Tim Weber updates $AMPY and talks the double dogs (Podcast #99)
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Transcript begins below
Andrew Walker: All right. Hello. Welcome to Yet Another Value Podcast. I'm your host, Andrew Walker, and with me today, I'm happy to have, Tim Weber. My friend, second time on the podcast. Tim is a private investor. Tim, how's it going?
Tim Weber: Hey, Andrew. Thanks for having me. The real reason I'm on today is because I'm just trying to catch up with Jeremy Raper. I really appreciate it. I know I have a lot of work to do, but you never know. I could get there someday.
Andrew: Yes. I think Jeremy's at six or seven and this is two for you. You've got a lot of work to catch up on if you want to catch up to him. But, hey, let me start this podcast--
Tim: That's okay. I'm the tortoise and he's the hare.
Andrew: Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone nothing on this podcast is investing advice. I'll use the same disclaimer we used for Tim's first podcast. That disclaimer is particularly true today. We're going to be talking about a heavily leveraged micro-cap oil and gas stock and some heavily leveraged commodity names later in the podcast. Everyone should remember, these are much higher risk names than normal. Please do your own work, consult a financial advisor, not financial advice.
A second quick disclaimer, Tim and I had a little bit of technical difficulties. I think he's on a slight lag. If you're watching on YouTube or you notice a slight pause, it's just because of that. But I don't think it's going to cause any issues today. The third pitch for you, people can go listen to the first podcast we did, but you're a great guy, a super-sharp investor.
AMPY has been just an absolute killer. You nailed that thesis in the fog of war. When I go back and listen to all the stuff we talked about then, I'm always like, "Oh, man, we really nailed this." Why weren't we five thousand times bigger when the stock was trading at three because right now it's tapping at the door of six dollars per share.
But this was great, the Double Dogs you're going to talk about has been fantastic. Look, I'm just really excited to talk in the podcast. All that out of the way, today, we're going to talk Double Dogs and an update on AMPY. I think it makes the most sense to start with the update on AMPY, so I'll turn it over to you. Since our last podcast which was in the fog of war, right after the oil spill, what's been going on with AMPY?
Tim: Yes, Andrew. The incident was October 1st, and I think we did it within one week of the incident. We were really just trying to take any information we could get our hands on and just frame the incident. And so there's been a lot that has transpired since then. I'm going to try and give you what I feel is the most important, but if I missed anything, just come right back to it. I've written about this on my Substack, but really, I tried to frame the incident whether it was the size of the incident, the insurance coverage, comparing it to incidents in the past. I just tried to frame it when we were in the fog of war and just say, "Okay, it's going to kill the company." I mean, it was that bad at first, right? You couldn't quantify the gross liability. You were just starting to understand what insurance might look like. The size of the incident was still a little bit in question.
For sure, the culpability of the incident was a total unknown. A lot of that has changed. I'm just going to go through a few of the things that have happened since the incident. First, on December 15th, the federal grand jury brings one misdemeanor charge against $AMPY for negligent discharge of oil, which, to me, was a huge win. We did a lot of comparing to the Plains All American incident. In that case, there was--
Andrew: When they put out the press release or whatever that said, one misdemeanor. I was like, "Oh," my first thought was, "Oh, no, I was hoping they would get away." And Tim was texting me, "LFG! LFG! To the moon!"
Tim: I don't remember that but I'm sure I did it.
Andrew: It wasn't quite that but it was pretty much.
Tim: So in that Plains All American incident, there were 46 charges brought of which four were felonies, right? So just that as a first path and there were some differences. For example, a lot of those charges were brought by the state of California, whereas this is a federal grand jury. It gives you a good sense of kind of the differences in the incidents here. We'll get to why these incidents were so different when we talk about the lawsuit, which AMPY just filed a few weeks ago. So 46 charges versus 1, that was your first real, I mean, look, we had a lot. There were a lot of speculation that things were going to work out here and that this incident could be contained and that there would be great insurance coverage and that sort of thing but that was one of the first things in print where you started to kind of have a sigh of relief.
So recently, March 2nd, Amplify filed a lawsuit against three parties. MSC which was the owner of the Demit vessel in question likely targeted the anchor on their pipeline. Costco is the owner of the Beijing vessel. Then also Marine Exchange, which you actually mentioned in your podcast, is essentially the air traffic controller and the region. All of these parties in the complaint had knowledge of the incident and did not notify Amplify, all three parties. So they filed this lawsuit, you can go and find it. If you're super interested in reading, it's actually pretty, pretty interesting, and entertaining. Some of the details in the lawsuit, maybe made me very bullish.
So the P&I Clubs for both MSC and Costco posted in the maritime industry is known as a letter of undertaking. So this is when your P&I Club posts on your behalf basically a letter of credit, you know, stating that in exchange for you the aggrieved party, in this case, Amplify not arresting the vessels, which would be a huge problem if you think about how much money container shipping is making on you know, on a trip by trip basis right now. So, in exchange for AMPY not arresting the vessel, the P&I Club for MSC posted and it was quantified a $97.5 million letter of undertaking, which essentially says if we are found liable for the damages and your claim was indeed real, here's a letter of undertaking for up to 97 and a half million dollars. Costco posted a letter of undertaking as well. Sorry. Costco's P&I Club also posted a similar letter of undertaking but it was not quantified in the lawsuit, I'm not sure exactly why but if we assume that it's approximately the same value as the MSE letter of undertaking, we're talking about nearly $200 million on letters that have been posted to Amplify, which is well in excess of what Amplify in its recent 10k estimates the total value of the incident. Now, of course, the total [crosstalk], it's almost a moot point.
