Pioneer Energy Services Unsecureds

Today’s post repeats many of the themes from our last.  A company in the energy sector?  Check.  Plenty of unsecured debt outstanding?  Check.  Unsecured trading substantially below par?  Check.  Revenues down nearly 50% YoY?  Check.  No signs of relief on the horizon… check.

“Pioneer Energy Services Corp. provides drilling services and production services to a diverse group of independent and large oil and gas exploration and production companies throughout much of the onshore oil and gas producing regions of the United States and internationally in Colombia. We also provide two of our services (coiled tubing and wireline services) offshore in the Gulf of Mexico.” (latest 10-Q)

Pioneer has a secured $350 million Revolving Credit Facility with Wells Fargo at present, with $110 million outstanding as of 7/30/15 and $21.3 million in committed letters of credit.  Borrowing availability as of July 30th was $218.7 million, and Pioneer was in compliance with all the covenants under the facility, which matures in Sept 2019.

Pioneer also has $300 million of senior notes outstanding which bear a coupon of 6.25% that mature in March 2022.  These notes Mr. Market currently values at roughly 60 cents on the dollar.  Similar to Cloud Peak, the market value placed on Pioneer’s unsecured debt is less than the availability on their credit line.

On the equity side, Pioneer had 65.5 million shares outstanding as of July 15, 2015.  After talking a $71 million pre-tax impairment charge in Q215, the company has a book value of $406 million at 6/30/15.  At today’s $3 per share price, Mr. Market values the equity a bit below $200 million.  (For those so inclined, it would appear there is no cost to borrow.)

Pioneer does have some capex commitments for the remainder of the year, roughly $65-75 million, to acquire “five new-build drilling rigs, nine well servicing rigs, eight wireline units, routine capital expenditures and certain drilling equipment which was ordered in 2014 but requires a long lead-time for delivery.” (30)  Pioneer did show $63 million in cash on the balance sheet at 6/30/15, and they are actively marketing some idle rigs for sale.

In the recent Q215 results conference call, management candidly described the challenges for Pioneer in this low energy price environment:

“…it is a soft market and there is not a lot of demand, there is not a lot of demand in drilling. And I think that it’s building for a definite recovery probably beginning in 2016 if not at the end of the year, but it’s probably going to be slow and we have got to manage our business as if it’s going to be slow and lower for longer and keep our cost structure tight and that’s what we intend to do.  So, I think we are anticipating a little bit more pain in the third quarter…”

Not exactly a ringing endorsement.  As Dr. Michael Burry might say… ick.

Disclosure: I own some of Pioneer’s 6.25% 2022 unsecureds.

Cloud Peak Energy and Coal Valleys

From Dr. Michael Burry’s School of Ick Investing today I have a one-time, g78151bai001exclusive offer for you… a coal miner… aptly named… Cloud Peak Energy.

Cloud Peak enjoys the privilege of being one of the only U.S. coal “pure plays” with a share price greater than $1 (as of 7/24/15).  With 61 million shares outstanding, at today’s $3 per share, it carries a market cap of roughly $183 million.

Perhaps more interesting to me though is Cloud Peak’s unsecured debt.  Its 6.375% 2024 bonds have offers near 62 (with $200 million outstanding).  And their 8.5% 2019 bonds show offers near 70 ($300 million outstanding).

So it would seem that Mr. Market values the enterprise, based on its publicly traded securities at $183mm + $124mm + $210mm = $517 million.

Based on Cloud Peak’s Q1 EBITDA, that valuation may not yet be entirely compelling.  Yet…

“As of March 31, 2015, no borrowings were outstanding under the credit facility and we were in compliance with the covenants contained in the Credit Agreement.  Our aggregate borrowing capacity under the Credit Agreement and the A/R Securitization Program was approximately $539.9 million at March 31, 2015.” (42)

So the market value of the enterprise today is less than their availability on the credit line.  A rather rare occurrence in today’s markets.  But it’s coal… ick.

Disclosure: No position.

