In their latest episode of the VALUE: After Hours Podcast, Tobias Carlisle, Jake Taylor, and Conor Maguire discuss:
- Maximizing Upside: A Framework for Asymmetric Risk-Reward Profiles
- Finding Your Ikigai: The Secret to Long-Term Success in Investing
- UK Stock Market Woes: Why Domestic Investors Are Turning Away
- Why Oil Remains Essential: The Limits of Alternative Energy
- Is Shadow Banking the Next Crisis?
- Dowlais Group: A Mispriced Breakup Play with Catalyst for Value
- Charlie Munger: Success Lies in Playing to Your Strengths
- A Hidden Value Play in European Fertilizer and Ammonia Markets
- How Dowlais Is Navigating EV Slowdown and ICE Rebound
- A Cash-Generating Powerhouse in a Mature Oil Field
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Transcript
Tobias: This meeting is now being livestreamed. That means its Value: After Hours. I’m Tobias Carlisle, joined as always by my co-host, Jake Taylor. Our special guest today is Conor Maguire, Value Situations. He’s a special situations investor based in Dublin, Ireland. He does special situations from all around the world. I’ve been reading his Substack for a little while. It’s very interesting. So, we’re going to get into what Conor is about. How are you, Conor? Nice to meet you.
Jake: Welcome.
Conor: I’m good, thanks, Tobias, Jake, nice to speak with you both, and thanks for having me on. I think, as I was saying just before we went live there, I’m a longtime listener, but a first-time caller. So, it’s good to be on the podcast with you.
Tobias: We’re going to get every single listener on the podcast, eventually-
Jake: All ten of them.
Tobias: -given enough time
Jake: [laughter] I’m surprised we haven’t already cycled through them, to be honest.
Tobias: Conor, tell us a little bit about Value Situations.
Conor: Yes. Value Situations is the name of the Substack or the newsletter that I write. I’ve been doing it now for about just over three years. So, my background is originally, I qualified as an accountant. Then, I worked in kind of corporate finance, investment banking roles, and then I worked for one of the large, well-known international PE firms here in Ireland. And then, I kind of just decided to go out and do my own thing a couple of years ago and set up my own newsletter. I thought that was kind of the quickest route to market, so to speak, in terms of getting my ideas out there. And that’s been a really interesting experience. That’s kind of one of my main– That’s the day job, so to speak.
And then, I also do some consulting work with family offices on equities as well, some of which overlap with the types of ideas I write about in the newsletter, and then others are more kind of bespoke kind of situations.
Tobias: Give us an idea of the strategy. What are you looking for in broad terms?
Conor: I suppose I have a framework that has three parts or three elements to it. One is where there’s an asymmetric risk return profile– Bless you.
Tobias: Did I mute it in time?
Jake: Yeah, you got it.
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Maximizing Upside: A Framework for Asymmetric Risk-Reward Profiles
Conor: I didn’t hear it but got the visual. [laughs] So, it’s basically three elements to it, really, I suppose, are valuation, obviously, the clue’s in the title. So, valuation focused where I don’t really concern myself with PE ratios and EPS numbers. I take a more, I suppose, valuing the business on an entire enterprise basis and looking at the whole value of the whole company and its assets and so on. So, really kind of a more comprehensive view on valuation rather than headline PE ratios.
I suppose given my background in private equity and I worked in kind of credit and distressed and special situations, was kind of downside protection. And that’s really, I suppose, looking at the balance sheet, again, looking at the asset base, what kind of asset coverage is there, what kind of cash generation or what other kind of protections are there in a kind of a liquidation scenario or in the event that you’re wrong in your initial assessment, what’s the backstop there in terms of value?
And then really, I suppose combining those two elements, valuation where I’m looking for a certain level of upside and then matching that against kind of what I think the downside is and what’s the worst case in the downside scenario. I want to see a very asymmetric risk rewards or risk return profile, where typically the upside is three times the downside risk is kind of how I just– That’s the minimum hurdle I’d try and look for. I suppose, at a high level, that’s the framework I try and employ all the time.
Jake: Did you get the memo that we’ve gotten rid of bankruptcy in the US?
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Is Shadow Banking the Next Crisis?
Conor: Yeah, I mean, that’s an interesting one I suppose. I just remember back in 2019 before COVID hit and all the flood of stimulus came along, but there was a lot of concern at the time about leveraged loans and just how that was just 90% of issuance in 2019, I think, was covenant-lite. And you’re thinking that this isn’t going to end well. And then obviously Covid came along. The pretend and extend kind of has become a fairly well understood factor, I suppose. And yeah, we’re not seeing that in default rates since. So, yeah, bankruptcy, I suppose it’s not the kind of the obvious outcome that maybe it used to be, just the way markets have kind of evolved. So, that’s certainly an interesting area to be mindful of.
Jake: Yeah, I mean, I was being glib, obviously, it is. I’ve personally felt a little bit like chicken little sometimes. I was worried about cov-lite. I was worried about, God, the spreads are super low and tight right now. No one really seems that concerned. No one’s asking to get paid to take risk in a lot of these CLO type of pretty complex transactions that lots of ways that things could go wrong and it seems like it just hasn’t really mattered. So, I don’t know. Is it just not yet, or is it– Was I just being too pessimistic?
Conor: I think a big factor, and it’s an area I used to kind of partly work in terms of the whole private credit universe, is that the ability and the appetite to kind of restructure or amend loan terms when things get a little difficult or stretched is much greater than maybe banks and, previous traditional leveraged loan investors. That’s rates coming down, leveraged loans are getting more of a– they’re winning back market share from private credit, which has just exploded.
