country, allowing expansion of Orca’s production, is fully built offshore and now more than half built onshore, with its commissioning expected in about a year. In order to fill the pipeline and limit the brownouts in the country, the government needs to move fast to provide clarity for Orca so it can continue its spending. The election next year and the fact that Orca’s gas production generates over 50% of the power in Tanzania should expedite the government to resolve a poor situation.
Orca’s cash (it has no debt) represents half its share price and including receivables—from TANESCO—the resultant cash would be more than the current share price. With an estimated reserve value of $12 per share, the combined value is about 6x (not a typo) the share price. Meanwhile Orca is producing at record levels, has long-life natural gas reserves, and operates at low costs with high netbacks.
After being range-bound between $5 and $7 per share for some time, Legacy Oil + Gas finally benefitted from the multiple-expansion in the Canadian energy sector and from stock-specific news. The share price should continue to benefit from the large, multi-year development inventory, high netback light oil production with high IRRs and management’s intention to use cash flow to both grow the business and reduce leverage.
Two recent developments may have helped too. First, Crescent Point Energy announced a significant Torquay discovery in southeast Saskatchewan. Legacy also has a significant land package (30 to 40 sections) that is prospective for the Torquay formation and investors have extrapolated from Crescent Point’s results. Second, the company entered into a deleveraging transaction, announcing the acquisition of Highrock Energy, a Saskatchewan-based private
light oil company with an under-leveraged balance sheet. Production guidance was raised to 22,150 boe/d and exit production guidance to 25,250 boe/d. Perhaps more importantly, management guided to a debt to funds flow from operations ratio of 1.6x, well below the 2.0x debt-to-cash-flow threshold that had concerned the market over the past year or so.
Our estimate of the company’s current value is approaching $12 per share and growing by over 15% per year as it exploits its 2,200 net drilling locations. Despite better recent performance, with the shares currently trading at approximately $8.50, we expect the discount to narrow even further. Even at $85 oil, our fair market value estimate rises to over $18 in 3 years—more than double today’s share price.
Dynacor (OTCMKTS:DNGDF) continues to generate strong earnings. The share price has rebounded but remains below its highs and Dynacor remains significantly undervalued, especially from the effects of the Peruvian government’s crackdown on illegitimate miners, which do not include Dynacor. Other competitors have been disappearing. And, Dynacor expects to be the recipient of a lift in its business as noncompliant competitors fall away. Trading at about 6x earnings estimates, the price is still much too low.
The company is awaiting the final approval for its larger mill which is taking longer than expected as the government is preoccupied with enforcing its newer rules. The approval should arrive this summer and construction should be completed about 12 months thereafter allowing earnings power to climb to over $0.35 per share annually. At just 10x earnings, this could more than double the share price based on its milling operations alone, ignoring the value from Dynacor’s own exploration properties where the company should have a NI 43-101 report later this year which could show an initial resource in excess of 1 million ounces. As long as results continue positively, the company’s own production could begin in about 3 years.
Our top holdings in our All Cap portfolios include large cap positions China Unicom, Apple Inc. (NASDAQ:AAPL) and Weatherford International (NYSE:WFT), which are all discussed below in our Global Insight portfolio review.
Portfolio Changes
In the last few months we sold Vivendi, Goldcorp (NYSE:GG) and Agrium (NYSE:AGU) after these large cap positions ran up to a TRAC™ ceiling, close to our internal valuations. American Eagle Outfitters, (NYSE:AEO) Madison Square Garden (NASDAQ:MSG) and Samsung (OTCMKTS:SSNLF) were sold too as they declined and breached TRAC™ floors. We may look to repurchase them at lower prices. And, we disposed of Renegade shortly after the announcement that it was to be acquired.
We also recently added Honda Motor (NYSE:HMC) and TRW Automotive Holdings (NYSE:TRW) (both summarized in our Global Insight portfolio review below).
Global Insight (Large Cap) Portfolios – Key Holdings
Through April, our Global Insight Long/Short Model (our entirely large cap model) is up 10.5% (USD) and 13.9% (CAD) annualized since inception June 1, 2012, net of all fees. A complete description of the Global Insight Model is available on our website.
Our target for our larger-cap positions is more than a 20% return per year over a 2-year period, though many may rise toward our FMVs sooner should the market react to their undervaluations sooner. Or, some may be eliminated sooner if they decline and breach
TRAC™ floors.
After selling China Unicom (NYSE:CHU) last quarter when it breached a TRAC™ floor, we repurchased it, even cheaper, when it declined to the next floor below. The company reported an in-line quarter and the stock price has risen back towards our estimated fair value. A good portion of the price rise can likely be attributed to a recent Chinese government proposal for a new centralized cell tower and related infrastructure telco. As proposed, this new telco will build, own and maintain equipment which will be shared by the 3 wireless carriers in the country. Given the increasing focus and cost of data networks, this proposed sharing arrangement should materially lower capital spending requirements for the industry. Even without this new telco we continue to see upside in China Unicom as our estimate of fair value remains above $20 per share, implying a 25% potential lift. Should the sharing telco form soon, there’s another $5 per share increase in our fair value estimate from lower capital spending requirement.
Weatherford International, one of the largest U.S. domestic and international oil and gas services companies, is beginning to deliver on its promise of divesting underperforming or non-core assets and improving the profitability of its remaining operations. Its share price has reacted positively to the announcements of a sequential improvement in its operating margins, identified job cuts to potentially save approximately $450 million annually, the closure of 20 underperforming locations and an agreement to sell its pipeline and specialty services business for $250 million. Continued margin recovery and the use of proceeds from asset sales to reduce debt should lead to multiple-expansion back to historic levels of almost 16x forward earnings. Based on the solid results, earnings estimates are rising rapidly, leaving more room for capital appreciation.