Andrew: If I remember correctly, the estimate was 99 million. I think that's right, or was it?
Andrew: Okay, just to give readers-- [crosstalk]
Tim: Exactly. Right, but again, the 99 is somewhat a moot point to the stock itself, just because insurance coverage, which I'll talk about next, has come in so favorable in print. So basically, you've got these two letters of undertaking. You read this too and it feels like Amplify has an incredibly strong case against both shipowners, as well as the, they call them the air traffic control, their name is Marine Exchange. My guess is that what happens is there's some sort of reasonable settlement here. However, I would say there is that probability that if this gets litigated, Amplify is, of course, they're suing for both damages, which is more of a matter for their insurance company, frankly, but its damage and reputation, right?
And so there is this, it's funny, because you asked me this question on the first podcast, and I laughed when you ask that you said, "Hey, Tim, is there any chance if this anchor scenario is true? Is there any chance that there was zero net liability or even positive?" And I sort of laughed, right? Now, it seems like that is actually an option on the table. So that's kind of bright, when my guess is that, we have a really good estimate of what the incident is going to cost and the insurance coverage is extremely high, and then we're talking 90% or more. Even the leakage will be, you know, the leakage will be essentially what Amplify is asking for in the settlement, I would guess. But again, if you litigate, and you get to the point of reputational damage, that's where you could be in the zone of even positivity.
My guess is that the way that it plays out is that there's some sort of settlement, which is terrible, the leakage, the deductibles, the things that just for whatever reason, the insurance did not cover, plus, Amplify's loss of production, income insurance. You kind of resign that insurance each year, and they had basically lost their loss of production income at a really low oil price at the end of 2020. So you could argue that when they locked off of production in the high 40s yet oil goes $30-40 higher in the next year. My guess is that that would be something on the table if we're sitting around the table trying to come up with a settlement. So we're talking, it seems to me to be getting more clear each day that this is a zero net liability issue. Now, of course, the next big question is okay, but when will the pipeline operate again? Before I go there, there's this loss of production income insurance will cover 18 months. So we are not even six months post-incident right now and the time to fix the pipeline was measured in weeks, not months. It's actually a very straightforward fix.
Andrew: So let me pause you there because I think we're going to start talking about beta coming back online and everything in a second, which is kind of upside case at this point right? But I just was there when we talked last, I think it was a popular podcast, listeners should go back and listen to it if they want to but when we talked last, we were worried that AMPY was going to be on the hook, we were trying to size the liability, we didn't know because of the fog of war. At this point, we do know the liability, right? The max liability is kind of 100 million, maybe beta never restarts probably does. I mean, we're gonna talk about that in a second. But we can size the liability. So we know the max liability is 100 million, and most of that would get covered by insurance. Our hope here is that insurance will get will require a lot of that from the shipping company, whatever insurance doesn't cover, AMPY will recall from the shipping company in the suit and maybe you asked me when I mentioned it, but now it doesn't seem so silly. Maybe we get little reputational damage and AMPY actually makes money off that. Was that a good summary of where we are with the legal liabilities, the cleanup, and everything at that point?
Tim: Yeah, I think that's fair. I was just going to mention that in the interim since we did the first podcast, there has been a 10-Q and a 10-K file. The first 10-Q gave you the big glimmer of hope that insurance coverage was looking great. The second report and the 10-K gave you, you know, you never use the word certainty but gave you a lot of confidence that the insurance coverage was more than sufficient.
Andrew: Perfect. So that brings us today as we talk, AMPY stock is you know, it is March. Is it March 16th? It's St. Patrick's, March 17th.
Tim: How could you say that on St. Patty's Day?
Andrew: I know, I know. I'm wearing white, somebody's probably gonna have to pinch me but on March 17th, AMPY stock is around $5.70 per share. And I mentioned that because I want to talk about why it's right here, right? Because people can go look at AMPY's investor deck, and they put out, "Hey, here's how much free cash flow we're gonna, we think we're gonna generate over the next couple of years." "Hey, here's our PV 10, at the end of the year 2021 strip, and here's our PV 10 at the current strip, which by the way, the current strip is a lot higher than the year 2021." They say, "Hey, we think beta is going to restart in the next couple of months and we build some of that into our model, and I don't think the market really believes that." So I want to talk through all of those things and why kind of AMPY is where it is right now.
Tim: Yeah, and it's funny because Amplify was at almost exactly the same stock price the day before the incident. So if I mess up my 575, that's only because the stock was exactly there before the incident. So the day before the incident. Let's let's rewind. So when I wrote this up, I actually wrote it up a few weeks before the incident. So I mean, I'm sure the oil market moved, oil and gas moved a little bit, but probably not much. But I was essentially saying, Okay, here's what I know is this is assuming every asset is operating, right? And I said in 2023 because they had they have some below market hedges in '21 and '22. I said if I look out to 2023 and I simply just put three to four times EBITDA on what I expect them to do at the current strip, including all the hedges because there's still a little bit of hedging in 23. I said I think this stock can be worth $10 to $13 per share. At that time, the oil 23 strip was $62, gas was 350. NGOs were around I think I had $25 in my model for 20. If I mark these market now. First of all, marking to market the 23 strips right now, my EBITDA in that prior scenario was 123 million on all assets. Again, this assumes beta is operating. It is now 212 million. Now what there's going to be $10 million of restart costs, I'm sure for data but it just put that aside for a moment, which again, EBITDA has gone--
Andrew: $10 million which probably gets covered by insurance or the ships in the lawsuit right?
