem that he even sees the end being near, now that his truck is stillborn and he can no longer distract people with dreams of colonizing Mars and tunneling under Los Angeles.

In any case, the TSLA implosion is my top pick for 2018 (...and 2019) and it sure is cheap to play it through 2020 option spreads.

2017 has been quite rewarding for myself and readers. These are the positions I have written about.

Manas Airport Company currently up 50% (all right, fess up, which of you guys opened a brokerage account in Kyrgyzstan and front ran me??)

JYNT from 3.75 and currently up 35%   

SNAP puts up a few hundred % (depending on strike) as the stock dropped 30% in a month into unlock

AIM CN from 2.05 and currently up 86% along with a second post adding more at 1.98

DRYS short up 90% in 7 weeks

NZM AU up 29% including dividends in 6 months

Mexican REITs up 10% in 3 months

SBLK up 90% in 3 months

For 2018, I intend to let my AIM CN and JYNT play out. I also have a few other positions I'm following closely that I intend to write about. However, at today's prices, nothing quite attracts me like those 2020 puts.

Happy Holidays and Happy New Years everyone.

Let's hope 2018 is as successful as 2017 was,



Disclosure: Long JYNT, AIM CN, TSLA various put spreads

Categories: Current Investments
Positions Mentioned: JYNT, AIM CN, TSLA
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Most Canadian PM's Have Crappy AIM

November 10, 2017 9:55 AM

I previously wrote about Aimia here and here. Sorry in advance for all the numbers but it's necessary...

So, earnings came out Wednesday night and I quickly read through for a few key segments of interest to me (redemptions, card spend, cash build, PLM) and within a few minutes, I was celebrating with a bottle of tequila.


For a quick backstory, AIM has been in the dog-house ever since Air Canada decided to end it's agreement in 2020. At first, there was a fear of a run on the bank (didn't happen and redemptions have stabilized at a few basis points worse than card spend for a slight cash leakage), then a fear that cardholders would leave AIM for other loyalty programs (active cards and spend are both up), then a fear that they'd have to spend massively to buy AC flights at retail market prices (redemption cost is down and margins are up as the business diversifies into non-airline spend), then a fear that they'd have a liquidity crisis (cash is waaaaay up) and now I don't know what the excuse is for the stock to be the cheapest liquid stock in the galaxy, trading at .9x EV/cash flow with half the market cap in net cash and with a seperate business not taken up into the financials that is worth more than today's market cap on a stand-alone basis!!!

While there are a lot of moving pieces to the adjusted numbers due to rapidly down-sizing the cost structure and eliminating unprofitable divisions, the overall result was roughly inline EBITDA, better than expected margins, maintining guidance on cash flow of $220m (market cap is $425m based on Thursday's close) and guiding to increasing EBITDA margin along with acceleration of cost cuts (sure sounds like 2018 guidance will be up from 2017 guidance when released with Q4 results). Normally, meeting guidance and guiding up slightly may lead to a shrug, but we're at less than 2x cash flow, with 1.44 a share of net cash (shares closed 2.80 on Thursday) and .9 EV to cash flow, with cash flow now growing as revenues grow, I just don't get it.

(in $CDN Million)

Cash and Investments         669

LT Debt                             450

Net Cash                            219

Net Cash/Share                 1.44

Cash Flow Guidance           220

Cash Flow Per Share          1.44

TTM Cash Flow Per Share    1.40

Equally important, AIM's 48.9% interest in AeroMExico's loyalty program (PLM) had yet another huge quarter of member and EBITDA growth, going from USD $19m in Q2 to USD $21.2m in Q3 and the 9 mos of 2017 show USD $56.6m of EBITDA vs USD $48.1m in all of 2016. Annualizing the USD $21.2m of EBITDA gets you to USD $84.8m, slapping a 10x multiple on that (I personally think it should be much higher given the runway and growth prospects of a negative working capital business) and you're at USD $848m and AIM's 48.9% is worth USD $415m or CDN $525m at today's fx rate. That's $3.45/shr + $1.44/shr in net cash = $4.89 and you get a pile of businesses that spit out $220m a year in cash flow for free!!!

