Yet Another Value Podcast - Jeremy Raper on his Serica engagement campaign (SQZ)

Episode Date: January 19, 2023

Jeremy Raper returns to the podcast to discuss his latest "engagement campaign" at London listed Serica Energy (SQZ). In particular, he focuses on why Serica is trying to rush through their most recent deal and why shareholders should consider voting against the share issuance at the meeting next week.   Jeremy's letter to Serica: https://rapercapital.com/wp-content/uploads/2023/01/open-letter-Serica-Board-1.pdf  All of Jeremy's engagement campaigns: https://rapercapital.com/engagement-campaigns/   Chapters  0:00 Intro  2:30 What's happening at SQZ  8:45 SQZ's past deal rejections and timing on this deal  15:45 Why an "accretive" deal does not necessarily create value  17:30 How this deal insulates management and discourages shareholder feedback  22:05 Discussing SQZ's shareholder base 27:30 How this deal gives away a controlling stake in Serica for free  30:00 What should shareholders who don't like this deal should do  32:20 How Serica management will respond if the current vote fails  36:05 Providing an update on the coal trade  47:35 Discussing Unit Corp (UNTC)

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you're watching it to it. With me today, I'm happy to have on the most popular guest of the Yet Another Value podcast. My first guest, the people's, maybe the people's favorite guest based on the response on Twitter when I said you were coming on. My friend Jeremy Raper, Jeremy, how's it going? It's going great, Andrew. Nice to see you again. The people's champ. That's what I go by these days. That's what I was thinking in my head when I, when all the response of Twitter came through. Let's start this podcast just with a quick disclaimer. Remind everyone, nothing on this podcast is investing advice. We're going to talk about, you know, Jeremy's busted out the the poison pen again and he's going activist on a company it's a small cap london listed company

energy focus going through what i think what jeremy thinks is a pretty bad merger we're trying to stop that but there's obviously lots of risk everyone should consult a financial advisor do their own work this is an investing advice and i'll add on top of that i think we're going to start by talking about that and then at the end we're going to go and maybe bounce through just other situations we've been looking at but let's start with jeremy you bust out the poison pen Serica Energy. The ticker is SQZ. Trades in London. They've got to vote next week trying to rush and heal through pretty quickly. I'm going to toss it over to you. What's going on there? I said in the preamble, I'd try to maintain a dispassionate position because this really got me fired up. Actually, a lot of people who read the letter thought I was a little too aggressive. But in response to that, I kind of said, look, it accurately reflects the outrage that I feel of this transaction. I mean, we've talked in the past. about UK corporate governance and the propensity for bad transactions to get pushed through.

This is definitely up there, if not the worst, one of the worst transactions, rush jobs that I've seen in recent times. Basically, CERICA Energy today is a oil, excuse me, gassy, very gassy, 85% production is gas, ENP, entirely North Sea focus. They supply about 5% of the UK's natural gas. and it's very cash rich. So it's got 65%, 63% of its market cap in cash today. So if you look at the stock, it's 272 pence. It's got about 160, 165 pence per share in net cash. They're exchanging the vast bulk of that net cash to buy another ENP,

also in the North Sea, called Tailwind Energy, in addition to taking on Tailwind's debt. So they're going from a 460 million pound net cash. position to a 124 million net cash position. So they're taking on effectively 337 million of net debt. In addition, they're giving 29% of the pro forma capital of the company to the selling company, that is to tailwind shareholders, Mercuria, a Swiss trading house. So they're buying another operating asset. They're changing their balance sheet completely. They're changing their capital structure completely, and they're creating a de facto, as we'll discuss, a de facto controlling

shareholder on their register because pro forma, Mercuria will own 25% of the company. Now, in isolation, those kind of transactions would require examination, but what's the real kicker is they're doing it on wildly disadvantageous financial terms. So they're exchanging their own equity, which is trading at about $6 a barrel on a EV to 2P basis, means. meaning the enterprise value of the proven reserves. So when we look at oil and gas, we don't really look at current annualized earnings, whatever, we basically look at the value of what's proven to be under the ocean.

So the value of the oil that's proven to be there extracted over time. So on a dollars per barrel basis of what they've proven exists, which is 2P is pretty conservative, right? Generally over time you spend money, you can find more resources and convert 2C, so contingent resources to proven a probable resource. But anyway, on a 2P basis, their own equity is currently trading around $6 a barrel. The implied multiple they're paying on the tailwind assets is $20 a barrel.

So day one, my main contention is you're just incinerating value because you're paying for something three and a half times where your own equity trades and you're paying for it in stock. 52% of the total consideration for the deal is in stock, meaning even if you believed management's arguments that this deal was a strategic. and accretive will come to that. But even if you gave them credit for all those strategic arguments, that doesn't matter because the vast majority of that supposed accretion will go to the new shareholders, not the existing shareholders. And so, look, there's tons of problems with the transaction, but at a very high level, you have another example of kind of corporate Britain gone mad.

