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2010 Q1 Results

March 31, 2010 Leave a comment

I had said 2010 would be a strong year for the holdings. Q1 was a great start for the year. In Q1, the holdings were up 24.5%. Comparatively S&P500 was up 4.87%, NASDAQ was up 5.6%, and DOW was up 4.11%.

The interesting thing about the Q1 results is most of our holdings still selling at a big discount. Even with the run-up the intrinsic value is much more than the current market price. I run a concentrated fund with 6 holdings making up  85% of the fund value. Running a concentrated fund will give results that can substantially deviate from the major indexes. In the short run, I can substantially underperform compared to the indexes. Although in the long run, I believe the concentrated approach will beat the indexes by a large margin.

The holdings that had a major impact on the Q1 performance were: Ternium (up 15%), Harvest Natural Resources (up 42%), General Growth Properties (up 39%), RHIE (down 43%), and Palladon Ventures (down 12%).

There were 2 new additions to the holdings in Q1:
– ATP Gas & Oil: The company’s Telemark project is a game changer for the company. The market is acting as if the Telemark project is not going to happen, even though the company has started production. 2010 will be a big year for the company.
– Heckmann Corp: I believe the company’s water pipeline business is going to be a huge cash flow generator. It will take 3-5 years but I think this company is going to be worth substantially more than current prices.

There were also 2 positions that I sold out of:
– Palladon Ventures: I entered the holding as a speculative buy. I expected the new management team to delivery on fixing the debt issues and entering into an agreement to sell its iron ore. The company could not resolve the debt issues and now 75% of the company is owned by the debt holder. In the end, this was a high risk/reward situation that didn’t work out as I expected.
– RHI Entertainment: This was a disappointment. I like the management team but in the end the business cycle killed it. As Buffett said “when management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that stays intact.” In this case, RHI’s business was impacted, much more than I expected, by the 2008-2009 crisis. In a bad business cycle with a huge amount of debt, only a few businesses can survive.

Looking Ahead

I expect 2010 to be a very strong year for the holdings. I think the holdings are still selling at a huge discount to intrinsic value. Many of the holdings, ATPG, HNR, TX, KVHI, and PRXI, have shown that their business is growing. In some cases, ATPG and HNR, there are major game changer events that have occurred in the last few weeks. For the others, their business fundamentals keep improving and I believe once strong results that showing Mr. Market will realize the true value.

Even in today’s market, I still see some very interesting buying opportunities. I can still find companies selling at discount to cash on hand. Also there are companies where the business has run into some problems which management should be able to fix, the shares currently are trading with expectation of the worst outcome. I think the market still has many opportunities where investors can lock in gains over the next 3-5 where the returns will beat the historical average return on equities.

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Categories: Updates

Harvest Natural: Hits Oil

March 30, 2010 2 comments

Yesterday was ATP Oil & Gas and today it is Harvest Natural Resources turn.

Harvest Natural Resources today announced further results from the flow testing of the Bar F 1-20-3-2 well in Duchesne County, Utah.  Harvest had provided initial preliminary flow test results during the Company’s earnings release conference call on March 16, 2010.

Since the last update, Harvest has completed drilling out plugs installed to isolate the six hydraulically fractured oil intervals, and commenced a flow test of the commingled six intervals between 8,200 and 9,600 feet in the Lower Green River and Upper Wasatch formations.  The testing program yielded first oil to surface on March 24, 2010, and the well has produced over 4,000 barrels of approximately 42 degree API oil over the first five days of production through March 29, 2010.  These production volumes have been achieved as the well is cleaning up, producing load water pumped into the well during the fracing process.  The testing is at a current stable production rate of approximately 900 barrels of oil per day and 650 mcf of natural gas per day with a flowing surface pressure of approximately 1,400 psi.  The testing program is expected to continue for another one to two weeks.

Harvest President and CEO James Edmiston said, “We believe that the results achieved in the Bar F testing program to date indicate a high likelihood that we have made a commercial oil discovery in the Bar F well, and we are excited about the potential growth opportunity that this brings to Harvest in the Uintah Basin.  We expect to put the Bar F on production as soon as necessary surface facilities and gas flowline construction work can be completed.  We believe that these results indicate that a significant portion of Harvest’s 65,000 acres (39,000 acres net to Harvest) land position in the Basin is prospective for appraisal and potentially development drilling targeting the intervals tested in the Bar F well.  We are moving forward with planning and preparations for a flexible multi-well follow-up drilling program that we hope to commence in the second half of 2010.”

