As I mentioned in a previous post, I went away on vacation for a few days with my family earlier this week. It's absolutely amazing how many great articles about special situations investing were published during that short period of time. I'm just catching up on all of the news, so I figured that I'd share the best of them with everyone. Enjoy! [more]
Well last night a stock that I have been talking about here in my blog for a while, SemGroup, finally made its much anticipated announcement (by me at least) about what it plans to do with its corporate structure. Let's just say that the company's move isn't exactly what I was hoping for, but it isn't terrible either. SemGroup stated that it plans to spin off its best assets (SemCrude) into an MLP instead of converting the entire company like I had hoped it would. A spin-off of these assets isn't the worst thing in the world because it will be only a partial spin, which theoretically will demonstrate that the market is currently undervaluing the division and the ownership stake that SEMG will retain. Plus it will be more tax efficient for SEMG, but it's annoying that we won't be getting that juicy 9% yield that would have likely resulted from SEMG converting its entire company into an MLP.
I guess that this is what the company meant when it talked about investigating a conversion to "drop-down MLP" structure in a recent presentation. I would much prefer that it spin-off the MLP assets directly to shareholders than through an IPO. The cynical part that's left in me (remember that I'm trying to be more positive :) ) just knows that the underwriters for the new IPO will somehow screw up the issuance of shares and gank SEMG out of proceeds that it deserves (see LNKD for an example of this). Plus, what is SEMG going to do with the money that it gets from the spin, other than pay down debt? Do we trust the company's new management to invest the money wisely. I'm not sure that I do. I'd much rather have the MLP shares myself than trust SEMG management with the potentially underpriced proceeds from the IPO.
I'll have to see if the shares look attractive and if I have the ability to actually get in on the IPO offering. Schwab isn't great with that.
At least the company was able to refinance its debt a couple of weeks ago at much more attractive terms like we thought it would be able to. It said that it will be able to reduce its interest expense by 50%. That should help its earnings going forward. Plus, a partial spin of some assers via an IPO is better than no action at all. SEMG is making some solid moves and I don't think that I am going to sell my position at this point, but I would have much rather seen them convert the entire company to an MLP or spin SenCrude to shareholders. [more]
Here's an interesting new stock, ATP Oil & Gas Series B Convertible Preferred stock. I know that this is a favorite company of many here at The Motley Fool so I thought that it was worth mentioning.
This new issue trades OTC under the symbol ATPGP.PK. At its $100 face value, it pays an 8% dividend and it is convertible to ATP common stock (ATPG) at a ratio of 4.5045 shares per B share.
The B shares are already down to $90.50, making the effective dividend payment equal to around 8.8% and the ATPG break even conversion price $20.09. This compares to ATPG's current share price of $14.82.
There was a detailed article about this new stock over on Seeking Alpha today for anyone who's interested:
ATP Preferred Convertible: For the More Risk Averse Investor, Worth a Serious Look
This sensational headline from Yahoo! Finance got me thinking about where the price of natural gas is headed and whether it will indeed eventually be used more in the future. [more]
Hi everyone. I was dying to write about this strange special situation last week, but I had to wait two days to abide by TMF's trading guidelines. I found a new "Merger Security" that is being issued by Energy Transfer Equity (ETE) to finance its recently announced purchase of Southern Union Company (SUG). This one isn't going to turn into a ten-bagger like some of the awesome Rule Breaker selections, but it does look like an excellent low risk, solid return place to park one cash in today's low interest rate environment. Here's my rough notes on the situation for anyone who's interested. [more]
Let me begin by saying that I absolutely hate the shipping sector. For some reason, the shipping industry seems to be nothing more than the capital-destroying airline industry, just with dividends. I'm sure that one can make a lot of money timing a purchase in a shipper right, but eventually the companies in the sector never seem to be able to control themselves and they build to overcapacity. [more]
I came across an interesting stock idea in this week's issue of Barron's, which contained its always interesting Investment Roundtable. This one was brought to us by Meryl Witmer, who by far had the most SPOPY stock ideas in the last Roundtable issue. Her idea this time was to go long Macquarie Infrastructure [MIC]. I actually wrote something on this trade several months ago. Here it is for anyone who's interested, followed by a portion of the write-up from this weeb's Barron's:
"A new type of special situation, Invest in companies before they significantly increase their dividend
I am constantly reading anything that I can about investing in "special situations." I recently came across a great quoted on one variety of special situation that comes from many people's favorite value investor, Warren Buffett:
The buying opportunity that Warren exploits is this: after the company announces that it is going to convert into either a royalty trust or a master limited partnership, which means that its future dividend payout will increase after the conversion, the stock market won't recognize the increase until the conversion is completed and the dividend is actually increased and paid out. This creates a short period of time, between the announced reorganization and the actual date of the conversion, in which the company's shares are undervalued in relation to their future increase in value, due to the increase in the dividend payout that occurs after the conversion.
