Usually I'm writing about famous gurus and their investments, but today I wanted to highlight three very interesting investment ideas I pulled from Cale Smith of Islamadora Investment Management's annual presentation.
You can watch the whole hour-long presentation below. It primarily deals with energy and oil prices as well as three stocks in their portfolio. The sheet below shows why they are looking very hard at energy stocks:
This presentation is incredibly interesting because the energy space is something I'm looking at pretty hard these days. Unfortunately, I'm not a veteran investor in the space and don't have a lot of knowledge about companies to quickly zero in on. To get a number of ideas from a fund that is clearly knowledgeable in this space helps considerably.
Smith mentioned these three ideas:
The main selling points they identify are:
- Less than 4x expected cash flow for 2018. Paying nothing for 5,000 acres in the Permian base. If you bought the company and sold off all the assets you would get back 2x what you'd pay for it.
- Forced selling by a private equity fund that closed end of last year.
- Shares trading around $4 when they are worth $24.
From the most recent Contango presentation I pulled the slide below, illustrating a basic outline of the value present here:
The company owns and leases offshore drilling rigs. The primary reasons they are interested in Ensco are:
- Offshore drilling got decimated. It is the best-positioned company in the industry.
- Trading at 20% of book value.
- Like a perfectly good house that's worth a million dollars for sale for $200,000.
- Using book value as a proxy it is worth $30 a share and trades around $6 per share.
Most offshore drillers trade at a discount to book value but if you believe offshore will ever come back, book value is a reasonable proxy for replacement value. It should be approached at some point.
3. Energy XXI (EGC, Financial)
EGC has a market cap of around $260 million. The main selling points are:
1. Its PV-10 value is $135 million. PV-10 means "the present value of estimated future oil and gas revenues, net of estimated direct expenses, discounted at an annual discount rate of 10%."
2. Reserves are valued based on stale oil prices. In the next report its reserves could be worth $1.2 billion, assuming WTI of $58. That's because the PV-10 calculation would be based on higher oil prices.
3. The share price at $6 now could be worth $30.
4. A new deal has been proposed that is interesting to consider. The drilling results were good and increased confidence in assets. The deal values the company at around $20 per share by an informed investor. The deal de-risks the company but trades off some of the upside. Overall, Cale Smith likes the deal.
5. Activists could wake up due to the deal structure.
This slide from the company's most recent presentation shows how operating cash flow is very much levered to the price of oil. A high oil price can result in an enormous windfall. Merely staying around current oil prices should generate operating cash flow of roughly 1x its market cap.
Disclosure: Long EGC.