Tim: I would say more than that, probably more than the settlement you would go for that and then insurance but you know, let's see. So again EBITDA market has gone from 123 to 210. So that's a 90 million increase in EBITDA and a company that has a market cap today of 220 million, the new range at three to four times EBITDA rather than that $10 to $13 and $19 to $23. So you could say, "Okay, Tim, the stock was at 575, who cares, it was at a huge discount, or made up three times EBITDA multiple in 23." Right? To which I would say, sure, it was at a 40% discount, you know, two to the three times EBITDA number in 23. That same 40% discount is now $11. To me, what closes the gap to that $11 are two things, and it's going to preview what we're going to talk about next.
What could close that gap is, of course, getting your permits, which Amplify needs, in order to do, let's call it a two to six-week fix that will be required to get beta operating again. The other one is actually crystallizing some of the value through a sale, which is a whole different topic that we can kind of move to next. But again, the equivalent of Amplify being at 575. When they're three times EBITDA, which is, by the way, that's three to four times EBITDA to somewhat decent approximation for what they say that PV 10 is the equivalent today is an $11 stock on a company that's trading at five-eight today. So to me, you've got this really big upside catalyst that will be you know, will start to be crystallized, I think, when you get your permits, do your work on beta then if you sell an asset.
Which leads me to my next point, which is that as Amplify reported and started doing investor presentations again, and get a conference call again because they had skipped last quarter, just as they were in the fog of war. One of to me, the most important disclosure, possibly in that release, is that they're selling their non-operating Eagle Ford asset. Now, this is the smallest of five assets, it only has a $50 million PV 10, compared to a PV 10 for the whole company that's approaching $1 billion. So it's a relatively small asset in the grand scheme of things but symbolically, it's a way to use the proceeds to pay down debt. They have a reserve base lending facility, which is too large, and which just introduces kind of, I would argue stakeholder conflict shareholders versus banks, which will be a good thing to wind down over time.
So Amplify is actively marketing this non-operating asset, and it should be a relatively straightforward sale, right? I mean, a financial buyer could look at it, or the majority operator could look at it, which in this case is Murphy. This is a big positive because any stock can be at a huge discount to fair value, it does not matter if there's not a path to close, if there's not a path that closes this current trading price versus, you know, versus what you have in your mob or versus what Amplify has in their deck irrelevant, right? They don't trade an asset at PV 11, let's say, then that implies that the whole company is worth $20, right? I would argue, if you pick apart each one of their assets, you can make a really strong case for why each one could trade a PV 10 Right now, yeah. And again, that PV 10 is a two handle on it right now, and two zero. This is a $5.80 stock, right? So, to me, again, there's a little bit of this is this is somewhat symbolic, this is somewhat about just reducing the size of the RBL. But to me, what's really important is that if this asset trades and trades that you know, PV 10 to PV 12 This really does, it's a lot harder to make that argument that, who cares, it's just a theoretical value in your spreadsheet.
Andrew: Let me give you the most, the pushback on that right so I hear you you know, bull you know, I'm with you here but Eagle Ford as you said is a non operated acid I believe you go for it's the only non-operated asset. Right. So I think you and I as generalists you know, generals generally get their face ripped off in oil and gas. I think our first thought was Eagle Ford is their worst asset because it's a non-operated asset. And I believe we've heard a little bit of scuttle blurb essentially thinking about that we are actually wrong right there like no Eagle Ford's probably your best asset on a PV 10. Because anyone can buy it. It's really simple, right? There's lots of you can have financial buyers, they can just come in and say oh, cool, we'll just cash those checks. You can have the A you can have the majority producer buy it you can somebody's just looking for a little asset diversification and to get kind of into southern Texas if they don't have oil and gas exposure there, right? So it's small, it's probably really easy to just flip it to a variety of buyers, whereas everything else they have, I believe is operated by them. So buyers have to do a lot more due diligence, there are fewer buyers, they have to make a lot more assumptions on that there's kind of no one, you know, in this case, Murphy, who's the majority owner on Eagle Ford is kind of backstopping a lot of the assumptions there. So, I think my first pushback would be if I saw a press release tomorrow, that's an Eagle Ford sold for about PV 10. I would be like, Oh, yes, stock to the moon. But some people might say, Oh, well, you know, everything else, you can't value everything else at PV 10. Because it's so different. How would you respond to that pushback?
Tim: I would just say, you know, each asset is going to have its own peculiarities. You know, the fact that it's not operated means definitionally there's no paying up for any incremental development opportunities, or any idiosyncratic, you know, benefits to that asset. So let me just give you two examples. The range, the assets, the Colorado assets, J have this angle where, you know, it's enhanced oil recovery using co2 ESG, positive 45 Q tax credits, which Amplify is not currently receiving, I believe the way that it works is that Exxon receives the credits right now. But what if somebody had a strategy to use the co2 and to get the 45 Q credits? Let's say for as one example is the East Texas assets. Do you have incremental drilling opportunities? You know, there is a double-spend cutback there at, obviously, with today's natural gas strip, incredibly high our IRR. So I would say each asset has, you know, its own peculiarities which, which, you know, certain buyers might see as a positive. So what we did, we obviously listed what the positive on the ego for it is, it's just the financial transaction, right? I mean, you know, if I'm Murphy, it's a $50 million on my revolver cost me a million dollars a year of interest expense. Right. So, you know, a pretty straightforward transaction.