Why does this window of market inefficiency exist? These companies, because of their small market cap, are usually not well followed by Wall Street or the general public. Also, investors have a preference for valuing an interest-bearing security on the basis of what it is paying today, not what it might be paying tomorrow.
The popular members-only investment idea website, SumZero, recently published a write-up on a company that fits this description in the "free" section of its site for the unwashed masses of non-members like myself.
MIC ($21/shr) >> Big Upside, Limited Downside, and a Near-term Catalyst
The company that was discussed is called Macquarie Infrastructure Company (MIC). Macquarie is an infrastructure company that ran into trouble at the height of the Great Recession when one of its subsidiaries was forced to file for bankruptcy and it had to eliminate its dividend. To compare it to a company that Fooldom is familiar with, think of MIC as a mini Brookfield Infrastructure Partners (BIP).
Macquarie owns things like bulk liquid storage tanks, a Hawaiian natural gas utility, a company that services private jets, and a water utility.
To make a long story short, you can read the great write-up for the details, the author not only believes that MIC is undervalued on a sum-of-the-parts basis but that the company's stock price will surge once it reinstates its dividend, which MIC has mentioned will happen some time in early 2011. They peg MIC's fair value at around $36/share, approximately 50% higher than its price today and that the catalysts in place will enable the company to reach that target level within the next six months.
Like many of these ideas, the time to buy this stock was several months ago, it has rallied 75% since late last year, but I'll take a 50% gain on a company that may begin to pay a substantial dividend in the near future. I have not bought MIC in real-life, but I did add it to my CAPS portfolio at $24.05/share.
Is anyone out there familiar with this company? I'd love to hear your thoughts."
Here's what Ms. Witmer had to say about the company:
We have been buying Macquarie Infrastructure [MIC], an infrastructure fund with ownership interests in four businesses: International-Matex Tank Terminals, Atlantic Aviation, the Gas Company and District Energy. International-Matex, or IMTT, is the most exceptional. It is one of the largest bulk-liquid storage-terminal businesses in the U.S. Macquarie owns half.
What makes it so exceptional?
The company can store more than 43 million barrels. They store petroleum, vegetable oil and commodity and specialty chemicals. The main storage facilities are in Bayonne, N.J., and St. Rose, La. Storage contracts last from three to five years, so the business isn't particularly sensitive to the economy. The Bayonne facility is strategically placed on the Kill Van Kull, a tidal strait near New York Harbor. The facility is able to load and unload ships quickly due to the depth of the water in front of its docks. Competitors' docks can't handle large ships; products have to be transferred to barges before docking. That increases costs. IMTT's advantage will increase because the Port Authority of New York and New Jersey is dredging the Kill Van Kull even deeper so New York Harbor can be accessed by larger ships being built to take advantage of the widening of the Panama Canal.
We estimate IMTT will contribute about $1.50 of after-tax free cash flow in 2012 to Macquarie. The division deserves to trade at about 15 times free cash, which makes it worth 22 a share. Macquarie is trading for 24.75.
So you're getting the rest of the company for less than $3?
Correct. The next-largest asset, Atlantic Aviation, operates gas stations and terminals for private planes. It suffered during the financial crisis, but has been cutting costs and the business is improving. Last year it contributed about $1.20 per share of after-tax free cash flow, and could earn about $2 a share if the business returns to earlier levels. We value Atlantic at about $10 to $15 a share.
The Gas Company operates the only private gas utility in Hawaii. District Energy operates the largest district cooling system in the U.S. Together the businesses earn 55 cents a share. Along with some tax assets, they're worth about $7 a share.
.How will Macquarie unlock this value?
The game plan is to pay out dividends. The company pays 80 cents a share, giving it a 3.2% yield. In a few years they could pay as much as $3 a share, if not more. There is no debt at the holding company. Executive compensation is tied to the stock's outperformance relative to a particular benchmark. For management to receive extra performance fees, the stock needs to reach the mid-30s. Macquarie is worth 40 to 45 a share.
This is exactly the type of situation that I am in love with right now. I have been trying to add the stocks of companies that I believe will substantially increase their dividends, and likely as a result in turn their share prices, in the future. Along these lines, I currently own UAN, SEMG, ROIC, and PEB and I am always actively looking for more. I may see if the Barron's pop fades in a few days and pick up a little MIC if I like what I find when I dig into it a little more.
A post-bankruptcy situation that I have mentioned a couple of times here in the past, Semgroup Corp. (SEMG), got hammered after it announced its recent quarterly results a couple of weeks ago. The company was essentially break even for the quarter, but it did not change its outlook for the year.
The reason for the weaker than expected quarterly results include worse margins in the company's propane and overseas segments.
Semgroup officials tried to put a positive spin on things during the company's conference call stating that things should get better in the second half of the year after the company increases its Cushing oil storage capacity (350,000 barrels’ worth right now and another 1.95 million barrels in 2012 at a time when there's not enough storage), expands its pipeline capacity, and renegotiates its credit facility, reducing its interest expense.
