Penn West Petroleum (PWE) has 50% upside

Penn West Petroleum Ltd. (PWE) explores for, develops, and produces oil and natural gas properties in western Canada. The company had been mismanaged and changed it’s CEO in 2013. Dave Roberts, the new CEO, has been trying to cut cost and sell non-core assets in order to deleverage the balance sheet. 

However with the crash in oil prices, investors have not been rewarded. The company has taken a huge hit the last couple of years. It is trading at $1.36 as of today. It had been trading over $20 a couple of years back when oil was trading at much higher prices.

Recently, there was talk that PWE would breach its financial convents at the end of quarter 2. It has to be maintain a total debt/EBITDA ratio of 5. It was at 4.4 at the end of quarter 1. The stock went below $1 and hit a 52 week low of $.45. 

To make sure this would not happen, the company sold some non core assets and sold one of it’s key core asset. It sold its Viking light oil assets in Saskatchewan to Teine Energy for C$975M ($763M). It was a much higher price that analysts had expected. With the sale, it removed any chance of a breach for 2016 and the stock shot up to its current price of $1.36. However, it still seems the company is undervalued based on the assets that are left. Let’s take a look:

Currently the company has a market capitalization of C$870 million. It has a net debt of C$600 million after the asset sale. Here are the assets still left:

  • It’s crown jewel – Cardium area. The Cardium area produces 50% more boe/d than the Saskatchewan assets and has a lower operating cost and higher netback. If  Saskatchewan assets sold for C$975M – Caridum is worth more and close to the full enterprise value of C$1470M – if not more. Cardium still has plenty of prospective areas where PWE can do additional development.
  • Non core assets worth C$100 million – C$200 million that company plans to sell. After the sale, its asset retirement obligation will be reduced to C$100 million.
  • Alberta Viking area – which currently only produces 1,000boe/d but according to PWE has the potential to be like the assets it just sold over the next couple of years.
  • “The Peace River area is focused on our Peace River Oil Partnership (PROP) with our joint venture partner. We expect this area to remain a stable production and cash generation vehicle for the Company, as approximately 90% of our operating and capital costs are paid for by our partner. Our first quarter net production at Peace River was approximately 5,000 boe/d, 98% weighted to crude oil, with operating costs of $1/boe(3).”
  • The company has also has some oil production hedged into 2017.

I am not an oil expert and do not know these areas and their worth, but it is safe to assume that the value of all these pieces exceed the enterprise value of C$1470 million. It is more like they exceed C$2B easily at the current oil prices. The price of $PWE should approach $2/share as investors start to realize this.

Disclosure: I am long PWE

 

Buy PCC before merger

Last year I wrote about the merger of PMC Commercial Trust (PCC) with CIM Urban REIT. After some shareholder revolt, It looks like the merger will go through. To reiterate, here are the details of the merger:

  • Existing shareholders will receive a special $5.50 dividend.
  • The merged company will have a implied valuation of $2.439 billion (based on CIM Urban equity) and pay a dividend of 3.5 after the merger.
  • PCC shares should trade at $10.50 (pre-dividend of $5.50) if the merged company trades at the implied valuation.

Currently, PCC trades at $9.50. 

Because of the shareholder revolt, CIM three founders have “agreed to purchase up to 2.75 million shares of PMC Commercial at a market price of up to $5.00 per share under a 10b5-1 trading plan. The plan generally will expire on the date that 2.75 million common shares of PMC Commercial have been purchased or August 10, 2014, whichever is earlier.” Read more about the agreement here.

The agreement should provide a price support to the post-merged company. I expect the shares to trade higher from $9.50 to $10+ in coming weeks. I owned some shares for years and have loaded up recently after the agreement was announced.

Disclosure: I am long PCC

HypeZero10 Returns 17.1% Last Quarter

For those investors new to HypeZero, we run an automated portfolio of 10 of the best investment ideas from the best hedge funds called HypeZero10.

We take the quarterly holdings of the best hedge funds, and then run our sophisticated algorithm on those holdings to pick the 10 ideas.

This algorithm has returned over 199+% since 2004 exclusive of dividends. A $10,000 investment would be worth almost $30,000 in over 8 years.

For the November 15th to February 15th quarter, HypeZero10 returned 17.1% as compared to 12.9% for the S&P.