Private credit is now bigger than leveraged loan market and the high yield bond market. So, you’ve got three very high-risk appetite parts of the loan market now as opposed to used to just be really two in terms of real scale. So, I think that’s a big factor. And you look at kind of firms like [unintelligible 00:06:52] and others are doing in terms of the machine they’ve built up around Fibre Credit I think. Banks have retrenched, as we all know, and I think the structure of the market is different now. So, I think that has to be some factor in terms of where default rates are relative to what maybe we would have previously expected.
Jake: Could you foresee a day where we’re all collectively bailing out this shadow banking world.
Conor: It’s hard to know. When you look at previous collapses and loss of confidence, it’s the panic selling and it’s the withdrawal of liquidity. The last market episode or event where we maybe got near that was the UK pensions crisis and the UK government gilts. It wasn’t even the really racy types of credit that were causing issues back then, although everything else was affected. But you saw what happened then. The Bank of England stepped in almost immediately–
Jake: Yeah, whatever it takes.
Conor: Whatever it takes and we’re seeing that now. China is now or maybe has that kind of “whatever it takes” mindset as well, so it’s kind of hard to know. And there’s so much liquidity still in the system, really, and I think also you’ve got– when you look at what I call the private capital complex, and I don’t know what [unintelligible 00:08:23] is that globally now, maybe it’s well over $3 trillion.
The flip side of that is that there’s a similar amount in maybe portfolio companies that haven’t been exited or monetized yet. So, it’s hard to know the markets in that respect, private capital is more opaque than previously. Bank-led financings, that dominated markets maybe pre-COVID era, maybe. So, yeah, I suppose that’s something we just need to be mindful of.
Tobias: This conversation usually happens after the veggies. We got dark early.
Jake: Ugh, sorry. [laughs]
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Dowlais Group: A Mispriced Breakup Play with Catalyst for Value
Tobias: Conor, give us an example of one of your ideas. I think you suggested DWL. Do you want to take us through that one?
Conor: Yeah, sure. A lot of the ideas I look at are typically not by design, but just by– I try to go where the value is typically more so in European markets, European equities at the moment, and particularly in the last 12 months, 18 months, the UK. The UK, it’s been well reported, it’s out of favor. No one wants to own UK equities. Even the UK pension funds don’t want to own UK equities. So, in the absence of buyers, I just tend to find that there’s a lot of stocks and situations there that seem to be mispriced. And a lot of these things are cyclical as well, and things will rebound and flows will return and I think these situations will eventually play out in a positive way.
So, DWL, which is Dowlais Group, which is a UK-listed auto parts business. So, it basically makes the side shafts and prop shafts in cars. So, the kind of components that connect the wheels to the base of the car. It’s a UK-listed business. At the moment, it’s about a $700 million market cap business. And it was spun off from another UK-listed company called Melrose Industries, which is pretty much another UK-listed business that was a listed private equity turnaround shop. Melrose originally acquired a company called GKN, which was two segments, auto parts and aerospace. So, Melrose spun out the auto parts business and called it Dowlais Group PLC. So, it’s now an independent auto parts business. It’s the market leader in its segments in terms of the components it provides.
The interesting thing about this business is that it itself has two segments. And management recently stated that they were going to spin off– They’re looking at a strategic review where they’re likely to spin off, I think. I suppose you could deem a non-core segment now, which is called powder metallurgy. So, they make kind of metal powders which are used to make all kinds of metal components that typically in the automotive industry, but also there’s a whole range of industrial end markets that use these kind of components like bearings and so on. And magnets as well is one area where they’re getting into.
So, it’s a really niche industrial business but if you look at kind of what the likely private market value of that segment is, if they spin it out, it’s worth, I think over 100% of the entire market cap of the Dowlais business listed today in London. And so, if you back out the implied private market value based on transaction comps and other listed comps, the core auto business, which is a billion-pound sterling business, and it’s the market leader, as I said, in its components. I think it’s one in two cars globally is estimated to have one of these Dowlais auto parts in the vehicle. So, it’s a pretty well-established, solid business in its niche. It just happens to be in a really out-of-favor industry at the moment in auto parts where no one is really too keen on that at the moment.
But if they spin out this powder metallurgy segment at anywhere near the value, I think it might be worth– The implied multiple on the core business is sub two times EBITDA. And you look at listed peers in Europe and the US now, and they’re kind of four to five times. So, I think there’s a lot of value there.
Going back to kind of my framework in terms of valuation, when you break apart the segments and you look at what are these really worth, and then you look at the downside protection in terms of the asset coverage there, I think it’s a really interesting breakup situation where I think you’re well covered on the downside in terms of if they spin off this powder met business at a reasonable multiple, it totally derisks the balance sheet, net cash position. You’ve got a leading auto parts business. It’s not like it’s producing fancy auto components. These are fundamental to any vehicle and they’re well established. 90% of the leading auto OEMs globally, they’ve got long-established relationships with. So, they’re kind of a key supplier there.
Also, I suppose the interesting thing about this business as well is that if you look at the one part of the auto industry that’s actually doing well in relative terms, it’s been Chinese electric vehicles which have really gained market share. Again, Dowlais is the supplier to the top ten electric vehicle manufacturers in China. They have a JV in China. So, they’re actually benefiting from– If Chinese EV manufacturers come into Europe and steal market share from incumbents here, Dowlais are going to benefit from that, and they’re kind of got a reasonably agnostic kind of portfolio in terms of the ICE, internal combustion engine vehicles and then electric vehicles as well. So, it’s kind of well positioned from an auto market perspective, if you believe the auto market is going to recover from the current challenge that it’s undergoing.
And then in any event, even if the auto market kind of doesn’t really uptick meaningfully in the next 12 months,18 months, you’ve got an event catalyst here with the spinoff of the powder met segment which I think you could see management initiating some kind of buyback or special distribution which can catalyze value as well for shareholders in the meantime. So, I think that’s a really interesting situation.
Again, I think no one really is too aware of it. It doesn’t have a huge amount of analyst coverage. So, I think that’s a good example, I suppose, of where I’m kind of finding value at the moment. And it’s the type of stock that I think, as David Einhorn and a few other people have said, no one cares about these companies.
So, the other aspect to it is it’s probably likely to be a takeover target itself. If they spin off powder met, deleverage the balance sheet and the market still doesn’t care, somebody’s going to take a run at this, I think. And again, to talk about private credit and the dry powder that’s out there in the private capital world, I think it’s a very plausible takeover target.
The other interesting aspect to this again is going back to the original takeover of GKN. The predecessor business, that was a hostile takeover process. And there was a number of US auto parts businesses that were interested. One of them actually bid on the auto business that became Dowlais Group the time, Dana Incorporated. So, there’s precedented there where you could see some kind of consolidation in the market. And, given all, everything that’s going on with the auto industry and data, again, it’s an obvious takeover target I think if it doesn’t re-rate in time.
[crosstalk]Jake: Looks pretty good from Acquirers Multiple perspective.
Tobias: Two times, yeah. Have they announced that spin or is that–
Conor: So, they’ve announced a strategic review where they’re going to exploring this. And I think just to put that in context as well, at the initial capital markets day when the company went public or when it was spun off from the previous parent, that was one of the things management flagged at the outset. They said within, I think it was 18 month or 24 months, they would consider the ownership position on the powder metallurgy segment. So, true to their words, they’ve done that within that kind of timeframe.
Yeah, I think that’s a really interesting one. Again, nobody’s really looking at it. You could argue that it’s the type of company in the current market environment that’s probably too small to remain public potentially. People just don’t care about these small caps, particularly if they’re kind of industrial perceived old tech type businesses.
Tobias: I’ve got a few questions from the crowd here. One is why is it historically loss making?
Conor: Well, since it’s gone public, it’s kind of positive free cash flow. It has been positive free cash flow, and it has to be positive on an EBITDA on EBIT basis. So, I’m not sure what the loss-making observation is there, but certainly cash flow in the last 12 months has taken a bit of a hit because they’ve incurred some exceptional charges in terms of post spin, there’s been some restructuring. They’re closing two plants and they’re opening new plants in cheaper locations and so on. But unless your commenter there is looking at maybe the financials that were part of the previous Melrose structure where there might have been other central cost or something, but no, since it’s gone public, it’s been earnings positive.
Tobias: I’ve got one here. Which part of the DWL business contributed to the recent profit warning?
Conor: That was the auto business. That’s everything that’s going wrong with autos and the large western manufacturers scaling back EV production, so that’s obviously impacted them. On the flip side, Dowlais have kind of benefited from the Chinese incursion into the European EV market. So yeah, it was the auto business that kind of– But again, that’s the same issue with every auto business at the moment.
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Tobias: I had a few. Let me just give a shoutout to folks at home. Hopefully, I can do this in a reasonable time. I’m going to miss the first one.
Jake: Riveting right here.
Tobias: Good, good TV.
Jake: Yeah. This is great.
Tobias: Petah Tikva, Israel. Bellevue. Toronto. Santo Domingo. Philly. Andhra Pradesh, India. Bendigo. Good for you, early start, late night. Toronto. Dubai. London. Savonlinna, Finland. Lebanon. Helsinki. What’s up? Valparaiso, Mac, how is it? Lausanne, Switzerland. Snohomish. France. Walnut Creek. Palestine. Jupiter, Florida. Moncton, New Brunswick. Manchester, England. Pants party saying, this is amateur hour, not Value After Hours. It’s actually probably a better name for it. Cromwell, New Zealand. Spastic Lithuania, might be cancelled after that one if that’s not a real place. Hamburg, Germany. Paso Robles. Kuressaare, Estonia. Scotland. Tallahassee. Hamburg. Tomball, Texas. Omaha. Phoenix. Thanks, fellas, we appreciate it. Chemnitz, Germany. Mendocino. Awesome. Thailand. Good one. That was good stuff.
I’ve got a comment here. Many experienced UK private partners have been burned on Dowlais. Many given up and sold after big losses. Seems interesting. Sentiment worse than rock bottom. That’s from ValueHurts. So, you know he’s a real value investor.
[laughter]Conor: Yeah, that pretty much sums up the sentiment all right, yeah.
Jake: At its peak, how big was the market cap of this company?
Conor: Oh, well, I mean, when it spun off, it was, I think it would have been about 1.4 billion, maybe pound sterling.
Jake: Okay.
Conor: Did we say that Conor’s coming to us from Dublin, Ireland? I don’t know if– I should have given Dublin, Ireland, a shoutout on the list.
Jake: Yeah. We led with that. That’s okay.
Tobias: Do you want to take us through one more and then we’ll do JT’s veggies. OCI, we’ve gone from London to we’re in, it’s Dutch.