Here's a sample of a piece that I have been working on about the company:
"Over the years I have developed into a huge fan of special situation investing, a circle of investing where one looks for corporate events that can unlock hidden value in stocks. Perhaps the most profitable subsegment of special situations is companies that are emerging from bankruptcy.
A 1996 study by a team of researchers that included one of the world’s foremost experts on corporate bankruptcy, Edward Altman, found that the stocks of companies emerging from bankruptcy significantly outperformed the major market indices. From 1980 through 1993 the re-listed stocks of formerly bankrupt companies outperformed the major market indices by over 24.6% in the first two hundred days after they became publicly traded.
Check out these returns
Some of the most amazing investment returns that I have ever seen have come from companies that have emerged from bankruptcy with relatively clean balance sheets and depressed stock prices.
Take the specialty chemical producer W. R. Grace (NYSE: GRA) for example. The company went bankrupt as a result of asbestos-related claims earlier this decade. After its emergence, its stock traded as low as $1.50/share in 2001. Today the stock is just under $44/share, nearly a 30-bagger.
The list of astonishing returns from post-bankruptcy situations goes on and on...Walter Industries (NYSE: WLT) has been over a ten-bagger since it emerged from bankruptcy in the mid-90s.
Perhaps the ultimate example is that of Toys R Us, the business unit that emerged from the Interstate Department Stores bankruptcy. It was literally a hundred-bagger between the time that it re-listed in 1978 and when it hit its all-time high in 1993.
Look for over-leveraged companies with solid businesses
It is important to be picky when investing in post-bankruptcy situations, because not all of these stocks will be winners. Some companies just go bankrupt because they are bad businesses. The companies that seem to perform the best are the ones that have solid core businesses models that collapsed because they were overleveraged or for some other reason that isn’t related to their main operations.
A perfect example of this type of situation is Semgroup Corporation (NYSE: SEMG). The company owns a network of pipelines, terminals, and storage tanks that it uses to store and transport oil, natural gas, and refined products….a solid business. The problem with Semgroup is that instead of merely hedging its exposure to commodities, it was speculating and making massive bets on the direction of oil. During oil’s historic run up to $147/barrel in the summer of 1998, Semgroup’s then CEO Thomas Kivisto was short the equivalent of 20% of the country’s oil inventory…Oops. Needless to say, this move lead to a $2.4 billion loss for Semgroup and its eventual filing for bankruptcy.
Under new management, Semgroup emerged from bankruptcy in September 2009 and went public in November 2010. It reported a loss last quarter, but after backing out non-cash depreciation and amortization charges the company is doing fairly well on a cash flow basis. Semgroup expects its EBITDA for 2011 to be between $120 and $140 million.
So where’s the catalyst?
While Semgroup does not jump off the page as an obviously cheap company by many metrics, there is a catalyst that could cause its stock price to soar in the near future. The company is considering converting to a Master Limited Partnership (MLP), like most of the publicly traded pipeline operators such as Boardwalk Pipeline Partners (NYSE: BWP).
When a company announces that it is going to convert into an MLP, like Semgroup has openly mentioned is a possibility some time between now and June 30th, it means that it will significantly increase its cash payments to investors in the future. I said cash payments instead of dividends because in MLP-speak these companies pay “distributions” to “unitholders” not dividends to shareholders like conventional companies do.
The majority of investors won’t initially recognize Semgroup as a dividend-paying stock, because the company is not yet widely followed by analysts. Furthermore, its attractive distributions won’t be mentioned in any of its stock listings until after it has actually made its first payment. This phenomenon may create a window where investors can invest in the company when it is undervalued compared to its dividend yield and then ride along as the public becomes aware of the stock’s attractive distribution and bids its shares up."
I still think that SEMG represents an interesting opportunity for investors. As an added bonus, anyone who buys in today can get a better price than I did with my initial small position ;).
Today SEMG's share price is approaching the price that it was at when it re-listed on a major index last year. I just came across a good article on SemGroup that appeared over at The Complete Growth Investor:
A Semi-Sweet Post-Bankruptcy Morsel
The article contains a lot of the same information that I have mentioned in my previous posts on the company, but it goes one step further and talks about a potential valuation for the company, which is definitely useful:
At $100 million, if SemGroup were an MLP, it would need to distribute about $2.40 per share on the 42 million shares outstanding. That’s a 9.6% yield on today’s $25/share price. Once this gets known, Mr. Market will probably choose something closer to 7.5%, which implies $32/share. But I’ve used low estimates and ignored the growth prospects, so the potential for more is good.
Furthermore, the downside protection is strong, as there are many MLPs with low cost capital that would be happy to buy this cash flow below their 6% to 7% cost of capital, so we should be fairly well covered on the downside, as well.