HNR is setting up for a huge 2010. The company will now have production outside of Venezuela that should offset all its operating expenses and could be cash flow positive. The market had discounted the shares due to risk related to Venezuela. Today’s news reduces the risks and creates a new stream of cash flow for the company.

HNR still have many other projects outside of Venezuela that it is testing. In three years, when we look back at 2010 we will realize that this was a game changer event for the company. I believe in the next 2-3 yrs the company’s shares will be worth substantially more than what it is trading at today.

Categories: Updates

ATP Oil: Starting a new chapter

March 29, 2010 2 comments

One of the key attributes of value investing is finding good management. A good management team knows how to execute and they tend to execute even in the worst of business climates.

Today ATP Oil & Gas announced that they have executed successfully on the Telemark Hub. The company has started production on its first well from the Telemark Hub.

ATP Oil & Gas Corporation (NASDAQ: ATPG) today announced first oil production from its deepwater Atwater Valley (“AT 63”) #4 well at the Telemark Hub in approximately 4000 feet of water. ATP initiated production on Sunday after completing a sequence of inspections, certifications, permits and approvals of facilities, structures, safety systems and field development plan systems from required government regulatory bodies including the Minerals Management Service (MMS), Environmental Protection Agency (EPA) and U.S. Coast Guard as well as classification of the unit by the American Bureau of Shipping (FOI Spar). ATP owns a 100% working interest and is the operator of the Telemark Hub

“We have delivered on our goals and objectives by bringing the deepwater hub to first production utilizing our own floating drilling and production infrastructure, the ATP Titan,” said T. Paul Bulmahn, ATP’s Chairman and CEO. “Although ATP slowed development and capital expenditures during 2008-2009, this billion dollar deepwater project is now on production within 46 months from acquisition of the first Telemark Hub property. That is only 3.8 years from acquisition by ATP to first production in 4,000 feet of water. Offshore data shows that the average for deepwater developments utilizing tension leg platforms is 94.3 months or just under eight years and spar installations averaged 55.6 months or just under five years from discovery to first production. Through difficult financial times, ATP constructed, installed and is producing from a major piece of deepwater infrastructure within a very short development period.”

Management took on all the nay-sayers and executed on its plan in the last 4 yrs. The company had, and still has, piled on substantial debt. The market believed the company would not be able to get the Telemark project completed and the debt load would kill the company. Management carefully guided the company through the tough 2008-2009 cycle. The company now has an extremely strong future ahead. The Telemark project will completely change the company’s future prospects. Also, the company has a few more major project in the pipeline. With a management team that can delivery, shareholders can expect great things from the company’s strong pipeline.

Categories: Updates

Weekend Reading

March 26, 2010 Leave a comment

The Quiet Coup: An interesting take on how the big financial firms have ‘captured’ our government.

Michael Burry’s Online Comments: Michael Burry’s online comment before he started Scion Capital are still available for online viewing

Wesco Annual Letter: A must read for any value investor.

Categories: Uncategorized

Ternium: Steel demand to return

March 25, 2010 Leave a comment

Steel demand dropped to historic low levels in 2008-2009. Companies cut steel orders and decided to run through their inventory and raw materials before placing additional orders for materials and products. This created a big drop in the demand for steel.

Well we are now in 2010 and things are looking good for steel companies. A large part of this is because most companies have run through their inventories and now can’t go any lower. Also, the consumer demand has stabilized or increased. The steel companies are recovering and some are looking to expand.

Demand for steel around the world will rise 11 percent in 2010 as the global economy recovers, World Steel Association chairman Paolo Rocca said on Thursday.

Speaking at a Mexican steel event, Rocca said higher demand in North America would anchor the global increase. Rocca is also CEO of Argentine conglomerate Techint, which controls steel producer Tenaris.

Global steel makers have been bringing back capacity idled during the recession in anticipation that demand for steel will pick up this year.

In Mexico, steel companies may invest up to $10 billion over the next five years, which could increase capacity by up to 10 million tonnes, an industry official said.

Raul said the investments would largely come from major companies like AHMSA, Ternium, ArcelorMittal and Brazil’s Gerdau.

Now I don’t think we are back in 2006 or 2007 type of demand. Although 2010 will be better than the past 2 years and the irrational fear of the past two years is fading. The companies that are looking to grow in 2010 are actually positioning themselves for 2012 and thereafter.