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OCI: A Hidden Value Play in European Fertilizer and Ammonia Markets
Conor: Yeah. So OCI, it’s a Dutch listed– It’s a complex one and another one of these kind of multiple segments where it’s a breakup story essentially again. It was fertilizer business listed in Holland, but over 50% of the business was actually an Abu Dhabi listed venture that they owned with Middle Eastern investors. So, complex structure with– Interestingly, it was the third largest ammonia fertilizer producer in the world, behind CF Industries and I think Nutrien in the US. I think Nutrien’s Canada listed.
So, one of the major nitrogen fertilizer businesses, but not really well known, it’s 40% roughly controlled by an Egyptian billionaire called Nassef Sawiris, if I’m pronouncing that right. So, he has an interesting track record of kind of creating value. He built this business up from– It was initially kind of an offshoot of the family-owned construction business, built it– I think he originally tried to sell it. At the time, European and US nitrogen fertilizer business, tried to sell it to CF Industries back I think in 2015. That didn’t work I think at the time. I think it was due to maybe antitrust concerns. Then, he decided to build a competitor to CF, which he pretty much did.
Tobias: Is that CF Industries, the US listed CF?
Conor: Correct, yeah.
Tobias: Yeah, okay.
Conor: Yeah, yeah. So, had tried to sell it to CF. That didn’t happen. So built basically a competitor to CF, but in a pretty clever way where he partnered with Middle Eastern investors, acquired just over 50% interest in an Abu Dhabi listed fertilizer producer called Fertiglobe. And the clever aspect of that was when the energy crisis hit and natural gas prices went crazy in Europe and CF and Yara and a lot of other producers had to shut down capacity, OCI had the benefit of very cheap natural gas supply from Middle East, which meant they were able to very, very profitably produce gas and ship ammonia and other fertilizer products to Europe with a cost advantage that even some of the US producers didn’t have.
But long story short, it kind of didn’t really get recognized in terms of the value or kind of the sum of the parts. And Jeff Ubben, who’s the activist investor, he got involved, recommended the board to strategic review, which they undertook. I think that’s about 15 months ago, maybe. Since then, they’ve basically broken up the business. They had four elements to it. They had a methanol business in the US, they had a US fertilizer business, they had Fertiglobe, which is the Abu Dhabi listed fertilizer business, and then they had a European nitrogen fertilizer business. So, all that remains now is the European assets. So, they’ve done deals to sell the US fertilizer business to the Koch Industries. They’ve sold the Fertiglobe business to, I think it’s ADNOC, the Qatari national energy company. And they’ve sold the methanol business to– I think it’s Methanex, the US-listed methanol business.
They had a market cap of, at the time, if I remember in euro terms, something like $6 billion. And they’ve realized about $11.6 billion in proceeds since then.
Tobias: It’s good work.
Conor: Yeah, a lot of I suppose the interesting thing there was that management acted when the market didn’t value the business properly. They engaged with an activist and they’ve realized, they’ve unlocked a lot of value for shareholders. And I think at the moment, I think the share price is something like 25, 26 euros a share. They’re going to pay out a special dividend of about 14.50 euro between now and year end, just the timeline they’ve indicated. So, you’re getting 50%, 60% of the share price back in cash before year end, and you’re left with a European fertilizer business that at the moment is probably break even or marginally profitable, just given cost base. And some of energy prices are still elevated and demand has been subdued for fertilizer since the energy crisis.
But it also owns a really interesting infrastructure asset. It owns the only ammonia import terminal in the port of Rotterdam in the Netherlands. So, that’s a pretty unique infrastructure asset. I don’t even think that’s actually really been reflected in the earnings, the stabilized earnings of the business. It’s at 25, 26 today, you’re going to get 14.50 back. And I think there’s total value somewhere between 35 and 40 euro if they return the cash and then the residual, the stub equity value, if they sell off the remaining assets, or if they distribute further excess cash beyond. There’s additional surplus cash beyond the 14.50 per share. So, they may well do something with that I think.
Why is it not trading tighter to maybe private market or break of value? The question is, I suppose, what does the controlling shareholder, Nassef Sawiris, what does he intend to do? They’ve said in some of their statements that they might use the cash to do something else. It could become a kind of a vehicle for a new strategy. I suppose the market is– I suppose with that uncertainty, it is not comfortable valuing it maybe on the breakup value, or what I think may be the ultimate breakup value is. I think that’s a really interesting one as well.
And I think, again, going back to the framework that I try and follow, the downside is pretty well covered. I think really the risk here is that maybe he does a take-under and you don’t get a fair value multiple at the end of it. Maybe you get a low ball take private. But, again, he’s also the biggest beneficiary of all the cash that comes off this thing. He and his family own roughly about 40%. So, I think at the same time, he’s incentivized to get cash out of this. He’s shown a willingness to break up a business. He spent the guts of ten years building. He’s realized a lot of cash already, and maybe he’ll take the cash and move on and do something else. So, again, yeah, I think the value is skewed to the upside here in terms of the likely outcomes.
Tobias: What are the influences on that ammonia business, on the fertilizer business? You got gas prices on one side.
Conor: Yeah, if you track the stock price and for any of the major nitrogen fertilizer businesses, not the other types of fertilizer, but just potash or phosphate but on the nitrogen side, it pretty much tracks the price of natural gas. I think natural gas is something like 80% of the input cost into producing nitrogen fertilizer, which is typically ammonia, urea, and then there’s offshoot for derivative products of those two.