Newfield Exploration (NYSE:NFX), an independent oil and gas company, headquartered in Texas, is part ofa group of U.S.-based E&Ps that have been aggressively selling international assets in order to focus on the development of domestic, higher-growth, unconventional resources. Newfield recently sold its Malaysian operations for nearly $900 million and is expected to announce the divestiture of its remaining international assets based in China shortly. Proceeds are being redirected to concentrate on its growing production from U.S. basins. Well results from the company’s SCOOP play in the Anadarko Basin have been particularly impressive, with five wells in one area averaging about 2,000 boe/d over an initial 24-hour test period and four wells in another area averaging over 1,500 boe/d over an initial 24-hour test period.
With solid drilling results, Newfield’s proved reserves increased 8% in 2013. More impressively, the pre-tax present value of the proved reserves (excluding assets held for sale) grew by 44% due to a higher liquids weighting and improving development economics. We continue to expect substantial value creation in the near term as the company’s new resource plays are booked into reserves.
Apple Inc. (NASDAQ:AAPL) recently reported results which came in ahead of analysts’expectations from strongiPhone sales. It also announced a boost to its share repurchase program which should result in $90 billion worth of stock repurchased. Now trading just above $600, the discount to our $650 FMV estimate has narrowed. However, our Apple valuation model is conservative and assumes very harsh average selling price declines and decelerating growth rates for its major products. Furthermore, our model does not factor in new products or services that have been long rumoured such as the iWatch or iTV. The company keeps suggesting revolutionary products are in the works and we’ll evaluate their incremental potential once announced.
We continue to hold EMC (NYSE:EMC), a provider of enterprise storage systems and server virtualization software. Its anemic share price performance can be attributed to potentially disruptive trends in storage technology and a slowdown in enterprise storage. New product cycles for VNX2 and XtremIO and continued success of its VMAX offerings should lead to market share gains and accelerating growth.
Technip, headquartered in Paris, France, is a global company that provides projectmanagement, engineering, construction and installation for the energy and chemicals industries. After a downward guidance revision during the fourth quarter of 2013, Technip has delivered 2 quarters of results that have met expectations and reiterated targets for 2014 and 2015. With expectations set extremely low, the shares have responded positively. Order intake increased nicely in the most recent quarter (including a major subsea award offshore Angola) and the company’s book-to-bill ratio is now well above one, implying solid revenue growth going forward. In fact, the momentum continued subsequent to quarter end with additional significant subsea contract wins. Although the shares have moved up, Technip still trades below its long-term valuation range and at a discount to its peers.
CST Brands (NYSE:CST), the gas station and convenience store operator, continues to improve itsprofitability mix since being spun out of Valero last year. The share price remains undervalued as the company is still underfollowed and revenue growth has trailed as the company shifts away from certain lower-margin products, like cigarettes. CST’s share price saw a boost when its competitor, Susser, was acquired last month. The deal valued Susser at $2.9 million per store or 12x EBITDA which is significantly higher than our estimated appraisal value for Texas-centric CST Brands.
TRW Automotive Holdings is among the world’s largest and most diversified suppliers ofautomotive systems, modules and components to the global original equipment manufacturers.
It’s primarily focused on safety products, including braking and steering, airbags and seatbelts and electronic control units including crash and occupant weight sensors. TRW trades at a large discount to its auto parts peers despite being in higher-growth segments of the market
and raising its revenue guidance for 2014. Net earnings are also rising rapidly and, excluding special items, TRW reported first quarter 2014 net earnings growth of 20%.
Given its excellent operating and financial performance, the company is aggressively buying back stock, deploying $400 million of cash through an accelerated share repurchase agreement in the quarter. However, if the valuation discount continues to persist, given its suite of industry-leading and proprietary safety technologies, TRW could become an intriguing takeover candidate for any of its larger peers.
Apache (NYSE:APA) is a globally diversified energy company with a portfolio of oil, natural gas liquids andnatural gas producing assets in Canada, the U.S., Australia, the U.K. and Egypt. Apache is another U.S.-based E&P that is in the midst of rebalancing its portfolio to focus on growing North American liquids production. Through 2013 to today, the company has sold approximately $9 billion worth of assets including Gulf of Mexico Shelf and deep-water assets, Argentinian assets, and a one-third minority participation in its Egyptian oil and gas business. With the proceeds, management has reduced debt, bought back stock and boosted its dividend.
Over the past several years, Apache has lagged its peers due to slowing growth while repositioning the portfolio and multiple-compression related to its Egyptian exposure. However, we believe that management is making the right decisions to position the company for its next phase of growth, which will come primarily from its U.S. basins. Management is currently forecasting 15% to 18% North American liquids growth in 2014. Multiple-expansion should occur now that the company is returning to growth mode and the share price appreciation could even surprise on the upside, given that the unrisked North American onshore resource is four times larger than the currently booked proved reserves.
For decades Intel (NASDAQ:INTC) has been the dominant supplier of CPUs for PCs and notebooks. These markets are now in secular decline as mobile devices and tablets have become the preferred computing devices for individuals and even corporations. While admittedly late to respond, Intel is shifting its focus to mobile, SoC (System-on-Chip) and Data Centers. We believe Intel will eventually make inroads into the mobile and tablet space—which will ultimately be bigger than PCs. Meanwhile, stabilizing PC demand and strong server sales should see Intel earn approximately $2 per share in the next two years and drive the share price higher towards our fair value estimate.
In the last few months a number of positions were sold as they rose to our FMV estimates or inflected down from TRAC™ ceilings, including: Vivendi, Goldcorp, Baker Hughes, Continental Resources, Total, Agrium, Randgold, Orange and Yamana Gold.
A few fell below TRAC™ floors and were sold to avoid further potential declines from those levels:
