Value Hive Podcast
Judd Arnold Pt.2: Offshore (TDW, VAL, RIG), Pagaya (PGY), and Unseasoned Stocks
Fri Jun 30 2023Tidewateroffshore servicesconsolidationOSV ratesorder bookliquidityPagayaopen lendingcommunicationinvestment analysis
Description
This episode covers various topics including Tidewater's bond deal, offshore services space, consolidation in the industry, OSV rates, order book in offshore drilling, liquidity in investments, Pagaya as an investment opportunity, open lending strategy, and insights on effective communication and investment analysis.
Insights
Tidewater's bond deal opens up opportunities for future capital market transactions
Despite executing at a higher rate than expected, Tidewater's bond deal allows for more acquisitions and plans to buy more boats with the capital raised.
Offshore drilling industry faces challenges due to lack of order book and shipbuilding factors
The lack of an order book in offshore drilling and shipbuilders not building new boats due to various factors create opportunities for investment in companies like Tidewater and Sub-C7.
Liquidity is crucial for successful investments
Investors should consider liquidity when choosing investment ideas, as it attracts more attention and provides better trading and exit options in the future.
Pagaya offers a compelling investment case despite negative perception
Despite being associated with subprime lending, Pagaya's loan performance is improving, and it has not lost the ABS market. It is considered a procyclical stock that performs well in an expanding economic period.
Open lending strategy provides opportunities for lower rate lending
Open lending, used by companies like PAGAYA, allows banks to lend at lower rates by wrapping the risk with insurance products. PAGAYA's creative use of open lending in personal loans and expansion into other verticals makes it an interesting investment opportunity.
Effective communication and investment analysis require balance and preparation
Boiling down complex information to simple terms aids effective communication, while organizing memos with repetitive points helps address different topics. Balancing breadth and depth of research is important in investment analysis, and the level of detail needed depends on the company being analyzed.
Chapters
- Tidewater's latest bond deal and its implications for the offshore services space
- The second bond deal is easier than the first, allowing for more acquisitions
- The lack of an order book is a significant factor in the offshore drilling industry
- Subc7 and FTI are asset light businesses that could be good investments in the oil field services sector
- Pagaya has a billion shares and is expected to be liquid in the future
- Liquidity equals victory in investing
- Men and women lose creativity after a certain age and stick to what works
- Frontier Communications (FYBR) is a post-bankruptcy stock that is converting from copper wire voice to fiber
- Junior capital is preferred over ABS for debt trading up
- Boiling down complex information to simple terms is important for effective communication
- The podcast discusses the differences between Thai water and Pagaya as investment opportunities
- Open lending is a strategy where insurance companies provide CDS products to wrap the risk for banks, allowing them to lend to consumers at lower rates
- The market cap of the business is around a billion dollars, with potential for growth
- The speaker appreciates the feedback received on Pagaya and other topics
- This episode is a follow-up to the first episode
Summary
Transcript
Tidewater's latest bond deal and its implications for the offshore services space
00:01 - 06:52
- The speaker is bullish on Tidewater and discusses the company's post-bankruptcy bond issuance
- The speaker mentions the discount demanded for a first bond issuance post-bankruptcy
- Tidewater launched a $577 million bond deal, with secured and unsecured components
- The speaker expected an unsecured component to be priced at a discount
- The bond deal was executed at a higher rate than expected, but it opens up opportunities for future capital market transactions
- Tidewater plans to buy more boats with the capital raised from the bond deal
The second bond deal is easier than the first, allowing for more acquisitions
06:40 - 13:36
- There is value in consolidation within the fragmented industry
- Management plans to pay down debt and increase equity
- OSVs have shorter contract durations compared to offshore rigs, leading to quicker rate adjustments
- Leading edge day rates for OSVs are currently above $21,000
- Super premium assets can command rates of up to $40,000 per day
- Offshore CapEx cycles are long-term and require sustained oil prices below $55 or $50 to slow down investment