Jake: It’s all bullshit, Toby.
Tobias: What part? [chuckles] That’s all bullshit. That’s good.
Jake: Thanks.
Tobias: Had to think through it a little bit. So, it’s commodity, there’s no demand influence on the price.
Conor: Yeah. So, it is a commodity business, I suppose. In terms of the European business that’s left, it doesn’t have that benefit of– Whereas previously, it had this Abu Dhabi production that was over 50% or more of its revenue of the conglomerate revenues, call it historically, where it was able to produce fertilizer really cheaply, and then send it into that port terminal that they have in Rotterdam when everyone else had shut down and couldn’t produce like BASF and CF and others in Europe at the time, during the energy crisis. That angle is gone, but I think they got fair value in kind of selling that off. So, it’s a question, really, of does the European fertilizer business rebound or recover? You look at gas prices, it has come right down again. So, you would think that it’s a commodity industry, it’s cyclical, it’s going to improve at some point. And this guy’s a canny operator. I think he has the track record as well that I think he’s going to get some kind of positive deal done for shareholders at some point of which, again, he’s the biggest shareholder. So, he’s well incentivized to do that.
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Finding Your Ikigai: The Secret to Long-Term Success in Investing
Tobias: Yeah, nicely put. JT, you want to do some veggies?
Jake: Yessir. So, let’s see. I recently learned about this Japanese concept called Ikigai, and I don’t know if you guys have heard of this before. It’s I-K-I-G-A-I. And the word breaks down into iki, which means life and gai, which is interpreted as worth or value. So, put those together, and you get kind of a reason to live or kind of your calling.
But before we learn more here, do you guys remember that 1978 study which found that people, they tend to have a relatively stable level of happiness regardless of major life events and what they looked at were lottery winners and then those who became paraplegic. So, it was like one seemingly very, very good life event and one seemingly very bad life event, and then how were there levels of happiness a few years after that. I don’t know if you guys remember that one, but it’s kind of a famous psychological study that found that it was surprising in that people seemed just as happy as before or after these major events.
That study was authored by a prominent psychologist at the University of Michigan named Philip Brickman. He’s actually the one who coined the term “hedonic treadmill,” which is basically like, you adapt to any new environment, and you feel like you’re sort of running in place. And by all accounts, he was this warm, irrepressible, really engaging to talk to gentlemen.
Yet despite all of his academic success, Brickman struggled with his own mental health. And in 1982, at the age of 38, he climbed to the top of the tower plaza in Ann Arbor and jumped 26 stories to his death, leaving behind a wife and three daughters. So, even studying happiness in depth might not be enough for your ikigai, your reason to live. And we’ll try to cheer up the segment here a little bit. I know that was a bit– I should have given a little warning. It was going to get heavy there.
This concept I discovered from a book of the same name, and it’s mostly about Japanese people and how they blend together longevity and health and purpose. And the author diagrams out these four overlapping circles, and one circle is what you love, and another is what you’re good at, what the world needs, and then finally, what can you get paid for? And right in the center of that intersection of that Venn diagram is your ikigai. And it’s this thing that lights you up and makes you feel like you’re contributing to the world in a meaningful way.
And in reading this book, I was reminded of Simon Sinek’s talk, Start with Why, which I don’t know if you guys have ever seen that one, but I would encourage you to watch it, it’s very engaging. And people really key into the bigger why of something. And then later you can worry about the who, what, when, where, and how. And I’ll use one of Sinek’s examples that he uses in the talk just to kind of illustrate the purpose.
Do you guys remember TiVo? And I don’t know if that’s still a thing or not, and that’s kind of exactly the point. At the time, they were the first to market with this game changing technology, a device that lets you pause live TV, skip commercials, record your favorite shows, and they were the only ones who had– And they had it all. They had the cutting-edge technology. Reviews were great. User base who absolutely loved it. And despite all this overwhelming enthusiasm, they didn’t have a massive hit that you’d expect. Like, the sales were a flop. And Sinek points out why he thinks they failed is that instead of focusing on the why, which is the fact that it gave you total control over your TV watching experience, they focused instead on the features. So, their ads were like, “Hey, you can pause live TV or rewind or fast forward.” But basically, they were just telling people what the product did. And Sinek argued that if you connected to the why, which is like, “Are you someone who wants total control? Boy, do we have a product for you. It lets you pause live TV, lets you rewind, lets you fast forward. But you’re always in control, and that’s the big thing that separates it.”
So, in this book, it also then leads to the concept of flow which, if you think about, it’s those things that make time just absolutely fly by. Maybe for some people, it’s painting or coding or cooking or surfing or reading 10-Ks. Who knows? But it’s where you lose all sense of time and then also kind of your sense of self-consciousness in the moment.
And the man behind the research into flow is this guy named Csíkszentmihályi. I’m not going to say that a whole bunch of times, and I’m not going to spell it, because it’s quite the mouthful, but he really cracked the code on this, and it’s really about peak performance and feeling good while you’re doing it. And he was born in 1934 in a section of Italy, which is actually now modern-day Croatia. And in his early years, during World War II, he was a kid, and like a lot of people at that time, he saw all this hardship and chaos. But what fascinated him, even as a kid, was that even how terrible things were, some people managed to stay happy in all of that craziness, and that question stuck with him. How do they stay positive even when the world feels like it’s falling apart?
