The Rational Cloning: Weekly Ideas #8
Conor Maguire on Pantheon Resources, Goehring & Rozencwajg on the Upcoming Oil Crisis, Asymmetric Bet on Rafael Holdings, Alta Fox on IDT's NRS, and More
Welcome to the 8th edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
(1) Conor Maguire: The Real Asset Ownership Complex and an overlooked real asset play in the O&G sector (published 9/27/21) (LINK)
PANR is a ~GBP£420m / $575m market cap independent O&G exploration and production company listed on the London AIM market. While incorporated in the UK, its business is focused on an enormous oil resource on the Alaskan North Slope spanning approximately 160,000 acres, where it has a 100% working interest over a world-class oil resource, with an estimated ~16 -21 BILLION barrels of oil in place (OIP), making it one of the largest oil finds since the 1960s.
PANR sits on a world-class oil discovery of 16 billion+ barrels of oil, and appears significantly undervalued based on precedent comparable transaction valuations for similar assets in the Alaskan North Slope area.
PANR’s current market cap of £420m / ~$575m implies a valuation of just $0.20 per barrel of oil (BO), based on the total estimated recoverable resource of ~2.9 billion BO. To put this in perspective, the most recent comparable transaction for PANR’s assets was Oil Search’s acquisition of interests in the Pikka and Horsehoe oil developments in 2017, when it paid $3.10/barrel of recoverable oil, or 15.5x the value of PANR’s assets as implied by the current market cap.
(2) Goehring & Rozencwajg Natural Resource Market Commentary Q2 2021: The IEA Ushers In The Coming Oil Crisis (LINK)
The foundation for the upcoming oil crisis is now firmly set in place. The world is re-opening and global oil demand is recovering strongly. By the beginning of 2022, global oil demand should be making new highs. Non-OPEC oil supply has fallen by over 2 mm barrels per day from its 2019 peak and non-OPEC oil supply growth will turn negative as we progress through this decade. A structural gap will soon emerge between supply and demand. As early as Q4 of 2022, demand will approach world oil-pumping capability — a first in 160 years of oil history. The ramifications will be huge and the investment implications monumental.
The following essay studies four oil supermajors (Exxon, Chevron, Royal Dutch Shell and Total) in terms of reserves and production trends. In all four cases, both reserves and production have stagnated over the past decade. In the case of Chevron and Royal Dutch Shell, oil reserves and production have already begun to severely decline. These trends have emerged despite ample upstream capital spending over the past two decades. What will happen once all the supermajors are forced to dramatically cutback upstream spending the way Exxon and Royal Dutch Shell are now?
The previous bull market started in 1999 and saw oil prices rise 13-fold from $11 to $145 per barrel. The most dramatic part of this move occurred between 2003 and 2008 as weakness in non-OPEC production allowed OPEC to regain market share and exercise pricing power. While oil bears will continue to claim that EVs make things different this time, we believe the most important driver of the oil market going forward will be the lack of non-OPEC+ supply. The oil energy crisis is here.
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We continue to recommend exposure to high-quality copper related mining equities. While we do not usually talk about individual stocks, we want to highlight a statistic about Freeport McMoRan (a copper miner we own) that demonstrates the potential. Freeport is a bellwether copper stock that operates Grasberg, the largest copper and gold mine in the world in Indonesia — a mine we had the chance to visit on several occasions.
While most investors are familiar with Freeport, few we have spoken to realize how much profit it stands to earn if copper prices remain high. Were copper to rally to $5 per pound(and remember, we believe this cycle will see prices above $10), Freeport stands to generate $14 bn in EBITDA. By comparison, Visa generated $15 bn in EBITDA in 2020. Freeport’s enterprise value stands at $63 bn, compared with $500 bn for Visa. As investors begin to appreciate the earnings potential of some of these names, we think they will accelerate their purchases of the stocks materially.
Copper continues to be our preferred base metal investment and one of our highest conviction themes overall.
Activists / 13Ds / 13Gs
(1) Activist investors Starboard, Elliott take stakes in Willis Towers - WSJ
The interest from the investors comes a little over two months after a mega $30-billion merger between Willis Towers and Aon Plc was called off due to objections from U.S. regulators that created unacceptable delay and uncertainty.
The merger would have created the world’s largest insurance broker with $20.3 billion in annual revenue.
The presence of the activist investors underlines the immense pressure Willis Towers’ incoming Chief Executive Officer Carl Hess is under to perform on a plan to improve the company’s performance, the WSJ report said.
Earlier this month, Hess said Willis Towers has around $5 billion of capital which could be used for acquisitions. The company also told investors it planned to return at least $4 billion to shareholders through share buybacks by the end of fiscal 2022.
(2) IDT Corporation’s NRS Subsidiary Sells 2.5% Minority Stake to Alta Fox Capital Management for $10 million
NRS operates a point-of-sale (POS)-based platform that enables independent retailers to operate and process transactions more effectively, while providing advertisers and consumer marketers with unprecedented reach into underserved consumer markets. NRS generated revenue of $21.2 million in the twelve months ended April 30, 2021, and increased quarterly revenue by 123% year over year. IDT holds an approximately 81% equity interest in NRS (on a fully-diluted basis) following the sale.
“Given IDT’s strong balance sheet and ample cash flows from our mature businesses, we have been reluctant to accept outside investments in NRS,” said Marcelo Fischer, IDT’s Chief Financial Officer. “However, Alta Fox has demonstrated a deep understanding of our markets and growth opportunities, including expansion into adjacent markets. We are excited to have their support.”
“We are impressed by the quality of the NRS business and leadership team,” said Connor Haley, Alta Fox’s Founder and Managing Partner. “NRS has many of the characteristics we seek in our portfolio companies including market leadership, multiple high-margin revenue streams, and a significant revenue growth rate. We believe that NRS has the potential to be worth many multiples of the over $400 million implied enterprise value from our investment as management continues to execute on its strategic roadmap.”
Share Repurchases
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