Andrew: And this doesn't apply to Amplify in particular, but I've been really into a I've spent a lot of time looking at recently, all the controlled MLPs from the giant companies. So a great one right now is shell is talking about buying shallots, which I've talked about a no. Matt Turk has been on the podcast talked about, uh, they're looking to take them out, right, they filed a thing that said, Hey, we own 70% of you will flip you, and all the MLPs have been doing this because look, the MLPs yield to the equity 10%, right, they own these great pipelines, they yield 10%. And I think shell and all these guys are looking say, well, with oil Presper there are we need to start drilling some more, we need to control our infrastructure. And by the way, debt-equity yields 10%, we can go buy it, and we can issue debt at 40 Your debt at 3%. To buy it like it's super creative for us to go buy it anyway. So with exactly what you say, with Murphy, they can look and say, oh well amplifies the cost of equity cost of capital right now is probably 15% implied by the market, our cost of capital is 4%, we can split the difference at 10%. And everybody's gonna be super happy with that.
Tim: Right, and to me, there's a lot of financial buyers that could actually, you know, if you're a financial buyer, there's no reason that you wouldn't look at the same opportunity and say, Oh, with no sweat off my back and no work, I can make this sort of IRR, right, which is only meaningful. Because you're you know, you're not operating assets. So I do think that one could be interesting. And again, I mean, I don't think the markets are ready for this company selling an asset or to at TV test, for sure. Otherwise, the stock would not be here.
Andrew: I want to talk beta, but you just said the stock would not be here. So let's talk about a couple of other pushbacks. You know, I think the other pushback I get is, "Tim, Andrew, you guys are generalists, y'all are interested in Amplify because it trades at this huge discount to PV 10. Now there's these really sexy catalysts with beta coming back online or winning a lawsuit or selling your ego for that close to PV 10." But you know, well you were here before this, Phil but a lot of people say look before the spill, PV 10 was $12 per share, and the stock traded at 5. Today PV 10 is probably 20 in the stock trades at almost six but PV 10. You know, there's a beta risk. There's all sorts of other concerns. There's probably some concern that you know, the trend path for oil and gas prices is probably lower, not higher if you assume geopolitical tensions are cooled down just a little bit. There's probably a little bit of geopolitical premium. Not to say couldn't go higher, but there's probably a little geopolitical premium there. I don't know what I'm saying on that. But you know, I think a lot of people say hey, you're just interested in this because of these situations. But the best thing, gas investors have looked at this. And for years, they've said, these are awful assets. We don't want to have them like it trades, it should trade for huge discounts, PV 10. And the current share price kind of implies the same discount to PV 10, as it did before beta. So how would you respond to that pushback?
Tim: I mean, I think oil and gas investors can't really invest in $150 million market cap special situation. So it's almost, it's almost a moot point.
Andrew: They've all gotten so rich for the past 18 months that this is too small for them.
Tim: I mean, you could make a similar argument for you know, that small-cap Canadian ENPs make just as little sense, in terms of, they've got shallow decline curves that are trading at crazy, call it free cash flow and yields. Those don't make a lot of sense either, and a lot of incredibly smart oil and gas folks are making great, great money on Canadian small caps. I would argue that there's a little bit of kind of the same energy here. Look at the beta California risk specifically, you can't rule out that California won't try to intervene here. Of course, the way that I'm framing it is, like, I'm sure they could figure out some way to file an injunction. I'm sure if they do this, you know, a federal judge would have to overturn that. By the way, I have a lot of confidence that it would be overturned because jurisdictionally This happened in federal waters.
Andrew: With that, one second. Yeah. I think you jumped ahead. So where I was going next, you knew where I was going. But the beta California risk is a lot of people are concerned beta, as Tim was saying is in federal waters. But a lot of people have been concerned that California because beta spilled off the coast of California, California will somehow try to stop beta, the asset that Amplify errands that cause this oil spill, they'll try to stop beta from restarting even though the jurisdiction should be with federal because this is federal water. So please continue. I just wanted to give that background.
Tim: Oh, yeah, no, that's fair. So look, I think I can't rule out the California risk here. And it's obviously not the most friendly jurisdiction in the world. Now, one could argue that that's probably going to be teaming right now, I would argue that oil and gas production, you know, is a few more geopolitical incidents away from being a patriotic positive, which is a whole total sentiment shift from-- [crosstalk]
Andrew: One thing I've been thinking about is I know a lot of people, especially institutional firms, who would not touch anything defense, or guns and ammo-related. And all of a sudden, a month ago, here we are today after Russia invades Ukraine, the EU just made guns in defense, stocks, investing whatever. They made them ESG friendly and I have been thinking like things that were politically unacceptable. Like, as times change oil and gas in six months, it could be ESG friendly to say, hey, in the short term, we need to do this. And you know, I'm sure on long term, like, we still need to go green and everything but in the short term, these could be as friendly moves.
Tim: Yeah, and look, and so the way that I'm framing it is, you just compare, you know, you compare what some other spills have looked like versus what this one looks like. And, you know, just given what's going on with with with oil prices right now, and how much of a hot button political issue this has become? Are you really going to shoot your bullet here, if you're California on a lawsuit, that, by the way, has an enormous uphill battle? So look, but Could something be? Could it injunction be filed? Of course, will the stock go down 10-15% that day? Of course, right? All that, my base case is that what that will do is simply just went out to get beta operating again. I mean, look, all this math we've been doing is on 23 Anyways, right? You know, so it would push your timeframe out, they have a loss of production income insurance for 18 months, and we're only six months into the incident right now. We're only six months post-incident right now. And so, you know, but you can't roll it out, of course. But again, you know, if this was a state really trying to fire a bullet, one misdemeanor is what they came up with. And by the way, this, any spotlight on this whole issue, you really highlight a lot of malfeasance on the traffic that was allowed to congregate in the outside of the Port of Long Beach. So this is not so straightforward. It's a losing political issue. There's no question about it. You know, anything, anything restraining the American oil project right now is it's just not the moment. So, look, that's me playing political analyst, which you should, that in a quarter we'll get you--
Andrew: Get you nothing these days.