That sent him on a lifelong quest into psychology and eventually developed this idea of flow. So, when you’re in that flow state, you’re fully engaged, you’re learning, you’re growing, and you’re really at your happiness, and it’s an optimal experience, and it fits in with– the real-time part of your ikigai is when you’re in this flow state, everything just clicks.
I think to bring this back to the investing world, if you study the best investors, I feel like you get a sense that they’re in that sweet spot all the time, like they’re riding in that pocket. Buffett says he tap dances to work every day, and you really believe him. It’s something they do for free. It’s more about the game than the money necessarily, maybe the relationships. And if you read William Green’s book, Richer, Wiser, Happier, which is really just a series of profiles and interviews of all of these stellar investors, you really get the sense that they’re doing exactly what they were meant to do on this planet. It’s kind of hard to imagine them doing anything else. And I think they spend all day in that flow state, in that ikigai.
And I think for us mortals, you really should ask yourself and check and make sure that you have this deep passion for investing because you absolutely will be tested at some point. And getting your teeth kicked in for multiple years is no fun, as all of us can kind of attest to at this point. And your passion and your resolve is really going to be tested, and so you need a big reserve of it. It needs to feel like this is really your thing. And if it’s not, it’s really difficult to compete with people who it is.
Anyway, that’s, a little bit of more of a Japanese term that blends with some Start with Why, which blends with flow, which then, I think you sort of see in all of the best investors.
Tobias: Isn’t the ikigai, there’s a Venn diagram that there’s three or four–
Jake: Yeah.
Tobias: The little circles for– What are they?
Jake: The four circles on that were– Make sure I do it in the right order. It’s what you love, what you’re good at, what the world needs, and what you can get paid for.
Tobias: What happens if none of your circles are–? [laughs]
Jake: Yeah. If you shoot the arrow and none of them hit the circles then, yeah, I’m not sure. I think you need to spend a little bit more time thinking about where you are and what that activity, where does it fall in those things.
Tobias: That’s a good one, JT, some good comments here.
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Charlie Munger: Success Lies in Playing to Your Strengths
Conor: An interesting one. Yeah, I think did Munger have some comment about– I think it was Munger about when you’re– I can’t remember the exact wording, but the sentiment was something like, if you’re playing a game with people who are better at playing the game than you, you’re going to lose or something to that effect. So, just in terms of one of those principles, it’s doing something that you’re good at or that you’re naturally inclined or have an ability for.
And I think to succeed in anything really, you really kind of have to be at that intersection of what you’re good at, what you’re naturally good at, or what you have an aptitude for with what excites you and kind of makes you want to do it regardless of pay or outcome or status or whatever it is. I think if you’re between those two in particular, those two ideas, I think that’s a good place to be.
Jake: Yeah, I think Munger has a quote about, and it’s not the direct quote here I’m going to get, but something like he was never any good at something that he wasn’t deeply interested in.
Conor: Hmm. Yeah.
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Chord Energy: A Cash-Generating Powerhouse in a Mature Oil Field
Tobias: Should we decode energy?
Conor: Yeah, sure. That’s a more recent idea that I’ve written about and it’s a US-listed oil and gas company, mainly oil focused, about 90% plus of its revenues are in oil. I think, again, just with– I started looking at some oil names recently when there was really, people were– Sentiment was really starting to turn sour on oil, the price of oil in terms of OPEC opening the taps and production increasing just at a time when global demand was weakening and whether it’s US and Chinese consumption was expected to decline.
Chord Energy is an interesting one. I kind of have it on my watchlist at the moment. It’s a US-listed oil business. It acquired another Canadian-listed oil business called Enerplus earlier this year. Again, in terms of the situation here, it’s that trailing numbers are kind of largely irrelevant, kind of a transformative acquisition in many respects. It now has, I think, roughly about ten years of inventory, pretty much focused in the Williston Basin, that the backing formation is probably the main formation there, that was what was called the birthplace of the US shale boom back in the mid-2000s.
And I think production has increased by over 50% following this acquisition. But the interesting thing about this business is that it has a peer leading capital return framework, as they describe it. So, they have a commitment to return 75% of all free cash flow to shareholders. So, that’s significant. They’re very disciplined on Capex. Everything they do in terms of capital allocation is geared towards optimizing capex to support production and free cash flow through kind of commodity price cycles. They’re not the type that are going to get ahead of themselves in terms of overdrilling, and they will do or will look at selective, opportunistic M&A.
The interesting thing about this business is that on a pro forma basis now, with the enterprise assets added in, I’m getting a free cash flow yield at $72 oil of about 13.5%. That includes some synergies, which I think management should be able to realize. And they’ve a pretty good track record in realizing synergies on previous acquisitions.
The other interesting thing in terms of this business, it’s the lowest geared in its peer group. It’s almost kind of debt free in terms of the net debt position. And the other important thing to say as well from a kind of an event driven angle is that it’s the leading independent producer in the Williston Basin there. All the other producers that were there or had large production in the Williston, Hess, Marathon, they’re all the subject of kind of takeovers, either in the process of being completed. So, it’s the largest player in a consolidating region of the oil market. When you look at how disciplined oil producers are now in terms of rather than spending capex on drilling, they’re just as likely to acquire already producing assets that are well located. So, jurisdictional risk is low here. Obviously, it’s onshore US.
And what I really like about it though is that it doesn’t need $80 oil to really throw off a lot of cash. On my numbers, it can produce that 13% plus free cash flow yield at $72 oil and $3.50 gas. And if you can form a constructive view on energy prices and specifically oil over kind of any kind of medium-term time frame, I think it’s a really interesting one.