Here are the results:

Company Price (Nov 15) Price (Feb 15) Hedge Fund 
Apple Inc. (AAPL) $525.62 $460.16 David Einhorn
Sears Holdings Corporation (SHLD) $58.48+spinoffs $47.33 Edward Lampert
AIG (AIG) $31.24  $38.35 Bruce Berkowitz 
Yahoo! Inc. (YHOO) $17.89  $21.02 Dan Loeb
Procter & Gamble Co. (PG) $66.32  $76.54 Warren Buffett 
AutoNation Inc. (AN) $40.28  $46.03 Edward Lampert 
BankUnited, Inc. (BKU) $22.16  $27.57 Wilbur Ross
News Corp. (NWSA) $23.12  $28.90 Donald Yacktman 
Assured Guaranty Ltd. (AGO)  $12.88  $19.61 Wilbur Ross
Canadian Pacific Railway Limited (CP) $90.38 $118.87 William Ackman
Return  S&P Return   12.9%

Check out new holdings for the February 15th quarter at HypeZero10

Disclosure: I am long AIG

Safe 7-8% Yield HCJ

Homeowners Choice (HCI), a Florida property and casualty insurer, recently sold 8% senior notes. I bought some today as they are a great deal. Here are the details:

  • Par Value is $25.
  • Currently trade around $26.33.
  • Quarterly dividend of $.50. At par value, they give a dividend of 8% annually.
  • They are callable on 01/30/2016 at $25. They mature on 01/30/2020.
  • They trade on NYSE under the symbol HCJ. 

The positives:

  • At current interest rates, a great deal for a medium term bonds. In the worst case, they will mature in 7 years. 
  • HCI is highly profitable $200+ million company.

The negatives:

  • HCI is not a multi billion dollar company.
  • Business is concentrated in Florida. A big hurricane could have an effect on their financials even though they are safeguarded by reinsurance. 

They offer a good risk/reward ratio. Here are the details of the security.

Disclosure: I own HCJ.

Abbott Spinoff Analyzed

I spent some time this weekend taking a deeper look at the spin-off of Abbott’s (ABT) pharmaceutical unit, AbbVie Inc. (ABBV). For every share of Abbott at the close of business on December 12, 2012, investors will receive one share of AbbVie common stock. Abbott expects that AbbVie stock will be distributed on Jan. 1, 2013. AbbVie will trade on a “when issued” basis this Monday, December 10, 2012 under the symbol ABBV.WI.

AbbVie

AbbVie generates most of Abbott’s profit. For 2012, it will have between $5 – $6 billion in FCF or around $3.50/share. Earnings and revenue are growing. However, they are highly dependent on one drug, Humira. The patent for Humira expires in late 2016. As a result, AbbVie is a bit risky. Future growth, after Humiras patent expires, will depend on it finding new drugs.

The company expects to pay an annual dividend of $1.60/share. I expect the stock to trade around 12 to 13 times earnings or around $45. At this price, it should give a nice dividend of 3.5%. I personally would not want to own this stock because of the dependent on Humira.

Abbott

Abbott looks interesting post spin-off. The company expects operating cash flow of $4 billion after spin-off. If you factor in depreciation, interest expense, taxes and other expenses, Abbott’s FCF should be around $2 billion.

Abbott has market leading products across their different segments. It expects to grow revenue in mid-to-high-single-digits in 2013. Earnings could grow faster due to margin improvements. I expect it to trade around 15 times earnings or $20/share+.

Conclusion

Once AbbVie trades on a “when issued” basis this Monday, we should find out what the market thinks of the value of AbbVie. I think new Abbott will be a steal at any significant discount to my $20 fair value.

Disclosure: I do not own Abbott.

Why I Like Facebook

Facebook Like ButtonI was going to write this article about Facebook (FB) a couple days after the biggest lock up expiration on November 14th. Lockup expirations allow early employees and investors to sell their shares on the open market. The plan was that since Facebook stock had gone down during the last lockup expirations, it was going to go down again as new shares flooded the market. I would be able to scoop up the shares at my intended target price of between $15-$20.

However, a funny thing happened. On November 14th, instead of the stock crashing like I had hoped, the stock shot up from below $20 to above $22 and I was not able to buy shares. Two weeks after the expiration the stock has gone up a staggering 30% to close above $26 yesterday. Although I have no plans to buy the stock at this price, I wanted to share why I like Facebook as an investment under $20.

Valuation

I agree that Facebook is expensive by all metrics. However, at $20 it is not that expensive. At $20, its market capitalization is around $40 billion. About $10 billion of that is in cash from the botched IPO. Its cash flow is more than a $1 billion+ a year and that is growing over 20% a year. If you back out the cash, you are talking about a PE of 30. It is not unreasonable for such a great company.

Facebook will be able to generate a couple billion more in cash flow over the next coming years. If it does, at $20, you are talking about an inexpensive stock. 

Here are some of the reasons that will enable it to generate more cash in the future:

Smartphone Prevalence

According, to a great article by the business insider, “there are an estimated 6 billion mobile handsets in the world, and only about 1/5th of them are smartphones. Over the next several years, most of these handsets will be replaced by smartphones.”