Payday for Kingsway

I’ve been following 1347 Property Insurance Holdings since their spinoff (or better, “IPO“) from Kingsway Financial Services in the spring of last year.  After all, it appeared as veritable catnip to the enterprising value investor–a spinoff, insurance float, aspirations of growth…

Initial plans included expanding 1347’s Louisiana property and casualty insurance business (“Maison Insurance Co.”) to include “Texas, Hawaii, and/or Florida during 2014.” (49)

A secondary offering followed quickly on the heels of the initial offering and raised $23 million more in June (PR).

Unexpectedly, the Florida market proved resilient to entry, as “1347 Property Insurance Holdings, Inc. notified the Florida Office of Insurance Regulation (the “OIR”) of the Company’s intent to withdraw its initial application for a de novo, wholly-owned subsidiary to seek a certificate of authority to write insurance policies in the State of Florida…  The Company may choose to re-submit an application to the OIR in 2015.” (8-k)  No official word yet on progress in Texas and Hawaii.

Admittedly the story of 1347 would seem to be only in its first chapters, which is why I was surprised to see Kingsway recently terminate its management services agreement with 1347. (PR)

1347 though was kind enough to ease Kingsway’s departure, offering $2 million in cash, $3 million in 8% preferred stock, a performance share grant agreement worth 100,000 shares of PIH, and 1.5 million warrants to purchase PIH at $15 per share.  That is no small gift for company with less than $50 million in equity.

It does leave one to wonder though–what services will 1347 now be foregoing?  With some digging, one can find a brief description of the management services agreement: “On February 11, 2014, we entered into a Management Services Agreement, which provides for certain permanent services, unless terminated, that we will receive from 1347 Advisors, including forecasting, analysis of capital structure and reinsurance programs, consultation in future restructuring or capital raising transactions, and consultation in corporate development initiatives. For the services performed, 1347 Advisors will be paid a monthly fee equal to 1% of our gross written premiums, as defined in the Management Services Agreement.” (63)

Going forward though, that monthly fee to Kingsway would decline if Kingsway ever sold 50% of its common shares.  As they say: “After the seventh year of the term of the Management Services Agreement, should the ownership of our shares by KFSI or an affiliate or subsidiary thereof fall below fifty percent (50%) of KFSI’s (or an affiliate or subsidiary thereof) ownership of our shares at the close of our initial public offering, the monthly fee shall be calculated by (a) dividing the existing shares owned by KFSI (or an affiliate or subsidiary thereof) by the number of original shares owned by KFSI (or an affiliate or subsidiary thereof) at the close of our initial public offering, and (b) multiplying by 1% of our gross written premiums, as defined in the Management Services Agreement.” (63)

All told then, Kingsway has elected to forego 1% of gross written premiums in exchange for the cash/preferred/stock/warrant package.  I suppose it makes good economic sense for them, since 1% of $20 million premium would only amount to $200,000 per annum.

Disclosure: No position

BNCCORP’s 2014 Results

Some twelve months past we briefly profiled BNCCORP’s 2013 results. Casting aside the convention of geographic contiguity, BNCCORP, Inc. “operates community banking and wealth management businesses in North Dakota, Arizona and Minnesota, and has mortgage banking offices in Illinois, Kansas, Nebraska, Minnesota, Arizona and North Dakota.” (PR)

Initially it was the attractive price that drew my interest (uncovered frauds tend to provide such), but over the last few years, BNCCORP has also pleasantly surprised its investors with strong core banking results.  And 2014 offered more of the same.

As of 12/31/14, BNCCORP had a book value per common share of $18.28, and it produced a return on average assets and equity of  0.94% and 12.37%, respectively, through the year 2014.  Non-performing assets decreased to $317k at 12/31/14, compared to $6.7 million at 12/31/13.  For that performace, today’s buyer is willing to pay $15.75 per share, or roughly, .86x BV.