You look at just bigger picture. People talk about peak oil and OPEC opening the taps, and there’s all this new production coming on stream in places like Guyana and Brazil and others, other non-OPEC locations. But if you look at oil historically, there’s all these predictions about where it will go. But oil has traded within– If you exclude the kind of real outlier moments like that negative oil price that hit for a short period of time in 2020, or that 2008 $145 peak when there was that kind of panic in the market, oil has traded an average of $72 a barrel over the last 20 years, and natural gas similarly has traded at an average price of $3.50. That’s the MMBtu pricing, Henry Hub pricing. So, if oil and gas prices–
C
And we’re living in an age of energy and security, and there’s so many variables now, where I’m comfortable enough thinking that over a medium-term timeframe, oil is going to hover around that long-term average. Sure, you’re going to get peaks and troughs, but on average, I think it’s not unreasonable to think it’s going to stick to that type of average pricing through a cycle, if you want to call that mid cycle pricing or whatever. And I think if you can get comfortable with that view and you look at the cash generation, the balance sheet, the jurisdictional risk is very low here.
And then, again, likely it’s the leading independent producer in the Williston. It’s been reported– and a number of its peers have been rumored to take over targets over a period of time. This business is now a much more fundamentally stronger business with the Enerplus acquisition. So, it’s potentially between two events in time, and in the meantime, it’s throwing off a lot of cash.
The bear argument here is obviously it’s Williston… is a mature field. No one’s really too interested anymore. It’s all about the Permian and decline rates are higher now in the Williston and so is it going to decline faster than others? And can you believe that ten years’ worth of inventory? But I think when you look at what management are saying, what they’re doing in the area and also what a number of other players are doing in the Williston and what they’re saying about it with kind of technological advancements and drilling techniques, it’s not unreasonable to think that they’re going to continue to generate cash sustainably from their asset base. So, yeah, I think that’s a really interesting name.
And again, one that’s overlooked. I think it has maybe 14 analysts covering it, which might sound like a lot but the average among its peer group is about 23 analysts covering its other peers. And it’s not in the Permian. So, people aren’t going to care about it as much maybe. Again, it has that kind of overlooked quality but in my view good asset coverage and downside protection and you’ve got a free option on oil prices going higher. You’ve got potential takeover catalyst at some point in the future as well. And in the meantime, they’re returning 75% to free cash flow to shareholders. So, you’re going to do okay on that basis as well.
Tobias: That’s a simple, clean idea. It’s a good one. And you answered all the questions that I had as you were going there, so good job.
Jake: Yeah. What’s their AI strategy though? That’s what everybody wants to know.
Conor: Yeah. They stayed silent on that, I think. Yeah.
Tobias: Keeping it close to the chest.
Conor: Shipping barrels of oil I think is their main interest.
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UK Stock Market Woes: Why Domestic Investors Are Turning Away
Tobias: Conor, just more generally, why do you think that the UK stock markets had such a rough run over the last five plus years? What’s driving that?
Conor: I think the headline reason that it doesn’t have those really attractive fast growing change-the-world-type businesses that the US has with the mag seven and those types of names. There’s a couple of issues affecting the UK market. Now, it’s viewed I suppose as a stagnant one. There’s a lot of lobbying now to get the UK government to try and stimulate renewed interest or equity investment in UK companies. I mean I think as well, there’s that kind of headline, US tech is just more interesting and faster growing and you’re going to get better returns looking at that, or just simplistically following that.
But I think then as well, you’ve got a real absence or retrenchment of domestic UK investors investing in UK. I mean, a lot of them have– You kind of have to follow the flows because in the short term, that’s what moves stock prices and that’s what moves the likes of Nvidia and Tesla and all these other household name companies. So, I think it’s really suffered from that. It’s probably suffered from a lack of forward thinking in terms of the government and other kind of authorities in the UK in terms of kind of trying to drive investment and encourage kind of risk taking, suppose whereas you have that real culture in the US, which the returns are– When you compare US and European and UK equities, that’s really played out over time. So, I think that they’re the main reasons really.
Yeah, just generally speaking at a more macro level, UK and Europe is in slower growth than the US, particularly post GFC. So, there is the perception that growth just isn’t there. Why would I invest in the UK when I can invest in something more attractive in the US? And I think as well, then one other factor is that UK really has suffered from a shrinking stock market. A lot of companies have been delisted or acquired over time through takeovers or other transactions, so that’s been a fact– And those companies haven’t been replaced. Private capital then has been a big factor in keeping companies that maybe otherwise would have listed from going public and keeping them private.
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How Dowlais Is Navigating EV Slowdown and ICE Rebound
Tobias: A few more questions from the crowd here. One was in relation to DWL, to what extent is that weakness driven by that shift to EVs?
Conor: In the recent– they guided down earlier this year, and that was a direct consequence of all the large manufacturers, western manufacturers, really scaling back EV investment and reducing the level of investment and the perceived uncertainty then has really hit the stock price again, although Dowlais has exposure to EV growth through its relationships with all the main Chinese EV manufacturers. So, yeah, EV has been a big– The current sentiment around EVs has been the main issue there this year.
Tobias: So, they’re a supplier rather than a replacement competitor for them.
Conor: Correct. Yeah.
Tobias: EV weakness is bad rather than good for them, the other way around.