- Transocean secured a contract in Australia at a higher rate due to a consortium of four committing to keep the rig there
- The lack of an order book is a significant factor in the thesis on offshore stocks
The lack of an order book is a significant factor in the offshore drilling industry
13:10 - 20:25
- Petrobras is aggressively securing assets and extending its operations in Australia
- The number of rigs is lower due to scrapping, but there is still a need for commitment to offshore drilling
- The shipbuilders and yards are not currently building new boats due to various factors such as high deposits and political implications
- OSVs are easier to build, but there is still a gap between Chinese and Korean yards in terms of efficiency and mobilization
- The top players in the OSV market, like Tidewater, are not making significant moves or acquisitions
- New builds tend to have higher rates than existing fleets, leading to an inflated order book
- Korean yards are sold out until at least 2024, with some orders for LNG and product tankers
- Other countries may start building yards for low-end industrialization and job creation
- Sub-C7 is an interesting company to consider along with Tidewater for investment opportunities in the OSV market
Subc7 and FTI are asset light businesses that could be good investments in the oil field services sector
20:05 - 26:54
- Investors may choose Sub-C7 or Schlumberjators based on factors like ROIC and portfolio construction
- Consider the liquidity of investment ideas and how institutional money may impact stock prices
- If people don't care about a stock, it may need a fundamental event like a buyout to generate returns
- Writing memos on liquid stocks is less impactful, so highlighting overlooked opportunities can be more effective
- Average daily trading volume of at least 10-20 million shares is important for liquidity and tradeability
- Tidewater has seen increased liquidity, making it easier to monetize investment work product
- Liquidity is crucial for better trading and exit options in the future
Liquidity equals victory in investing
33:04 - 40:24
- When considering investments, it's important to have a compelling case for why people will care and why it will become liquid
- Management quality is typically related to liquidity
- The best investments often involve exceptional individuals running small companies that grow into big ones
- It's risky to trust someone who has reached their level of incompetence to run a larger company
- The CEO of Cano was not qualified to run 150 Medicare clinics after running five
- The new interim CEO of Cano has positive feedback but the board needs to be removed
- Two board members with high rejection rates are still on the board, which is seen as arrogant and repugnant behavior
- People tend to lose creativity after a certain age and stick with what works, even if it's bad behavior
Men and women lose creativity after a certain age and stick to what works
40:03 - 46:58
- Bad behavior implies it's not the first time
- The stock is hard to own and could go to zero
- Value destruction due to dragging out the situation
- Higher medical utilization affecting the stock
- Equity holders are in trouble, bondholders are covered
- Finding unseasoned equities requires reading a lot and following distress debt stories
- Knowing enough about a name helps process news as positive or negative
- Buffett's investments in oil companies based on trust and macro basis
- Accepting that you'll miss a lot with unseasoned equities but can make multiples with winners
- Timing is difficult in these stocks
Frontier Communications (FYBR) is a post-bankruptcy stock that is converting from copper wire voice to fiber
46:33 - 52:58
- The new management team is spending a lot of money on the conversion and achieving high penetration rates in areas with the new fiber
- The stock price has dropped from $30 to $15 in the last six months
- There are 265 million shares, mostly owned by seven distressed investors
- In Q1, FYBR announced that CapEx would be $400 million higher than previously stated, causing concerns about subordination and deleveraging
- The company's long-dated capital structure and low interest rates were key factors in its investment appeal, but now higher rates are impacting the margin of safety
- Despite these challenges, FYBR offers a compelling investment case due to its cheap valuation, strong management team, and proof of concept for fiber conversion
- Debt holders have missed an opportunity to issue equity and may need the debt to trade up more than the equity
- At $15 per share, FYBR seems like an interesting investment opportunity with potential for significant returns
Junior capital is preferred over ABS for debt trading up
52:33 - 59:01