Tim: Yeah, there's my thought.
Andrew: I think we've covered most of the stuff I wanted to talk about Amplify here. I mean, like this is, it's funny, it's an under $400 million. It's about a $400 million EV company. but there's so many different things assets, angles to talk about. Are there any angles you wanted to... I mean, I think both of them are agreed, it trades at a huge discount of PV 10. I think both of us think beta is coming online. Even if it doesn't, I think the stock works pretty well from here to be honest, just given that big discount in the free cash flow going through. anything else you want to talk about on Amplify before we maybe quickly hit the Double Dogs?
Tim: Just two things. Number one, it's just always important to step back. What this was before the incident and what it is today has not changed. This is the most leveraged US-based expression of higher oil prices. There's operational leverage because they're higher costs, oil, for example, there's financial leverage, because they have debt. Then there's tremendous potential for valuation expansion because of where they trade. The three of those synergistically interacting, make this the best way to express a higher oil and gas deck. You know, that's just the math generally but there's a little bit of qualitative judgment within that statement, but largely, that's just the math. So that's one point.
Then the other point, I would just say, this management team has handled this incredibly well. They've been level-headed, they are talking to shareholders, they're taking shareholder input. I would argue that shareholder input is part of the reason why Eagle Ford is being marketed right now. And look, shareholders don't love having this major other stakeholders in the RBL, which might not always act in the best interest of stockholders. So I would argue that management are doing the right thing in terms of look, and they're getting a lot of feedback from a lot of different stakeholders right now but they're not blocking out shareholders in the way that some companies do when they kind of go into hiding in the middle of a crisis. I would argue that the CEO and CFO have handled this really well, from a shareholder perspective, which is obviously my last take.
Andrew: Perfect. Yeah, I think the only other thing I'll just briefly mention, I know both of you, and I, well, you're the one who pointed out. We were worried because this is a company that hedges a lot. We were worried about the beta hedges because you know, they had been put on in 2021 and beta isn't exactly producing now. We've been worried about that, or we've been worried about what I'll call the Peabody risk, where your hedges go so deep out of the money, you have to post collateral and you have to raise equity to post that collateral, even though you're going to produce that stuff, right? And both of those are off the table. The company wisely took off all the beta hedges when beta shut down, which saved them, I think, like 20 to $30 million so that was great.
Tim: It's $66.
Andrew: Yeah, and now if beta comes online, they'll be minting money off beta that's completely on hedge, and then be I looked through their 10k and they also confirmed on the earnings call. I don't believe that these not that they can burn through it but you can see because they haven't had to, they don't have to post collateral on their hedges as well. So on both those cases, I think those are two tail risks that have been removed or we can feel reasonably good about. Let's turn to the Double Dogs. Tim is the one who introduced the Double Dogs. I think both of us were kind of thinking along the same lines because my 2022 prediction said deep value stocks outperform, I cited a couple of cyclicals. Tim went even harder he found 10 or 15 cyclicals across the board that traded super cheaply. But I shouldn't be talking, I should turn it over to the founder of Double Dogs. Tim, can you explain the Double Dogs? Why you came up with it, how it's performed, and we can talk about a couple of the names?
Tim: Yes, for sure. So all throughout last year, I look at new names and hear different pitches. I kept coming back to this question that I was asking myself, but also that I would frequently hear from others as, for example, I was doing a lot of work on Arch. And the question was always wait for a second, if your numbers are even in the right ballpark, in the right stadium, how can this trade exist? That makes no sense. So I was doing all this soul searching on that question and a lot of folks were talking about it and posting about it with their own language, you know, and I'm running everything down so thoroughly in the case of Arch, it's misplaced ESG aggression, is it because Macro is just going to implode, and I just don't know about it. Maybe it's the spotted path of coal management teams.
But what I really started to realize is that there was no sense in running this down from an idiosyncratic perspective, with coal, let's say, because the same setup existed in US Steel. Then the same setup existed in the shipping names. And the same setup existed in the lumber names and some copper names. What I finally realized, and why I wanted to write a post about it is that the common thread that runs through all of these setups was sort of this historically accurate market maxim that you never pay a low multiple for a cyclical, it's been a great market. it's worked well, it saves you a lot of money, right? It sounded logical most of the time but as we're learning with the last couple of years, most of the time keeps getting run over. Your things that used to work most of the time, are no longer holding when we've just had the biggest economic disruption of the last century. You know, which was the biggest economic disruption followed by the most impressive, you know, synchronized global government response to a market disruption of the last century as well.