You have a board of directors where X the chairman, to be fair, the chairman does have a substantial stake in the company, but X the chairman, none of the other executives of the company, and that includes the operating executive, the chief executive, own meaningful shares in the company. Mr. Flegg owns 180,000 shares. He does have some options.

He has 185,000 shares. It's a tiny, tiny piece of the company, and it's largely irrelevant related to his ongoing tenure at the company. You have a history where another strategic bidder actually bid to acquire this company at a huge premium, a huge premium, 425 pence per share five months ago, that was rejected at the time with Serica saying said deal massive, excuse me, they didn't use the term massively. It said, I think they used some other adjective, but they said it strongly

undervalues Serica's equity. And now in this current transaction, barely five months later, CERica is underwriting selling 30% of their equity at 278 pence a share. So my contention is, the sole reason they're doing this transaction and they're rushing it through at the very last minute using a couple of loopholes unique to the UK market and also to them being an aim listed issuer rather than a premium listed London issuer is because they simply don't want to give up control. The management core at Serica did not want to give up their management control of the company, which would have happened if they'd merged with Kistos, the prior acquirer that made a reasonable offer. And now they're rushing through a transaction, which for all intents and purposes,

it has the same strategic merit as the Kistos deal. It increases. It increases. is your production. It gives you more scale. It allows you to create a platform for further acquisitions. The only difference being shareholders would have received 45% more, and Serica management would no longer be in control of the merged entity. So they're choosing the wildly inferior deal solely to entrench current management and allow them to maintain their tenures and operating control, even though it's wildly worse off for every other shareholder. So that's at a very high level kind of my take on why I think it's a bad transaction. We can dive into some more of the details.

I'm sure there's areas you'd like to focus on and maybe some of the pushback from people who are less aggressively against it than I am. No, look, I think you hit the main things. The thing that just jumped out to me when looking at this situation and, you know, I mainly heard about it from you, but there have been some really bad deals in the UK in the past couple months. And there's like almost an email thread at this point. People just emailing around like, hey, another.

deal in the UK energy space like does anybody have bandwidth to go look at this one but the two things that jumped out to me just of how bad a deal this is is as you said you had an offer 450 450 50% above the what their price is right now just six months ago same strategic rationale you rejected it is undervalued and now you're doing this deal diluting yourself for this deal it's just it's crazy to me and it shows I mean not I'm not even putting your roads in your mouth. But it shows to me management and trunchment. They wanted to be in control. They don't have a shareholder mindset. All they care

about is getting bigger, staying in control so they keep building fees. And then the second thing that jumps out to me, and again, you highlighted it, but I've never I literally feel like I heard about this deal two days ago. You know, they announced it basically Christmas. They announced it December 20th. Somehow they get a circular published

early January and somehow they've got the vote. We're talking, what, it's January 18th today. We're talking January or 18. Somehow they have the vote next month. I've never seen a hundred millions of dollar deal done within a month like this with a shareholder vote. It's absolute insanity. And I think it speaks to how hard they're just trying to jab this thing through. Absolutely. Okay. So a couple of points of detail on those points you just mentioned is very important. Serica, you mentioned in the intro, this is a small cap. It's actually not that small. It's a 750 million pound market cap.

So it's called it, what, one, one point one billion U.S. dollar market cap with a huge amount of excess cash, as I said, 60 plus percent of the companies in cash. The business they're buying tailwind, the pro forma, excuse me, the acquisition enterprise value they're paying is 703 million pounds. So it's, you know, market cap 770 million, 700 pound acquisition. It's a transformational deal. Like there's no debate about it. It's a large transaction. However, given the structure of the deal is they're funding it partially with, with cash, mostly with the share exchange, what they're seeking approval for shareholders is not a vote on a merger. They're simply seeking approval for a extra share issuance. So when you issue

over 25% of the equity of the pro forma share capital, you need shareholder approval, but it's an ordinary resolution, meaning 50 plus percent of the votes cast at an extraordinary general meeting. You don't need, it's not a scheme of arrangement where you need two thirds or 75% of approval. So if Serica was being acquired or was acquiring another company, well, actually, if Serica was being acquired, you'd need a much higher voting threshold, whereas now they've decided on this deal, which is essentially a merger transaction and obviously a transformational transaction, but because it's only needing a, they've structured it in such a way they're only issuing a certain amount of shares, it's a much lower threshold to push it through. That's point one. Point two is you're right. This was announced just basically before Christmas. they put out the circular, which was 23 pages long, 23 pages of which 10 pages were definitions and repetitions of documents. There is almost no historical financial information provided on the assets being acquired. This is extremely important because said assets were producing 11,12,000 barrels of oil equivalent per day in January, February 2022. And now, according to all company

presentations, they're exiting December 22 at 24, 25,000 barrels a day. So that's not to say tailwind energy assets are bad. That's not what I'm saying. I'm saying they've been highly volatile in terms of their production. There is very little zero historical information given. There was no CPR, CPR being a competent person's report. There was no CPR given with the acquisition certifying that the 2P reserves at Tailwind were actually there.

