Livermore Partners’ letter to all partners for the first quarter ended March 31.
To: All Partners
The year began almost as it ended, whereas oil, falling off a cliff in late 2014 continued its descent as energy stocks remained under great pressure and strain. Weak global demand, an accelerating US dollar, and surging US shale supply continues to be the overriding “theme” as well as further liquidity by global central banks to tackle deflation takes hold. In the meantime, the US stock market has become more volatile as we focus on timing of the Federal Reserve’s goal of raising interest raises to combat a strengthening, yet uneven US economic recovery. All this is leading to uncertainty amongst investors as far as how to be positioned.
Livermore Partners: Energy-linked equities pricing has been very mixed
Livermore Partners core portfolio ended the Quarter ending March 31st down 2%(net). Our concentrated portfolio of companies, most of which remains energy-focused have rebounded from their depths, but crude supply is overwhelming the market so pricing on energy-linked equities has been very mixed. Some of our Canadian companies are near lows while US producers have rebounded a bit too much. This is causing bifurcation and a compelling opportunity globally for value-investors like us.
We continue to feel crude, the most important commodity in the world, will normalize over the next 12-18 months back to a $70-75 price point and our core portfolio companies will then be positioned well for solid risk-adjusted returns. I continue to play on the dynamic that energy equity valuations will present vast corporate merger opportunities since growth at the drill bit will be minimalized given the marginal cost of production at $50bbl just isn’t economical. This so called, “cause and effect” has now surfaced. In recent days, a massive energy link-up in a Shell/BG merger with Shell paying a 50% premium for BG was announced and I expect further deals in the offing. Shell paid a staggering $70B price-tag. This is a very rich valuation of 11X EV/DACF which shows the current need for energy companies to increase their own equity value and replace lost production. Shell has failed to replace production these past few years even with crude at $100. So at $57 Brent, the need for long life reserves is paramount. There is an overriding theme of the sector now getting smaller with ROCE (Return on Capital Employed) now at the forefront.
Livermore Partners: Volumes over value
The “volumes over value” thesis we have seen the previous decade is now over. Bigger maybe better, but only when economics of scale and dramatic cost synergies are realized.
Our core portfolio of oil and gas investments consist of Occidental Petroleum spin-off, California Resource Corporation (CRC), small Canadian exploitation company, Zargon (ZAR), dynamic and liquids-rich Montney player, Paramount Resources (POU), as well as a growing position in London-listed and Irish energy company, Petroceltic (PCI), one we feel holds tremendous value in a World-class gas project in Algeria.
Our Special sit energy investment has been Billionaire investor Sam Zell backed, Par Petroleum (PARR). Livermore acquired Par in late Q3 of 2014 at a price of $16.50. The equity was under great pressure due to a lost refining contract and weakening energy environment, one which actually benefited PAR given the lower input cost of fuel burn as crude drops in value. Typically, a company such as PAR, with such a successful investor would trade at a premium, so taking advantage of such a disconnect in value was indeed rare and yet profitable. The equity is now at a 52-week high of near $25.
Livermore Partners: Volt Information Sciences
Regarding other special situations away from energy, temp staffing company Volt Information Sciences (VISI) remains our largest holdings, and the stake again increased in the quarter. As many of you are very aware, Livermore, along with the company’s largest holder in Glacier Peak, have pushed hard to re-structure the company from its legacy Board of Directors and many years of mismanagement, back to a core focus of a strong and growing enterprise with solid free cash flows and ever-increasing shareholder value.
Even with a now 20% rise since Jan 1st, the equity of Volt is massively undervalued. The new stock buyback we stressed is being implemented and is helping, and we are hopeful the new Board becomes even more aggressive to make up for much lost time and value. We continue to look at all avenues to maximize the ultimate intrinsic value of the company’s $1.7B in revenues, large NOL, and vast non-core assets. Much of which consists of prime real estate in Orange County, California; an asset we feel is conservatively valued at $40mm. Therefore, the equity move in Volt’s shares is far from over.
Livermore Strategic Opportunities, LP continues to grow both assets and opportunities and our special situation style of investing is marking a return. Though we ended the Q down 2%, I will stress that given the strong Volt news and further jump in crude back above $50, the portfolio thru the first week of April is now up 9% on the year.
The road ahead may be very rocky given the timing of the Fed’s next moves, but we feel it’s best to be focused and well-positioned in specific companies at specific valuations. This has always been the basis for equity outperformance over time and is something we will continue to believe in at Livermore.
Hope everyone has a wonderful Spring and as always, please feel free to contact me with questions, ideas, or interest in the fund. You may also contact our fund’s Prime Broker and custodian, Paris-based BNP Paribas SA anytime.
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