$4.89 which is roughly today's tangible book value + $600m (3 years of cash flow) + $70m of annual run-rate savings + interest savings and net interest income from accumulated cash reserves + growth of PLM over next 3 years - whatever severance and cost reduction expenses are incurred along the way; so by 2020, you're at roughly $10/shr in tangible book (mostly cash and PLM) and then you have a business that's moderately impaired due to losing Air Canada's business and maybe doing $140m of cash flow a year ($220m current run-rate - $150m hit from customers switching to AC + $70m in cost savings = $140 and I really don't see a $150m hit from customer defections. I'm just trying to be draconian here).

If you're at $140m/yr maybe it's worth 10x that cash flow and you get another $9/shr in value, so put it all together and you're at ~$19/shr in 2020?

Seems pretty damn cheap at ~$3 now, it's mostly de-risked after earnings, management seems to be doing the right things and buyers seem to finally be waking up to the above facts.

Let's just say it's a VERY large position for me.


Disclosure: Long AIM CN

Categories: Current Investments
Positions Mentioned: AIM CN
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When Will The Tesla Stock Promote Finally Fail???

October 31, 2017 8:57 AM

The history of industry leading consumer tech products has not been kind to investors who overstay their welcome. You need look no further than all the hundreds of notable recent failures, to realize that these companies almost always flame out. The list below (in no particular order) is a nice trip down memory lane of former favorites, that are now either bankrupt or shells of their former selves—often consumed by some other entity that fortunately put them out of their misery. Of course, the list below, is just from the past decade or two;

Palm, Gateway, Research In Motion, GoPro, FitBit, Heelys, Handspring, Compaq, BlueRay, Garmin, Delorean, Casio, Sega, Tamaguchi, TiVo, Betamax, AOL, Walkman (Sony), Set Top Boxes (Scientific American), Kodak, Atari, Napster, Netscape, Polaroid, etc.

Let’s just say, it’s hard at the top. You must guess each change in technology, each generation of improvement and design it for fickle consumers, while constantly outlaying capital for research and development that may never go anywhere. All the time, others are constantly trying to overtake you.

If you look at the lifecycles of these companies, they often follow a similar trajectory from ingenious creation with huge margins, to a few generations of new products with smaller margins, to massive competition as deep pocketed competitors and venture capitalists try and emulate your product, to missing a product cycle, to becoming obsolete. These consumer product companies rarely last more than a decade; often just a few years. In the end, consumer focused tech is vicious and Darwinian, with very few long-term competitive advantages.

Of course, Tesla (TSLA – USA) is something of an anomaly here. While the companies in the above list, all produced prodigious cash while they were industry leaders, Tesla seems to incinerate cash while in the lead—using repeated equity and now debt offerings to plug the hole. While other companies had a huge stash of cash to fall back on when others overtook them, Tesla’s cash balance leaves it only a few quarters from insolvency. Add in a host of questionable related party transactions, convoluted financial statements (what the hell is pro-forma revenue?), the inability to ever hit company guidance, deceptive disclosures and a business that seems to lose more money with each vehicle it produces, is it any wonder that Tesla is one of the most shorted large-cap stocks today? If I had to choose the most obvious pending bankruptcy of a large-cap stock, it is clearly Tesla.


At the same time, I have to give Elon Musk credit. He has created a company that is a rather successful cult, even if it is still a failing auto company. Every time that skeptics ask real questions, he deflects them with futuristic sci-fi pronouncements. What other automobile CEO is obsessed with Mars while his assembly line fumbles along? What other CEO talks of hyperloops, while his main product on auto-pilot will kill you if used as currently designed. This “visionary “status has deferred timelines and made all logical financial metrics meaningless to investors—which may be the point of all his hubristic talk in the first place. Extend, pretend, blatantly mislead investors, raise more capital. It’s the junior mining model—applied to auto production—on a scale that would make anyone in Vancouver blush.

Automobile production is a decidedly unsexy industry, with massive capital outlays, high fixed costs, huge cyclicality and low returns on invested capital throughout the cycle—the technical definition of an awful business. The leading players produce millions of vehicles a year, yet trade at mid-single digit cash flow multiples, due to how awful the industry is. Why is Tesla valued like a high-tech growth stock, where investors ignore accelerating operating losses; if the best-case outcome is that it becomes a cyclical auto manufacturer with depressing returns on capital? A new technology like electronic vehicles (EV) sounds cutting edge, but so was automatic transmission, air conditioning, power steering, fuel injection, etc. All the other auto makers copied these technologies and caught up within a few years—much like what is now happening in EV. So, how has Tesla become such an epic bubble, if it is competing (poorly) in an industry that is notorious for destroying capital? It is clearly the promotional genius of Elon Musk. Naturally, he won’t be the first or last “visionary” to have a comeuppance.

So, going back to my question, which is the genesis of this article; when will the Tesla stock promote finally implode?


Long-time readers of this site know that I no longer short companies. This was a hard-learned lesson from when I was short Research in Motion, about two years too soon and watched as it went up 3-fold on me—before ultimately collapsing as I had predicted. Unfortunately, I was not short much by the time of the collapse as a small position had mushroomed into something pretty large and I was forced to keep covering at accelerating losses—lest I be forced to sell good longs to fund the repeated margin requirements of the short. While my thesis had been right, my timing was wrong. As long as investors believed in Blackberry, it didn’t matter that Apple and Samsung were building competing products that were likely to be better. It didn’t matter that Chinese players were producing low-end models that were likely to be almost as good, but at a fraction of the cost. It didn’t matter that competition from cash rich competitors grabbing for market share would crush margins. No one on Wall Street cared—until the iPhone finally showed up and people realized it was better. Then the Research in Motion collapse began.

For the past year, Tesla was a bet on pending mass production of affordable EV cars. Earlier this summer, we saw the first of the Tesla Model 3s to be produced. Even the normally ebullient journalists struggled to hide their disappointment with the product. This is understandable, dozens of competing EV models are coming, starting as soon as 2018. Will they be better than the Model 3? Based on what we know thus far, they’re unlikely to be worse. As they continue to advance EV technology, auto companies with far greater resources than Tesla, will eventually surpass it—much like with Blackberry. Then again, Research in Motion was coining money while at the top of its game—Tesla consumes money, while racking up debt. This won’t be a game of margins and profits—all the incumbents need to do is show that they can break even producing a comparable vehicle. At that point, the funding for Tesla will subside and its debt will bury it.

I was too early with RIMM and I don’t want to be too early with TSLA. So, I’ve been patient. I’ve been waiting for the competitors to show up. They’re now coming. The Tesla Model 3 is a dud—competing products will begin showing up in 2018 and they look much better. However, I’m not going to short TSLA. I’m going to use long-dated puts—much like I’ve played all subsequent dead-man-walking companies with an uncertain mortality date.


The problem with puts, is that long-dated puts are expensive. Fortunately, there’s a way to offset this cost, the bear put spread. This is the purchase of a put and the sale of a put at a lower price. By doing this, your gains are capped by the price of the put you’ve sold, but since your cost is much lower, you get to play with many more of them. Besides, you don’t need Tesla at zero to win with these, you just need Tesla’s share price to drop materially from here. If my timing is wrong, my losses are small and I can reload when they expire. Besides, I don’t expect TSLA to be a zero immediately. It is much more likely to limp towards zero, as opposed to imploding towards zero—making the bear put spread even more attractive than straight puts. Let’s just say that for the past few months, I’ve been adding to this position. The net cost of the spread is cheap and the timing now seems increasingly pregnant.

When will Tesla’s stock promote finally implode? When people realize that it’s a cash incinerating vanity project for Elon Musk, at a time when new, better products are coming to the market. That point is coming soon. Very soon.


Disclosure: Long 2019 TSLA Bear Put Spread (250/175)

Categories: Current Investments
Positions Mentioned: none
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