market folly

Today we're posting up notes from day 1 of the Value Investing Congress.  Below is the presentation from David Nierenberg of D3 Family Funds on Superior Energy Services (SPN).

About D3 Family Funds: Started 17 years ago (David's dirty dogs is how they got the D3 name).  "Busted growth companies."  Take ~10% stake with firms and work with management.  Average investment is ~30MM.  Average market cap is $300mm to $400mm. The following notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Superior Energy Services (SPN)

•    Undervalued growth opportunity
•    Diversified mid cap oil field services company ($3.9Bn). Invested at $100MM in late 90s
•    Natural Gas and tectonic shift in US energy
•    Opportunity created by the market lumping this company in with other poor run oil field services.
•    Buying at “half normal multiple” Expect 3x on investment.
•    New CEO (2 years)
•    65% NA land17% gulf of Mexico, Intl 19%
•    Broad product mix
•    1.6x net debt to EBITDA at 3/31/12 – expect 12/31/12 net debt to EBITDA
•    Current PE of 7.3x 2013 PE of 6.3x
•    Former decade aver forward PE of 13x
•    “average market cap equivalent to size”
•    In and out 4 times this is 5th time in.
•    Price of natural gas is variable across globe. Creates Opportunity (Fracking had huge impact)
•    Growth drivers – Other NA services, deep water, Intl (Brazil Australia etc.), and water management.
•    BP Macondo incident shut down deep water drilling – permit activity was 0.  But permitting has spiked recently.
•    D3 expect SPN gulf’s revenues to shortly exceed pre-Macondo.
•    Near term catalysts: hot summer – reduced drilling activity
•    Long term  drivers: Displacement of coal & nuclear in electricity generation, growing demand for fertilizer, fleet usage, and LNG export opportunities ($15 in some countries)
•    CEO Dave Dunlop is focused on capital allocation – making non-core asset sales and investing in the water management applications. (CEO claim ROIC could be 4x higher on bought businesses than sold businesses)
•    SPN’s normative earnings per share is $5.25 per share.


Question & Answer Session:

On CPX purchase: Just about doubled share count. Dave Dunlop realized the fracking techniques could also be applied to domestic and international oil bases.  People thought of the company as gas-levered which created the selloff but not wholly accurate given the oil rig count.

Long term margins pressure pumping? How to think about this?  Coil tubing was large business before recent growth of fracking.  Queue of projects for coil tubing capacity - no downturn in coil tubing as we have seen in pressure pumping.

Natural gas storage filled up (October) before weather starts to get cold.  If too early, price of gas will go down.  D3 still likes LT prospect.  Don't build position right away.


Embedded below is David Nierenberg's slideshow presentation:





Be sure to click here for the other presentations from the Value Investing Congress.