This is, again, not required because they're not technically doing a merger or takeover of the assets. They're just asking for approval for the share issuance, right? If they were a premium listed company and actually doing a merger, they would have to do like the UK version of a proxy where they would give you, you know, background on the discussions and also some kind of CPR or competent persons report certifying the actual, you know, geological basis of the assets. They're not doing that. I mean, it smacks of an absolute rush job. So even if you thought this acquisition had merit, right? or you thought, you know, the idea of merging Serica with Tailwind has merit. Forget the price for a second, which you cannot do, but forget it.

Even then, you don't have enough evidence. You don't have enough information to make a valid judgment in such a short period of time as, okay, well, we're going to spend 70% of our net cash on this business and fundamentally change our course going forward. Why? We don't have enough information to make that judgment at the very least. And then when you add the context around this, so you then ask yourself, okay, well, why? would they rush it through? That's where it gets interesting because the Kistos deal was mid-late July, right? And in the UK, there's what's known as six-month cooling-off period, meaning if you

have an intention to make a formal offer to acquire, which Kistos did, then you cannot make another formal off of six months. That's the cooling-off period. Said calling-off period expires when, February 6th. Guess when the vote for this deal is? Jan 27th. Coincidence? Me-thinks not. Me-thinks not. So when you add the terms of the transaction, the structure of the transaction, the timeline of the transaction, all together with the prior context in which this transaction has been promulgated, it all adds up to a rush job. It's a put-up job to avoid the elephant in the room, which is, and this is the real key that I want to try and communicate. Like whenever you make a transformational deal or contemplate meeting a transformational deal, it's not enough to say, well, it's a credent. well, it's strategic. You have to consider, is this the best available alternative? It's the opportunity cost.

Or either the status quo or any other viable course of strategic action. So I want to ask management, why was no strategic alternative process conducted, right? If this is not the US where you have a proxy that explains exactly what happened during the negotiation of a merger, I believe very strongly there was no full process run. Because if there was, there is no way they would be selling. a third of their equity at one times per x cash one and a half times p x cash right and so as i tried to lay out in the letter either of two options merger with kistos at similar terms even with a reduced consideration because kistos stock has come down or just a simple recapitalization of the balance sheet would be so far in a way better than the current deal being being pushed through being shoved down

our throats as to question whether or not all of alternatives were considered and it's my contention and they had no intention to consider what's best for shareholders. You know, just to jump in on some point, you said, like the accretive thing, it's one of the things that used to drive me crazy. You know, in 2014, 2015, if you were a company with net cash on your balance sheet, you'd see tons of companies they'd announce deals and they say, it's an accretive deal and be like, yeah, of course it's an accretive deal. You're taking cash that's earning nothing and you're buying an earnings company.

Like you could pay 80 times earnings for any business in the world and it's going to be accretive. The question is the opportunity cost of it. You could buy back your own shares. You could dividend it out. You could go buy a company for a lower multiple, right? Like, of course it's an accretive deal. If you're, if you're an oil and gas company, like oil and gas are declining assets, right? They're never going to trade for 20 or 25 times P.E. Unless, you know, you think oil's going to 400 and we should all just be buying guns and giving them some bunkers and stuff. They're not, they're always going to trade for a low price earnings multiple. So really any deal you do is, probably going to be pretty accretive to your earnings just because of that simple math,

especially if you're using some cash for it and some debt. It's not a debt. It's your opportunity cost. It's your value. And like here, if I just say, hey, we're issuing shares to go by someone who's more expensive than us. We're issuing our shares for 300 when we had a deal at we had offers at 400. Like to me, it just screams. The opportunity cost is not there. And then the only other thing, I mean, your logic with the July offer, the cooling off period and everything makes so much since the other thing I would add is, hey, you make an announcement Christmas Day, let's call it, you've got New Year's, you hold the vote 30 days later. I mean, you've basically got 10 days to become a shareholder record. That's really great defense against, we can talk about C&E in London.

You know, they've tried to get two bad deals through. And activists have come back, built up a position and they're coming out pretty forcefully against them. If you've only got 10 days, 10 days of trading, activists don't even have time to do the work, like open up an Excel sheet, Right? So they seem to have really structured this well to insulate and entrench management. Totally, totally. Look, you hit on a number of important points. I mean, just on the accretion point, I think this is quite key to understand because let's kind of put it in the context of management's communications. As you said, the first announcement of this deal was just before Christmas. Note that this was simply just a press release and a simple presentation on the tailwind assets.

there was no discussion of accretion. There was no discussion. There was a broad discussion of strategic rationale and what would come with the acquisition, the 2P reserves of the acquired business, the run rate production of the acquired business, diversifying into oil from gas, blah, blah. But there was no discussion on the financial accretion. That only came much later, maybe mid-Jan 9th or 10th. I'd have to look up the document, but, you know, a week ago or something. And that was largely in response to pushback from people like me or other investors who said, what the hell? You're, you know, you're spending your own equity at $6 a barrel to buy something at $20 a barrel, right? You're selling your own equity at one-time's earnings. What is wrong with

you? And then they came back with this slide, they put out another press release, an R&S, a regulated news, and in which they went through describing the quote-unquote accretion on a per-share basis. To your point, if you swap a bunch of cash for an earning asset, if you take on cash for debt, which is essentially what they've done here. Anything is accretive, literally anything. You could pay 100 times earnings. It would be accretive versus the status quo of zero. But the very fact that they chose to portray the acquisition in those terms,

meaning according zero value for the extent cash in their view of fair market value or intrinsic value, shows that they're trying to pull the wall over the shareholder's eyes. I mean, that is the evidence enough, right? You would not portray if the acquisition was truly accretive to the enterprise, right giving value to the cash but also you know on the on the run rate earnings power of the pro forma you would not portrayed that way you would have two separate columns but okay cash per share plus earnings per share pre pre acquisition then post acquisition cash per share plus earnings per share still accretive that's not what they did they simply said yeah they simply said EPS width without

oh plus 10% plus 15% and so look here's a one and like I think there's a one and like I think I think the financials are powerful enough that we can speak to them a little bit. If you take management's own numbers, which I think are wrong, but if you just accept management's numbers at face value, they say that standalone Syrika next year would earn 85 pence per share midpoint. This is just the operating business, just what they have. Forget the current cash on hand, which, as I said, is 160, 165 pence per share. 85 pence per share, and it's going to add about 10, 12 pence per share in, quote, unquote, accretion.

But the difference in cash per share through the transaction is about 90.95 pence. In other words, you're going from a net cash position of 160, 165 to about 65.70. So you're swapping 9095 pence per share for 10 to 12 pence per share in earnings. So you're paying a nine times multiple. But the actual reserves of the business you're buying are only like five years, five, five and a half years on a two P basis. Now, there may be upside there, but there could be down. on site as well. I mean, that's the thing. There's execution risk. So you're paying a nine times multiple of run rate earnings for something where you only have five and a half, 60 years of

banked. It's just immediately as value destructive. And look, just to, just that there's something, like, again, I can't be an expert on tailwind because they haven't provided a lot of, a lot of information on them. But look, oil and gas assets do not trade for eight to nine times price earnings, especially, like, first of all, this would be really simple, right? They could come out and to say, hey, here's our value, right? Like most people value, uh, value oil and gas companies, PV10 in some way, shape, or form, right? So they can just say, right now, our valuation is, here's our net cash per share. Here's Serica's PV 10. We're going to take minus 100 or 90 or whatever it is from Syracus cash balance, but we're buying 110 of PV 10 from a tailwind and

by the way, for this reason, this reason, this reason, you know, there are these things that are excluded from PV10 where we think we have upside or there's up. Like, they could do that. They could very simply do that. It strikes me as pretty, pretty obvious, they have not done anything close to that. It strikes me as pretty obvious what they're doing here. Let me ask one quick question on shareholders. So Syrica Energy, it strikes me, you know, look, you know this way better than I do. But one of the things when I was kind of thinking through it, they've got one major shareholder here. Hardy DR. I'm just looking at the Bloomberg. And it looks to me like he, I mean, congrats to this guy because it looks to me like he bought Serica in like the mid-2010s,

if I'm remembering correctly, when the share price was hovering in, if I'm looking at this correctly, like in the 20 pence per share or something. So he's crushed it. He's crushed it. It's a 15 bagger, even after the drop and turning down. But you know, he owns 10% of the company. He's a 15. It's a 15. It's a 15. bagger. My understanding from talking to other people is it's a pretty material piece of his net worth. Has he said anything about the deal or anything? Because I've heard two kind of conspiracies about it. He hasn't. He hasn't said anything. I've reached out in a number of ways to try to contact him directly. Actually, previous to this transaction, you know, six, nine months ago when I was also involved in the stock, I tried to contact him. He's a private individual who

lives in the north of England. It's very interesting. He's not a, he's not a, you know, big institutional investor or anything like that. He bootstrapped himself into this position, but his mainline, he's actually just a businessman, I guess, retired. So the Hardy's, look, they've done very well on this investment. My sense is they believe they owe current management kind of like a debt of gratitude, given how much value they've created in the past. And so, you know, I can't speak to his intentions or how he's going to vote. I have not been in contact with him. I've tried to. maybe he's seen my letter and I'm sure he's aware at least of some of the you know counter position on this deal he's going to vote how he's going to vote but I guess my point

would be he's 10% it's not as if he's 30 40% so after him it's an extremely open register there's very very few institutions involved and it's a retail dominated float so I'm not going to say this is a done deal either way I think it's very much a 50-50 basically every incremental inquiry that I've had and I've been contacted by dozens and dozens of investors of various sizes and shapes has been incrementally negative. Maybe one out of 10 has said, well, it's actually not that bad and here's why. But that doesn't mean they're voting yes. They may be voting no or they may not vote. But you're right. I mean, I think it's quite interesting to see how he's going to vote or if you vote with management. I would assume management would not have gone ahead with this deal

without his support. It would be strange. So I assume he's a vote for this deal. But that does, to me, that doesn't. That's not the be all in it. If he was like a 25% shareholder, yeah, I would say it's probably hopeless. But at 10%, you know, I think it's more like a 50, 50 given the amount of outrage generated by these terms. I don't disagree with anything you said. It's just like, you know, it could go two ways. There's the old, if you've, if you're a private equity company and you have a company and you hit a home run, right? It's a 10x. You've got a management team who's 10x. You've got a the value, you know, a lot of times, especially if you've already IPOed and taken a lot off the table, you'll see the management teams get like a little bit of extra stock comp that they

shouldn't get. Or maybe the, maybe the C, the private equity firm gives them a little more rope to go empire build and get a bigger. They get a couple extra bonuses, something like that. And as an outside shareholder, you're like, they're destroying value. What's happening? But from the private equities firm, they're like, this guy already 10x my value. Like, it's all free money here. who cares if it becomes a 10.8x instead of an 11x and we give that extra point to the management team they did so well it's like a tip or whatever and we want to keep them happy for the next time you know so one one school of thought here is hey you know these guys are 15 times on their position in six years maybe they don't care and maybe they the management team did so well for them they just say hey we're voting with the management team we're going to trust them to keep creating value like they've already done so well who cares because to me if i own 10% of a company and five months ago somebody offered me 400 per share and then I had this dilutive deal that's going to burn a lot of cash to go I would be apoplectic but I could see both sides of it look it's it's certainly possible what I would say is that perspective is unique to the

hardies the vast majority other holders here are retail who have been told and sold a different story than what was then what was promised what not was promised than what was delivered to the hearties in the sense that when they rejected the Kistos deal, and this is kind of informal, this has never been publicly stated by management, but I've spoken with many shareholders who've said they were softly told that they should expect a very large special dividend out of that cash balance, like a pound a share or something. So the vast majority that cash would be coming back in return for rejecting that Kistos deal. It does strike me here. So the way they set this up, as you said, and I'm just speculating here, but

But it strikes me that tailwind is getting in total 28 to 29% of the combined company. And as you said, under the UK laws, tailwind, they only need to vote if tailwind's getting above 25%. It does strike me, there's a way to read, if management could get religion on this or if shareholders vote this down. You could quickly recut this, just cut the tailwind shares. They're getting in, you know, cut it to 66%. so they get 20% of the company. They don't even need to vote on it anymore. But for Syracuseholders, you keep a lot more of the value.

It probably goes from 270 a value to 360 a value. It's not 400 value, but it seems like that could almost be a win, win, win for everyone, but I don't know. You say that, but I don't think Tailwin would take that because at their current ownership, look through ownership state, they have the power to block any subsequent scheme of arrangement. So this is also key to the thesis. It's like the numbers themselves are horrendous and heinous enough in terms of the destruction of value and the relative disparity between your current trading price of your equity and what you're paying for the new assets. But when you consider the qualitative factors as well, this becomes like it goes from heinous to borderline abhorrent because in the UK, right, like if you create pro forma Mercuria, which is the parent company of Tailwind, they're going to own 25% of the pro forma equity. to pass any consensual merger transaction in the UK, you need 75%. That's a scheme of arrangement.

So because a scheme of arrangement is binding on all shelves, it's a high threshold. 25% Mercuria can block any deal that they don't like. And guess what? Macuria is not just tailwind. Macuria is a Swiss trading house that has a bunch of marketing and hedging relationships, not just with tailwind and soon to be Serica, but with a bunch of other assets we have known nothing about, but it's a much, much, much larger entity. So if any kind of strategic you know, North C, E&P, or whoever, even private equity, comes along that they don't like another trading house. They can just stuff any transaction. They can block it just off its bat. So you're creating a subordination, basically. It's funny because like, look,

CERica shareholders, vote this through, give us controlling sake for this really bad deal, and then we'll have a controlling sake and we'll block any future deals. Can't trust this management team to do good deals going forward. So let's... let's talk timeline the votes next week unfortunately as we said they jammed this through so quickly that uh you know it would have been really tough for an activist to come in here become a shareholder record get on here obviously you have shares so you're way running this campaign but i want to talk to uh this isn't investing advice nothing on here's investing advice but if you're a shareholder who thinks like there's more value you want to get to february let the cooling off period expire

yeah you want this to be a standalone company you don't think uh there's this transaction on these terms should go through. What should a shareholder who doesn't want the deal to go through? What should they do? And then kind of what do you see if this deal, let's say it gets voted down, what do you think the next steps for the company should be? Okay. If you are a shareholder of a record and you do not like this transaction, then, well, as I said, this is not investing advice, but what I am doing is I am voting against the resolution at the EGM. That is the resolution to issue the new shares to tailwind energy, to Mercuria, the owner of tailwind energy. Voting against the share resolution is basically the only

condition which can kill the deal. So they need a simple majority of votes to approve the issuance of the new shares. And if you vote that down, then the transaction cannot go through. If the transaction gets voted down, as I said, just needs a simple majority of votes cast at the meeting. So it's more votes against the better from our perspective. If it gets voted down, I believe management's credibility would be completely destroyed given this as a board approved underwritten deal and the manner in which they tried to rush it through as we've discussed now i can't speak to what the future holds i've publicly asked the chairman to essentially consider all strategic alternatives and also open up the board to potential reconstitution with new members who would be

more aligned with the interests of sheldons right so if you think about it they've promoted this transaction. If it gets voted down, that'll be a huge signal from the shareholder base that the board is just simply massively misaligned with the wishes of majority of shareholders and no longer represents the will of the shareholders. Therefore, it should be reconstituted. I am not a large enough shareholder to kind of process that myself, but I'd be very willing and able to support any kind of board reconstitution after that move. And I would expect there would either be reconstitution and or the pursuit of strategic alternatives or both. to me like no one knows for sure but the writing is so clearly on the wall if you have a simple

hey 50% of shares up down to just to issue these shares right like I don't even believe there's an ISS recommendation or anything coming out and saying hey this is this is a routine matter I think routine I don't know about London so I won't talk about like automatic voting by brokers and everything but if you have 50% of shares come out and vote against a routine matter to issue shares like at that point the writing's on the wall and i like board embarrassment is a thing right if 50% of shares are withheld from a director in a u.s company the director generally resigns because it's just such a glaring red flag that shareholders don't support you you might as well resign or change something because if you don't it's the easiest activism

gig ever for someone step in and say hey 50% of shares i have to buy one and just put a better plan for it and people will support me 50% of shares come out after this i think it's a very clear signal, hey guys, you have no faith. You can either go run a strategic process, sell yourself to the highest better now, or the next open window, shareholders are going to boot you out in an instant. So why don't you save yourself that embarrassment, go do it and go out winners, you know? I think that's right. I mean, I think the only kind of, the only thing that I'm missing, or at least thing that I expected may happen that has not happened, is why didn't an activist come in, like a larger activist, get involved publicly already, right? So,

the stock itself is not that liquid. And as you mentioned, there's barely two trading weeks to establish a position. However, there are ways to acquire stock, right? So let's say the stock's trading at 270 now. It's been trading kind of like a 250 to 280 range, basically for the last two, three weeks. If you're some prototypical activist, I don't want to name names, but, and you have $50 to $75 million looking for an activist campaign, this is kind of a pretty juicy target, at low-hanging fruit, in my view, couldn't you just go to a broker and say, get me 7, 8% of the company, pay through the market, pay 300, right? Just find 7% of the company, 8% of the company.

As I said, given the openness of the register and the retail shareholding and, you know, broad dissatisfaction, it wouldn't take a lot to kind of. And then once you can kill this deal, as you said, it's almost a self-fulfilling thing where you can quasi take control of the company and do what's, right by shareholders, whether that be strategic alternatives, reconstitution of the board, what have you, in a similar way to what's happening with Capricorn, right, which you mentioned. Now, that hasn't happened. Now, I don't know why that hasn't happened other than the time there was just simply too short.

Like, there's no time for anyone to go ahead. If you bought 70 million, you know, if you started the next day, yeah, you could have done it. But at this point, again, the press release hit, you went on Christmas, you went on New Year's, you came back, boom, shareholder records gone. Yeah, no one's right. buying out, you're trusting the prior shareholders to vote this deal down. So I think the trick is, again, if you're a shareholder of record, you don't like this deal. The whole thing hangs on.

You have to vote no next week. Yeah, for sure. And I guess you could say, look, if the deal doesn't get up and then there is still no change subsequent to that, at that point, you would most likely see some activists. It's an easy, it's an easy trade. All right. Do we need to do anything more on Syracco? No, I think we did it. look, it's 9.15 my time, but I'm excited. We haven't talked in a while. So let's talk

what other events are on your mind, the coal trade, anything else popping up these days? Lots, lots going on. What else is in the event space? Did you have any questions from some of the people? Do I just, do I just go through my book and tell what's, I think it's most interesting. position by position tell us what your favorite trades are when you're putting them on and everything let's see i'll get through some uh i'm pulling up the list of there were lots of questions here we've got lots to talk about i don't let me just start with the generic one i had the qual on for oh yeah that was great i love that everything he is the cole godfather i know you have done really successful in cole recently how are you thinking about coal these days

how am I thinking about coal I'm thinking I probably should have sold some of my coal stocks like two weeks ago that's what I'm thinking no um yeah look it's it's I don't want to say it's long in the tooth that'd probably be the long way of putting it the correction in TTF so European gas prices yep and the concomitant reaction in things like Asian LNG prices US Nat gas prices has obviously been a lot more strident than I would have expected.