Mexico now has capacity to produce around 22 million tonnes a year but in 2009 produced only 14 million tonnes as the country suffered a deep recession.

Gutierrez said the recovering economy would boost output this year to 15.8 million tonnes.

So even after the 2010 growth we are only looking at output of 16M tonnes. With capacity of 22M tonnes, you would question expansion of capacity. I think this is a good question but remember production of steel plants take a while. Also, you don’t want to start production or expansion of plants when you are already in the strong growth business cycle. You need to plan ahead and get yourself ready for the coming growth.

I think Ternium is very well positioned for 2011 and afterwards. The company has compensation coming in from the sale of subsidiary in Venezuela. The company can easily pay off substantial amount of its existing debt in 2010. The company’s current operations are also make strong cash flow. So management is putting the cash flow to work by paying off debt and expanding in existing markets. I think the company has great future ahead.

Categories: Updates

GGP: Recent activity

March 22, 2010 2 comments

I haven’t blogged about GGP in a while. There have two major updates since the Pershing/Fairholme deal to offer raise capital.

The first is from Simon. Simon is to increase its initial $9 offer to GGP. Representative of Simon meet with GGP executives last week. Also Simon is likely to include Blackstone and two sovereign-wealth funds in the new offer.

Simon is working to come up with a better offer in partnership with private-equity giant Blackstone Group =and two sovereign-wealth funds it hasn’t identified. Simon also is lining up a $6 billion credit line led by J.P. Morgan Chase & Co. to help finance the bid, according to Simon’s letter.

Citigroup Inc. and Morgan Stanley are part of the bank group that J.P. Morgan is leading, according to a person familiar with the matter. It remained unclear exactly how the $6 billion in financing would play into Simon’s new bid.

“There are a number of structural approaches that are under consideration,” said a person familiar with the matter, adding, “There is no shortage of capital to support the deal.”

I have said plenty of times that it would be foolish to count Simon out of the GGP bidding. The GGP assets are top quality and a chance to buy them doesn’t come around often. Simon will have no problem raising the money to buy GGP. The ability to line up JP Morgan, Blackstone, and sovereign wealth funds shows the available funding.

The concern with Simon has been related to FTC clearance on the merger. This is a valid concern. A Simon & GGP marriage would place Simon in an extremely strong competitive position. Simon end up as the number one mall operator with a wide margin. Although I think there are many structural ways to work around the FTC issue. I think Simon can figure out a ways to get the deal structured.

The second piece of news came out tonight. Elliott Management group and Paulson & Co, is in talks with GGP regarding joining the BAM structured deal.

Elliott Management Corp, a major shareholder and creditor of General Growth Properties, is in talks to join Brookfield Asset Management in its plan for the mall owner to exit bankruptcy as an independent company, a source familiar with the discussion said.

The source did not know how much Elliott, a New York-based hedge fund, would contribute to the deal. Elliott owns a significant portion of the 2006 $2.6 billion term and revolving credit facility used by General Growth, the No. 2 U.S. mall owner, which filed for bankruptcy protection in April 2009.

Also, Bloomberg reported that hedge fund Paulson Investment Co is also in talks to join the group.

It is not clear if Paulson Co is working with Elliott Management to come up with a joint offer or if they are working independently. It is also not clear how their involvement will impact the Pershing/Fairholme offer to raise the public capital for the BAM deal.

I would not be surprised if the Elliott Management and Paulson Co talks lead to a better offer for shareholders under the BAM deal. In the BAM/GGP plan to split up GGP into two companies, Pershing & Fairholme made an offer to raise capital needed for the BAM/GGP plan. It is possible that Elliott Management and Paulson Co are working on coming up with a better offer than what see the Pershing/Fairholme offer is. I think in a few days we will get more details on the talk these firms are having.

Shareholders will not have to wait too long to see more details on the Simon /  Elliott Management / Paulson & Co offers. The next 30-60 days will be extremely exciting and rewarding for GGP shareholders. I still believe that the shareholders can gain  quite a bit by GGP emerging as a standalone company. We will know soon what the outcome will be.

Categories: Updates

Weekend reading

March 19, 2010 Leave a comment

Michael Burry (Scion Capital) for Bershire CIO: He is definitely one of the best fund managers out there.

How 3 small companies stood up to larger competition: Great business lessons for managers of small companies

Newspaper economics: Interesting stats about the newspaper industry

India’s Media industry: A detailed paper from KPMG on one of the fastest growing industry in the world.

Categories: Uncategorized