- Frontier stock has performed poorly post-bankruptcy
- The company's move to fiber could be a potential gem
- Unclear who will own the company in the end
- Management needs to prove CapEx increase is worth it
- Distressed equity screens can reveal interesting names
- DIS go screen on Bloomberg is useful for bond trading over 10%
- Struggle between being concise and thorough in writing memos
Boiling down complex information to simple terms is important for effective communication
58:39 - 1:05:26
- Memos are meant to aid in answering investment committee questions
- Covering all bases and being prepared for any question is crucial in investment committees
- Organizing memos with repetitive points helps address different topics that may come up
- Having a deep understanding of the subject matter is necessary when pitching a complex story
- It's important to balance breadth and depth of research when analyzing companies
- The level of detail needed in a memo depends on the company being analyzed
The podcast discusses the differences between Thai water and Pagaya as investment opportunities
1:05:02 - 1:11:51
- Pagaya is a new business that requires an explanation of what it does, unlike Thai water which is more familiar
- Equity investors often have a negative perception of Pagaya due to its association with subprime lending
- However, data points show that Pagaya's loan performance is improving and it has not lost the ABS market
- Pagaya, LPro, and Upstart are considered procyclical stocks that perform well in an expanding economic period
- Pagaya earns money by taking a percentage of every loan they help originate
- Prime lenders like JP Morgan Chase avoid making loans to borrowers with default risk due to regulatory capital charges
- Neo banks and fintech companies have filled the gap left by commercial banks in lending to near prime and subprime borrowers
- Open Lending provides insurance products that allow banks to lend at lower rates while keeping the customer
Open lending is a strategy where insurance companies provide CDS products to wrap the risk for banks, allowing them to lend to consumers at lower rates
1:11:24 - 1:18:16
- PAGAYA is a company that uses open lending in a creative way, starting with personal loans and expanding into other verticals like auto loans and single-family real estate
- The average fintech rejects around 40-50% of loan applicants due to their cost of capital limitations
- PAGAYA takes a second look at rejected applicants from fintechs and creates a diversified portfolio of these loans, which can be financed by the ABS market
- PAGAYA offers an attractive deal to its partnering fintechs, allowing them to keep the customer and receive most of the upfront fees
- PAGAYA's margin comes from either ABS markup or lending depending on market conditions
- ABS markup allows PAGAYA to mark up loans significantly while still satisfying ABS investors
- PAGAYA is expanding into other verticals like autos and single-family rentals, aiming for $15 billion in originations in the next couple of years
The market cap of the business is around a billion dollars, with potential for growth
1:17:50 - 1:24:34
- Tiger Global is liquidating their LPs and selling assets due to being overextended
- Tiger Global's new fund is two and a half billion dollars and expected to perform well
- The speaker has released a memo on Pagaya and has other interesting ideas
- Life Stance and Zimv are mentioned as successful investments made by the speaker
- The speaker appreciates feedback and engagement from others in the community
The speaker appreciates the feedback received on Pagaya and other topics
1:24:10 - 1:30:51
- The speaker believes that their recent memo was one of the better ones they have written
- The speaker feels good about their progress and improvement over time
- The speaker suggests finding a group of credit guys to provide honest feedback and keep you humble
- The speaker recommends listening to podcasts featuring Kieran Goodwin and Scott Goodwin for valuable insights
- Both Kieran and Scott are thoughtful investors who have had a big impact on the speaker
- The speaker encourages people to listen to both Kieran and Scott's podcasts for credit-related content
- Scott emphasizes the importance of doing the work and being in position when it comes to investments
- Being on sides or off sides is easier to fix than getting in position, according to the speaker's experience
- The conversation was enjoyable, and the speaker invites people to reach out with feedback or questions
This episode is a follow-up to the first episode
1:30:26 - 1:31:25
- The host learned a lot from the guest
- The guest appreciates the opportunity to chat and share knowledge
- The host is excited to share this episode with others