The smartphone revolution will give a big boost to the already 1 billion+ subscriber base. Although, these users will have lower average revenue per user because they will be poorer, it should increase Facebook’s overall cash flow. Also, it should increase the engagement from users as the world is more connected.

 Although, there are challenges to advertising on the mobile platform, Facebook proved last quarter that it will be able generate revenue through advertising.

Open Graph

“Facebook Open Graph is an attempt to map all the complex interactions existing between you, your friends and the content you all like.” Although, this sounds complicated, it is not. Facebook is mapping the real world on Facebook. When you like an article on HypeZero or share a song on Spotify, it captures that information and  is able to build a better profile about who you are.

The obvious implication is that it and its partners are able to target advertise directly towards you taste. As a result, you are more likely to click on an advertisement.

Obviously, Facebook advertisements are not as powerful as Google’s where you are actually searching for something, but it will be possible for Facebook to compete with Google on search because of Open Graph. As Facebook maps the real world, it will not only be able to make search more personalized to your taste, but it will be an alternative to Google’s PageRank Algorithm. 

 Still Early

Facebook is still a young company, and there will be many unthought of avenues for revenue growth. Although revenue from Facebook credit revenue has gone down due to Zynga’s demise, the company has recently come out with Facebook Gifts that allows users to send gifts to their friends with just a few clicks by partnering with companies such as Fab.com. Although, this may not prove successful, there will be plenty opportunities like this and if any of them succeed, you are talking about millions of dollars in additional revenue due to the large number of users.

For example, it is possible that Facebook could have a premium service for users or businesses. If say 10% pay $1/month for such a service, it amounts to a billion dollars in additional revenue. The point being that it is not unimaginable for Facebook to generate billions in revenue from other sources than just advertising.

Conclusion

As Warren Buffett once stated, “it is better to pay for a great company at a fair price, than a fair company at a great price.” I think Facebook is a great company that has numerous opportunities for revenue growth. And at the right price, it is a great investment.

Disclosure: I do not own Facebook.

WhiteWave Earnings Conference Call

WhiteWave (WWAV) is having a separate earnings conference call on November 30th. Dean has already reported WhiteWave’s earnings as part of its earnings report. It is interesting because they clearly state they will “comment on forward outlook.” I am guessing the outlook is good as there is no reason for them to comment on it if it was not. 

I am disappointed in the Dean Foods investment. The thesis of it being undervalued has been correct. However, the wildcard, the value of WhiteWave has gone down considerably ($2+) since my valuation. As a result, my value of Dean has gone down in relation. I see it now valued between $18-$21. Obviously, the strategy of shorting out WhiteWave would have worked out nicely. Since, Dean has been essentially flat for quite a while.

Also, there has been no information about the sale of Morningstar since the WhiteWave IPO. Hopefully, it was not a marketing ploy to hype up the IPO. The more time that goes by, the more unlikely Morningstar is going to get sold.

I am contemplating of selling a full or partial stake in Dean at a loss at around $17. 

Disclosure: I am long Dean.

Abbott Laboratories (ABT) Spin-off

Abbott Laboratories LogoAbbVie Inc. (ABBV), the pharmaceutical unit of Abbott Laboratories (ABT), sold $14.7 billion worth of bonds yesterday as it prepares to spin-off. Abbvie will distribute about $8.5 billion of the proceeds to the parent Abbot. “Abbott intends to use the proceeds it receives from AbbVie, in part, to fund its previously announced cash tender offers for certain of Abbott’s outstanding notes.”

Spin-off

After the spin-off, AbbVie will be a “research-based biopharmaceutical leader” with a portfolio of prominent drugs such as Humira, AndroGel and Duodopa. Abbot will contain four units:

  • Nutrition (Similac, Ensure, PediaSure)
  • Diagnostics (Immunoassay Diagnostics, Blood Screening)
  • Medical Devices
  • Established pharmaceuticals (branded generics portfolio)

Here are the details of the spin-offs:

  • Company: AbbVie Inc.
  • Ticker Symbol: ABBV
  • Key Dates: When-issued in mid-December. Regular-way trading begins 1/2/2013
  • Distribution: Distribution ration will be announced in December. 

Here are investor presentations for both companies:

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Disclosure: I do not own ABT

Loading Up on Dean

Dean Foods (DF) is crashing today after the spin-off of WhiteWave (WWAV). It is around $17. WhiteWave has been up and down today between $17 – $19. I have loaded up on shares of DF. I am not sure why Dean is down today. Here is the quick math.

Assuming WhiteWave at $17. Dean still has 150 million shares of WWAV.

$2.94 billion worth from WWAV IPO means rest of dean is valued at 300 millon?