So weather is really kind of thrown a lot of these trades for a loop, at least recently. The fundamentals of the setup in coal are exactly the same. In fact, they're probably getting better because just today, it's good we're doing this call today. The New South Wales government, so New South Wales is the main thermal coal producing region in Australia and by definition one of the largest thermal coal producing regions in the world

and the largest seaborne producer of thermal coal in the high-grade Newcastle coal, so 6,000 kilicolary coal, which is the highest-grade spec coal for thermal. They just announced a new plan where they're trying to basically Indonesianize the market, meaning in Indonesia, 25% of domestic products, 25% of each mine's production has to be reserved for the domestic market to ensure there is a continuity of supply for domestic producers, power plants.

Now, it's not going to be 25% in Australia, but it seems like they want to do around 10%. So essentially they're taking tons that otherwise would have gone to the seaborn market, reserving them for domestic use. A whole lot of problems with this, not least because a lot of the domestic boilers do not run on the kind of coal that's mine in Australia, or at least the high-grade Newcastle coal grade 6,000 kilcaller, that doesn't fire the boilers in Australia,

or vast majority of them run on dirty coal, lignite, things like that. Put that aside, the net result is the shortage of coal in the seaborne market is only going to get exacerbated. And more nuanced, the shortage of high grade, 6,000 K-Cal, you know, Newcastle-grade coal is probably going to get pronounced because he was already massively short. Russia's already kind of half in half out of the market.

Japan's stopping buying Russian coal in a couple, in a month and change. So the massive spread between Newcastle grade and some of the lower grades of coal probably lasts longer, longer than is expected or even than I expected. that's probably going to be good for guys like Whitehaven that produce a lot of Newcastle coal, also not too bad for guys like Jan Cole where I have a position that produce a lot of 6,000 KKL coal as well as low grades of coal. So the overarching point I would say is weather's kind of caused prices to correct a bit

fast than expected, but the higher for longer thesis, if anything, is getting better because all of these historically pro-coal investment and pro-kind of fossil fuel extraction economies like Australia are suddenly getting this ESG woke religion in the weirdest ways and it's calling all kinds of distortions. So look, I'm not I'm not necessarily in the cold trade to trade the next two, three months. So I can deal with a bit of volatility. But a lot of these names still are implying zero or negative terminal value out beyond the next 18, 24 months. So as the Kuala said, still pretty bullish. As the Kuala said, if you're a pod boy, you know, if you're out pod shop and you get judged every day basically like you've got to be up today but if you know I do

just keep coming back and it's coal it's not get it's all these things it's like I just see a world with shortages and for a lot of these guys like literally with coal every day you can be like oh okay well they earned another 1.5% of their enterprise value today as long as prices don't go down 40% tomorrow they earn another one point and it's like it's so hard when all this cash it's literally just pouring in and you see the shortage. just like, okay, great, we had the warmest winter ever. And yes, it slowed down the pricing, but like the structural change isn't there. They're still minting money. All of this is coming in. And you're buying all of this. And it's like, hey, it's a, you know, I'm buying the next four years of

cash flows if I'm unlucky on the prices and getting everything, it's like as long as management doesn't do anything too stupid. And coal tankers, all of these, it's the same. I think, I think you're actually too conservative there. You're probably buying the next one and a half years of cash flow, not even. Because like the other things I think about with some of these names is you see the spot price. It's going to 400 a ton. Let's just use Newcastle's easy. Everything trades on the route of that. But Newcastle went to 400 ton in Jent. Now it's back at like 350 or whatever. And the curve is quite backwardated, right? So current prices are way higher than six months in the future. But because of the structure of these contracts, there's a big lag. So four Q cash flows,

obviously largely known. I mean, we don't know volumes for these guys and there's been floods, but 4Q cash flows and 1Q cash flows are not quite known, but almost known because of the lagging structure of these contracts. So when you see spot price really coming from, say, 400 a ton to 300 ton, 250 ton, for the next six months, Newcast, Whitehaven Coal, New Hope Coal, a lot of these guys will still be earning on the basis of not 400, but somewhere between 300 and 400 and ton because of the lag structure of a lot of their contracts. So if you actually just assume kind of normalized volumes throughout this period and, you know, do the math on that. You know, as you said, you're not actually betting on four years out. You're betting on actually

the end of 2023. Assuming they don't burn the cash they create in the next, you know, 12 months, assuming most of that comes back in dividends or buybacks, which for most of these Aussie guys is a reasonable assumption. Yeah, I mean, the terminal value of these things is at record lows. Like, Jan Cole is a name I like because, firstly, it's, It's kind of a funkier entity. It's largely owned by the Chinese, but all the assets are in Australia. So you have kind of quote unquote bad shareholder base, but very good assets. Secondly, because they have a lot of lower grade coal, so you're not actually betting on, you're not making this bet that the price premium between Newcastle coal and some of the lower grades lasts forever,