Last year I expressed some disappointment with BNCCORP’s modest loan book ($351 million in total loans at 12/31/13, vs. $436 million in securities), and the fact that they hadn’t yet redeemed their preferred stock and subordinated debt.  In 2014, progress was made on both fronts: the loan book increased to $408 million at 12/31/14 (vs. $449 million in securities), and the subordinated debt was redeemed in Q314.  Coupled together, these moves helped to prevent some of the net interest margin compression that peers have endured.

This year, one additional potential negative is the effect of lower oil prices on BNCCORP’s North Dakota loan book and demand deposits.  Though BNCCORP’s North Dakota loan book represents only $233 million of their $947 million total assets, it was the portion that many thought would offer the quickest and most profitable growth.

Disclosure: No position.

[P.S. On Seeking Alpha, Chris DeMuth has offered BNCCORP as his best long idea for 2015.]

Hingham Institution for Savings 2014 Results

We have found a new year, and what better way to begin than to digest the feast of community bank earnings?

Last year at this time we profiled the Hingham Institution of Savings (Hingham, MA).  Though already much admired, Hingham has seemed to only bolster its reputation further in 2014–retaining its spot as the #1 thrift in the East, and moving up to #2 in the US (per SNL Financial [PR]).

The close of 2013 found Hingham with a book value per common share of $48.49, a return on average assets of 1.07%, and a share price of $77.50 per share, or roughly, 1.6x BV.

2014 saw them improve nearly every operating metric of significance. [PR] Return on average assets and equity rose to 1.13% and 14.32%, respectively (after adjusting for a large one-time life insurance death benefit).  Non-performing assets decreased to 0.20% of total assets, compared to 0.46% at December 31, 2013.  And non-interest expense as a percentage of average assets settled at 1.37% in 2014, vs. 1.40% in 2013.

Book value per share reached $57.08 at 12/31/14, and today’s price of $88 represents a multiple of 1.54x BV.

Like last year, the most impressive aspects of 2014’s performance were Hingham’s large loan portfolio (i.e., as a percent of total assets) and low efficiency ratio (37.19%).  The most obvious negatives remain their relatively high cost of funds (now 0.78% in 2014, down from 0.93% in 2013), low level of demand deposits, and low level of non-interest income (when excluding the one-time insurance death benefit).

Disclosure: No position

California Water Rights

I have found a few more data points to add to my list of water rights sales in California and Arizona.

Some snippets:

1) “This year the market is unbelievable,” said Thomas Greci, the general manager of the Madera Irrigation District, which recently made nearly $7 million from selling about 3,200 acre-feet. “And this is a way to pay our bills.”

2) “Now everyone’s mad at me saying I increased the price of water. I didn’t do it, the weather did it,” said Etchechury, who manages the Buena Vista Water Storage District, which netted about $13.5 million from the auction of 12,000 acre-feet of water.

Disclosure: No position.

Investing at Any Price

“There are no bad bonds, only bad prices.”  So says the old and odd adage that gets kicked around trading floors from time to time.

Of course, once you start there, the adage subtly twists upon itself, becoming “there are no bad assets, only bad prices.”  Or perhaps worse, “there are no bad stocks, only bad prices.”

The truth that lurks somewhere therein is uncontroversial.  For any asset worth X (i.e., its “intrinsic value”), investment returns increase as the discount from X increases.  Perhaps more interestingly, the increase is not linear.

However, our seemingly innocuous adage seems to hide the way in which it breeds and feeds confidence and security.  The inner monologue quickly follows: “as long as I buy a security at a big enough discount to X, I’ll make money.”  Subtly the mind fixates on the discount, and comfortably takes the X as a given.

Given the prevalence of the adage, and the investment justifications it seems to elide, I was ever so grateful to stumble upon Robert Vinall’s May presentation, entitled “Mistakes of Omission.” (Hat Tip to ValueInvestingWorld)

It would be hard to overstate the profound elegance of the presentation, but even the barbarian would appreciate the simplicity of slide 14.

To me, it seems to suggest that there is no price too low for some equities, and conversely, almost no price too high for others.  The crux that differentiates the two–the quality of the underlying business.