Andrew: Yeah, can I just add, I'll just add a tangible example. You mentioned United Steel, I did a post at the beginning of the year, United Steel was 20 or 21. And I said, Look, this is a company tangible book value is 28. It's trading for like, one or two times EBITDA two times on levered free cash flow, like everything you're saying, I was like, steel at the time had come down from the peaks of kind of, like summer 2021. But steel was still way above mid-cycle levels. I was like, Look, this company is saying we're gonna print money, print EBITDA, we're buying back shares like crazy, we don't get it. And I posted that and everyone said exactly what you said, the time to buy cyclicals is not when the multiple is low, because that's the beat the time is when to tie and I was like, I get that. But you know, it's low because they've been minting money for nine months. They're not it's not gonna fall off a cliff overnight. And they're buying back shares are crazy. By the way, it's trading below tangible book value. Now, my only wish is I leaned into it harder because the stock's down from 24 to 35. Right now, but I sold that at around Cedral book. But I do want to ask you one question. So the strategies worked great. I want to ask you why all these why no one believed in these multiples would be my first question. And then my second question would be, you know, all of these have really taken off since Russia, invaded Ukraine, and the markets for everything commodity went parabolic. And we can talk about why they went parabolic. But I want to ask, do you think these were going to work if Russia didn't invade Ukraine? Because that's what got us steel working? That's what got a lot of these working.
Tim: Oh, for sure. Yeah. So I think that would be after I put 12 names into this index, by the way, it could have been 20. It was funny when I first posted this thread asking for input on names. Folks were getting really emotional about which ones were in or out. And I just said, look, the whole point is just to tell a story anyway, right? It's not that big of a deal, which names are in or out? So yeah, I mean, look that the average stock was up, I think 20% pre-Russia, and now it's a little over 40%. So yes, I think it was working. But it was a trade that was already working. Before I wrote the article, I was looking for terminology to explain it because it was just such a, it was such a unique point in time. And there were so many different folks on, you know, talking about this trade, but everybody had their own language. I was just actually trying to create, you know, kind of a shortcut to "Hey, what are we talking about?" "Oh, we're talking about the same thing."
Look, I mean, to your first question, commodities have a wave viciously mean reverting, right. And so if you're, if you're paying us four times, EBITDA multiple which would have historically would have been that low multiple that you quote, shouldn't pay on a cyclical, right, that can go to 10 times EBITDA in a flash, you know, if commodity prices get cut in half, which, which, by the way, is almost certainly going to happen in a broad basket of commodities right now, because we've got everything from, I don't know, aluminum is probably 50% Up above its marginal cost of production to coking coal is 300%. Above it's above the marginal cost of production, right? And so the prices are coming down for sure. But look, so you've got that issue where four times EBITDA can turn into 10. That's why that was a great thing, a great market maximum growth Capex as a way of being both destructive to the company. AMD industry. And so another reason why that's been a great market Maxim, m&a has a very spotty track record. You have industries that have had rounds of bankruptcy. So the reason why that market maximum exists is very sound logically, the issue is just that at our current point in time, it just got stretched way, way, way too far. And so if that four times is 1.2, that's different, right? And again, I talked about this before, that's like chiefs Jags last year, if you want to bet on the Chiefs length 14 points, it's a 5050 Bet you want to bet on the Chiefs length 32 points, you know, you should probably take the checks, right? I mean, point two times EBIT, done versus four changes the odds of the trade working by a lock.
Andrew: And I think another thing was, it wasn't just I agree with you on the multiples, and it wasn't just like the multiples at one point in time. It happened for like six to nine months, right? So at that point, it wasn't like they were trading super cheaply on some hugely levered bet, right. They made so much money and printed so much free cash flow that by the end of it, they had all this guide us to basically pay down all their net debt, and they were generating all this cash. So it was much different than Oh, it's two times EBITDA but 75% of the Evie is debt. So you're kind of trading levered equity stuff like it just went on for so long that it really deep wrist position. And I'm laughing because, on Bloomberg, somebody just messaged me and said, "Who is T. Web'?" What a brilliant guy, so I'm just laughing.
Tim: There's no way there's confirmation bias in that statement. No way.
Andrew: But let me ask. So Double Dogs, Double Dogs has worked great. You know, some of the cold names have just been screamers, there have been a couple of years and still, names have ended up working great. Like a lot of them have worked great. Which ones do you think are the best position right now? And I'll include a link to the Double Dogs post in the show notes if you want to go read the original. Which ones do you think you know, if I wanted to jump in on Double Dogs and say it's not too late? Where do you think people should be looking?
Tim: Don't do that to me. You know, the few of the bottom performers of these 12 names. Number 12 is resolute forest products. Number 9 is green first, although green first is up 31% and it's number 9 so it feels a little embarrassing to say that it's been a laggard up 31% year to date. But both of those still have a one handle EBITDA multiple and lumber does have some really big structural demand drivers, and some really scary, restricted supply constraints. And so I would argue, look, there's so many different commodities where I get it, it's the scariest thing in the world when the spot price is 100% above the marginal cost of production, it's actually probably 150% for lumber right now. You know, that's scary, right? Because you know, that spot is going lower. And, you know, these equities are, you know, these equities aren't PhDs, they're more like high school students, right? These equities are going down as stock goes down, which was, you know, let's be honest with ourselves. You have one handle EBITDA multiples in the case of what they green first, they did have some net debt post-acquisition, which is going to get rapidly paid down. We're going to be talking about kind of a net cash small-cap in an industry that's rapidly consolidating. So there's probably an m&a bid under the company. Either that or the company should be buying back a ton of stock by the second half of this year.
And I would argue, of course, lumber is not going to stay at $1,200 but I mean, what I did a write up on green first, and I essentially said, hey, if you believe that there's a one year super spike, but that normalize lumber is 500 versus if you believe there's a one year super spike, but normalized prices are 600. It kind of changes everything, right? I mean, you go up into the right in terms of what the equity might do. There's been a little bit of cost-push so you might want to, you know, take those numbers a bit higher in terms of, okay, you've got to believe that normalized at 650, let's say, right? But if you revert back to 800, let's say, because of these, you know, there's such a structural supply and demand issue and lumber if US housing remains strong, that you're not going back onto the marginal cost, and you're not going back on to the marginal cost curve for potentially a couple of years. And you know, when that's happened in coal right now, your thermal 220 to 250% above its marginal cost curve and coking coal is almost 300% above. And so could that happen in lumber for a couple of years? 100%. There's like, we're in that commodity zone right now, where you just, you're in this kind of shortage. mentality.
Andrew: I'm just laughing because you've said lumber down to 800, right? And I agree with everything you said on the supercycle on everything. I'm just laughing because I did a lot of work on green first, when they did the REITs offering I participated, I still own a lot of stock if anybody wants that disclosure, but I remember in their deck, I'm doing this from memory. I'm trying to pull it up, as I say, but remember, in their deck, they were like, hey, you know, lumber is high right now but here's our models with lumber at 650. Right? They were kind of running that as like, a little bit good bull case. And like right now lumber, I think was 13 or 1400 last I checked, and you're saying if it reverts back to 800, which is way above the lumbers they were talking about. And actually, I can't remember exactly, but I think they close like the end of August and they had a market valuation on the lumber when they closed. That's when lumber went from like 12 to 8 now that's 13. So they closed on very advantaged timing, but that's interesting. Yeah, I've looked at RFP in a while, or do they buy back shares actively?
Tim: Yeah, I believe they did a big special dividend last year. I think they're in the market. But I'm pretty sure that the dividend was bigger. But don't quote me on that. They're returning capital, but put it this way. They're returning capital actively. And you know, this used to be a company with... their balance sheet was a little scary, right? There's some pretty big post-retirement obligations, that sort of thing. Again, a lot of these other companies, totally like the balance sheets are so clean versus what they used to be, which is why this trade doesn't make any sense, right? I mean, there's 10 reasons we could keep going but you just keep coming back to well, that doesn't make sense. That doesn't make sense because again, you know, if you had a scary balance sheet right now, and you were looking at a super spike, and you were looking at a spot price way above the marginal cost of production, that's really scary, right? Because if you revert back, there's a lot of left tail risk, and you could lose a lot of money. I mean, in some of these cases, it's oh, boy, if that left tail risk plays out, I'm still net cash. And, you know, either debt will go down by a lot. So it's, it's the cleaning of the balance sheet is another reason why this trade doesn't make a ton of them.
Andrew: My only worry here across all these commodities, and this is actually the same worry I had at the beginning of the year, so everyone can take with a huge grain of salt. But like, my worry right now is a year ago, if you and I had pitched a commodity company, we would have just been laughed out, right? Like everybody would said, "Hey, let's go buy some stacks trading 50% above trust value or something." You know, nobody want to call it companies but right now, in my conversation with investors, most people are talking commodity companies. It just feels I mean, I was in college in 2007. So I can't put it just feels to me what I imagined, like when people were talking oil, super spike, and remember Buffett? Buffett right now is buying oxy. And Buffett back in 2007, bought a lot of ConocoPhillips. And he ended up selling that at a big loss. And it just like everyone to talk about, it feels like they're saying things can't go wrong, these things are so cheap, it does feel a little different, where it feels like everyone's looking at them. And you know, yet these things are trading at one and a half times EBITDA right now, and that is different than four times EBITDA but it just feels like so many bills that you can't lose, you can't lose and you can't lose. The price comes back down to, you know, from 1300 to 500. And all of a sudden, one-half times EBITDA is eight times EBITDA which isn't that crazy expensive? But these are commodity businesses that the DNA is real. And I'm just worried it feels like everybody's looking in this space right now. You know, I don't know any real betas in the space.
Tim: I think everybody's looking, there's this great Twitter follow aggressive value that I would recommend everybody follow. He's my Zen Buddha. [inaudible] and he made this point a couple of weeks ago, I forget which stock it was. But you know, there was probably a piece had by Russia, Ukraine, and you know, whatever stock, of course, Niger down 10%. We said, and so, so you stopped seeing this kind of action. It's just proof that you've got a lot of johnny-come-lately money in these names and no true believers. And I think there was a lot of wisdom in that statement. There's not a lot of true believers in the sector yet. There was I hope I don't mess up his name, but I think Eric Mandel Blatt did an interview with Patrick O'Shaughnessy a couple of weeks ago. And he told every single 13 F for I think, what he defined that to 30 or 40 top single managers, hedge fund peers. He pulled all the 13 assets, it was probably December 31st. They had a 20 basis point allocation to energy and material. And, you know, right now in the s&p, I think they're 5% I think they peaked at 17, something like that. But it's that stack that just tells you "Hey, do you think we're getting a little crowded yet?" I mean, until you see that cohort of folks hiring, you know, analysts that cover energy and materials, or pulling teams, from other funds, that sort of thing. I think identity where we're a little hot money crowded, but I really don't think we're anywhere near real money crowded.
Andrew: Let me ask you one question. I want you to play psychologist for me for a second because I think you and I have reasonably similar views of the investing world. You know, I wish my views leaned more towards commodity than resellers at the start of the year. But, you know, I do worry investors fight the last world, right, like 2020. tech stocks go parabolic because it's the best environment ever for them. Nobody can do anything in person. Everything's online, you know, tech stocks go parabolic, that runs through about mid-2021. And you mentioned the best like the best, right? Every Invest Like the Best episode is a tech founder or a tech investor or something pitching a tech company. So it's done. 21 And then the bottom slowly starts to fall off. And then from November to today, I mean, the bottom fell out quick, right? And now everybody wants to be long commodities. And these commodities are trading they're still very cheap. As you said, I don't know if there's a lot of true believers. There are some we had Josh on the podcast, that's a true believer who's done fantastic in the cycle, right. But, you know, I, I've been thinking to myself, hey, Andrew, why were you looking at things even cable right? Cable 10 times EBITDA, great compound buys back. Why are you looking at those when you could go look at things that are trading at two times EBITDA? and it doesn't even have to be commodities. The really cheap stuff that worked recently, and I'm wondering," Hey, are we leaning too far one way or the other by focusing on cheap stuff now?" Like, Should we be looking at the broken-down girthy stuff, right, like a peloton that trades at a pretty cheap subscription revenue? Or Pinterest? I don't know, we're showing you right now but in the past year, PayPal and Microsoft both tried to buy them for a lot higher than the current stock price. So like, are we fighting the last war by still looking at low multiple stuff, or should we be looking at beaten-down growth or something right now?
Tim: So can I tell you where it could get really scary on the upside, which I feel like my, I feel like most conversations I'm having right now are all about the left tail, and nobody's talking about the right tail. So what, what took those COVID and work from home winners, two to 3x, higher than they should have gone? I would argue that it's this cocktail of passive money, the momentum factor always working, and the momentum factor working on growth for about a decade. Right? If you think about which factors did you want to be long, it was momentum, and then grow, then you have this huge wave of passive money accelerating all these seeds. But the most important factor that most true believers always want to be long as momentum, right? Forget about the growth as a secondary factor. So all the themes that we're discussing, discussing now are, I'm sure screaming first decile, short term momentum, but are going to go first decile, long term momentum, momentum before long, and of course, every quant defined long term momentum differently. So I don't see why, you know, this momentum factor plus passive flows, going from nothing to something couldn't potentially accelerate this trade in a way, in the same way, that the work from home winners went further than they should have ever gone. But now we're talking about stocks that started at one time needed to find what is further than they should have gone to four times EBITDA, either to me, again, that's me talking right tail, that's not me talking my base case. But could that happen, given everything that we know about, you know, passive flows and factor investing? 100%. It's not the growth factor that everybody is obsessed with over a 50-year time frame. It's the momentum factor.
So again, I just throw that out there as one write-down scenario that we could look back in a year. And it wouldn't be shocking that I said that. And it wouldn't be shocking if it played out. And it would take these things way higher than you ever expected. You know, I'm sitting here getting white knuckles because I pitch Arch and wrote off Arch, and it's gone from 80 to, you know, Finland now, probably 145 or something like that. And so I'm doing my typical value investor thing where I think I'm being a pig and blah, blah, blah. And I'm sitting here questioning myself when by the way the fundamentals of frustration since then, met coal, which I thought was a dream was it 400 is now spot 650. And I'm sitting here, "When should I sell it? When should I sell it? Oh my god, is it two and a half times?" What if that thing goes to 5? And once that EBITDA is 50% higher than I was expecting because of what has happened with Russia. These are on the table, right? You know, and that's why. Look, each commodity sub-sectors gonna have its own nuance, right? I mean, met coal right now just happens to be in a crazy shortage. Maybe that's the one that ends up being multi-bagger. You know, but who knows, maybe it's lumber as well. Which is why, which is why I wanted to create this index in the first place. It's just, I want to tell this story is going to be different. There's going to be nuances, but I just want to tell the story.
Andrew: I'm just looking and look, I know things change ad the asset base is different and everything but like, just to show that there's not a lot of, kind of, I mean, I think their short term bullishness, but it hasn't ramped yet, like Exxon Mobil. It's trading under $80 per share today, it was trading over $80 per share back in 2018 and oil then was about 60 and oil today is about 100. I know how future curves work and everything, but I'm just saying like these oils are way tighter, oil prices are way higher right now. I think the share counts lower cuz I'm pretty sure they bought back stock in the meantime, I don't know, I know they did a lot of funky things. But you look at the long-term charts of these, and I get the commodity prices really high now. But the share price is for a lot of these guys. It's not crazy again, it's still even after big runs, a lot of them are still one or two times EBITDA. Cool. Well, Tim, this is great. Anything else you wanna chat before we wrap this up?
Tim: No, I just want to thank you again, because you know, when I first came on and did your podcast, I was a total unknown and you made this joke to me, I think offline, but you said, "Oh, you're going to get obsessed with Twitter, you'll get a bunch of followers because of my show," and that sort of thing. The amount of positive feedback that I've received, in terms of people willing to help you think through stock or a theme or a trend because I was on your show, or I'd published something that sort of thing has just blown me away in ways that I could have never predicted. So you were exactly right. You took a chance on interviewing kind of a random on Twitter that had like 200 followers, so I really appreciate it.
Andrew: Hey, that really warms my heart. I'm so glad to hear that and you know what? It's worth it because I invested an amp yet $3 per share and a lot of that was because you were there holding my hand. So, Tim, I really appreciate it. Tim Weber, the founder of the Double Dog index. He's back on the show for the second time. I'm hoping we can have one for the third time for would it be the Triple Dog index? I'm gonna think of something that has two T's in it, but Tim, thanks for coming on, and looking forward to chatting soon.
Tim: Thanks a lot, Andrew--