Conor: Well, yes, but they’re also pretty well established in the ICE market. So, if EV slowed down– I think it’s the US now has the oldest car fleet it’s ever had. Nearly 15 years is the average age of a car on US roads. It’s something similar, maybe not quite as old in Europe. And if EVs are too expensive– I mean, the EVs are slowing down because the infrastructure isn’t there to support them at the moment and they’re too expensive currently with the way inflation has gone and what has happened, what it’s done to household budgets. So, if they’re not an efficient mode of transport and they’re too expensive, well, then people are still going to need to drive and replace cars. So, Dowlais, I think, will benefit from what I think some commentators are now talking about a rebound in ICE vehicles. So, yes, while they might be losing now in the short term in terms of on the EV side, they also have the ICE side covered, and they’ve also exposure to the only part of the EV market that’s working, which is the Chinese piece I said earlier.
So, I don’t think– I mean, this is a case of car market’s in terrible shape. Anything to do with autos is in trouble, don’t want to own it. That’s kind of the headline take here. But I think when you look under the bonnet on this one, I think it’s a bit more nuanced. And then, you’ve got this whole other kind of strategic review with the powder met business that I think some of those kind of industry issues are not the whole story here.
Jake: What’s the debt look like there? How much are you kind of racing the clock?
Conor: Yeah, I think they’re about two times leveraged here. But they’re kind of well within covenant, it’s serviceable on kind of current run rate earnings. And again, if they sell this powder metallurgy business, that just wipes all debt and it’s comfortably in net cash then.
Tobias: Need another cash for clunkers, JT? Tip some sand to the transmission. All those old cars make people buy new ones, boost GDP.
Jake: Yeah, there you go.
Tobias: Glorious future.
Jake: Break all those windows.
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Why Oil Remains Essential: The Limits of Alternative Energy
Tobias: Glorious future. I’ve got a more general one, like, these are like borderline macro, but we’ve all got some macro influence in our portfolios.
Jake: This is a podcast, sir.
Tobias: Just generally on the oil production ones. What do you think about sort of oil being replaced by solar or wind farms or alternatives?
Conor: Yeah, those types of alternatives, they’re going to become a bigger and bigger part of the energy mix. But I mean, it’s just not realistic to think that they’re going to replace kind of oil or gas completely. I mean, transport is only one use for oil. You look at plastics, petrochemicals, there’s huge other end markets for those products that aren’t going to be– I don’t think that’s going to change massively.
The EV example is a good one in terms of, yes, are more of us going to be driving EVs in the future? Yeah, I think so. All ICE cars going to be off the road by 2035 or whatever the targets are? No, it’s just not realistic. It’s not actually geologically possible to extract all the minerals from the earth to actually achieve that. Even if you can get permitting for mines and all that kind of stuff lined up, it’s just not going to happen.
Jake: We need that asteroid.
Conor: But the thing is that Robert Friedland, the Ivanhoe guy, his statistic– Or I don’t know if it’s his or it’s just one maybe he’s kind of popularized, he said that more copper would need to be mined between now and I think, is it 2040 or 2050 than has ever been mined in the history of mining just to be able to kind of produce the amount of copper needed to kind of facilitate not just EVs, but the electrical grid, the rewiring or restructuring of the entire electrical grid. That’s just so abstract. It’s just not feasible to think that’s possible. So, I think, as with most things in life, it’s all about balance, and you’re going to have different types of energy, I think for different purposes.
You look at marine fuels, maybe that’s going to be– They’re talking about ammonia, maybe hydrogen if that’s economically feasible. It’s a big question mark over that. Methanol, that’s just maybe a marine fuel. Then you’ve got in certain places, yes, wind and solar works. Nuclear is the obvious one. I think pretty much everyone kind of understands that now. But yes, there has been some kind of progress on governments and policymakers may be getting more comfortable with that, but we’re still a long way off kind of any kind of a new nuclear fleet being able to kind of fill the gap.
So, I think in the interim, natural gas is the obvious transition fuel, see more nuclear. And I think oil as well is not really going to go, it’s not going to disappear from widespread use again. I think going back to the earlier conversation and pricing, I think $70 oil over the medium term is not an unreasonable expectation. When you look at– you’ve got a whole these massive trends like population growth, urbanization, infrastructure.
I think there’s a book I read, actually– One of the books, actually, I think I have it here, this one, Vaclav Smil, How the World Really Works. So, if you want to grow a chicken, that’s two cups of diesel that you need to do that. So, when you hear about Stop Oil and all these other kind of movements or lobbying to kind of phase out all these fossil fuels instantly, the reality, I don’t think they fully understand all the consequences of what they’re really talking about.
Tobias: That’s good stuff, JT, you talked about that. You told us that a tomato is a tailspin of diesel.
Jake: Yeah, tomatoes are especially-
Tobias: Profligate.
Jake: -especially difficult because they tend to travel pretty far too. Seafood is also really energy intensive.
Conor: Yep.
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Tobias: Unfortunately, that’s time. Conor, you killed it. Conor Maguire, Value Situations. If folks want to get in contact with you or follow along with what you’re doing, what do they need to do?
Conor: The newsletter is valuesits.substack.com. You could find me there, and I’m reasonably active on Twitter or X, whichever you prefer, @ValueSituations.
Tobias: Good stuff, JT, final words.
Jake: Thanks, Conor. Appreciate you coming on.
Conor: Thanks, guys. Thanks, guys. Enjoyed the discussion.
Tobias: Thanks, folks. We’ll see you all–
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