which Whitehaven is making crazy money right now and may continue to make crazy money, but you're implicitly making this bet that you're, you know, spread between 5,500 KCal and 6,000. kielkoy will stay at like record levels for some extended period you're making the scarcity bet where like every little last drop of energy is critical exactly so what i would say is if that continues you'll probably make more money in white haven but you'll still do finding yanko but if that crunches tighter you could still do okay or you know pretty good in yanko but whitehaven will take it on the chins kind of the way i think about it but the key reason why yankhole is a typical value investor bet is i think even at like current prices you're buying yankol at close enough to the lowest levels it's

ever traded on an EV per producing ton basis. Some guys on Twitter give me crap saying this is the wrong metric to look at. You have to look at profitability, not just the value of the producing assets. But like in the depths of the COVID recession, it traded on about $150 a ton for producing assets. Now these are all 20, 30 year mines. So, you know, NPV basis, you can do that if you want, but there are such a long life mines. You can look at it on this basis. Runway basis, I think it's okay.

And, you know, they all have 100 years of reserve. So these assets are essentially going to last for indetermined periods of time. So if it traded $150 a time in the depths of COVID, or even on an aggregate enterprise value basis, this entity has never traded below, say, $5 billion enterprise. Yep. If you give them credit for the cash flow they generate in 4Q and say the next one, one and a half quarters, it's not much north of that. Maybe it's a $5.5 billion enterprise value.

So it's like, okay, could it trade at the lowest valuation ever, despite cold prices being the highest where they are on a go-forward basis? I guess it's possible, but it seems very unlikely to me. As long as they're returning the cash, it seems very unlikely. I did some post at the beginning of last year that was just like, tell me what I'm missing. And it was basically, again, coal, steal, all these guys for six months. They had record prices and they generated it on a cash. And the famous thing is don't buy anything cyclical when the P is low because that's when

things are good and they're making money. And my point was, yes, the P is low, but they've already generated six months. months of the highest profitability they've ever generated, they gush so much cash, they paid down all their debt. And as you're saying, like, the EV to producing assets was so low. So it was like, it's almost heads. You win if the prices stay high. And again, famous last words, you look out, you look at this supply, you look at demand. It's hard to see how prices don't say elevated for a long time. Tails, you don't lose because, again, they paid down all their debt. You're buying the assets at the lowest production ever. So you literally need prices to crash immediately and never come back

to even start thinking about like kind of again not on a pod shop day to day basis but on a little bit of a longer term basis how are you going to lose and guess what basically every asset I wrote it I wish I just sold everything gone long all of them ignoring the Twitter trade but because all of them the smallest is up 40% since I put that post and obviously you've had plenty of oil and gas and everything that have just mooned since then look I don't disagree with a lot of what you're saying I mean some of those have worked really well on some of work less well, right? So I think one way to think about might if prices actually do crash.

So let's say Newcastle, Newcastle, Col is currently like 360 a ton front month. Let's say it goes to 200 a ton in the next month. You're going to lose money. You're definitely going to lose money. Like spot prices will dictate where stock prices go in the very short term. But if you have a very concrete view on where terminal value is or what it should be in a conservative scenario. So let's say prices fully normalize and go back to. to normalize ranges, I don't know, 80 to $150 a tonne, somewhere in that range, maybe at the upper

end because there's undeniably a global shortage. And you can underwrite the valuation on that basis. The point is you can get comfortable with taking that short term drawdown because you have a view on through the cycle value. Now, as you said, if you honestly think price is going to fall 50% in the next month, you shouldn't own any of these things. But it could happen. If it does happen, then you need to be aware of where you stand, right? And as you said, not for pod shops, whatever those guys are just, you know, trading the next two weeks move or next week move. But, you know, if you have more of a midterm investing mindset, then that's where you can, I think, make money through the cycle.

A lot of oil and gas, and it's very easy to look at like the spot oil and gas and say, Nat gas was nine, oil was 100, 120 back in June. And I was looking at these and saying, like the stocks look way too cheap and you've got this huge thing. And as you and I talked today, again, this is spot, but Nat gas was four and oil is 80. down 33% to over 50%. And a lot of oil and gas names are up over the same time. Because again, the market just, A, they generated so much cash. You know, oil is 120 for one month.

You're going to generate a heck of a lot of cash. But B, the market was pricing in curves. Like, it just didn't believe the curve. And yeah, the curve was too high. But the market was pricing in a curve 40% below where it was. And we ended up with a curve 20% below. but the stock still went up because of that. Did they go up as much as I wish they had?

No, but like you still could make pretty good money. That's my, yeah, exactly. That's the margin of a safety argument. That's why I like some of these trades. Like even today, a good example is unit corp. I think both of us are involved in Unicorp, UNTC. Oh, yeah. So like, look, it's a bit of a special situation,

a bit of an off-the-run name. So it's not, you know, represented necessarily. But stock 65, 66 today, they've been a bit more proactive on their capital allocation, very cash-rich story, a bit of a complex. you know, story, but they're largely dependent upon domestic US gas prices. Last we chatted, US gas was $758 per MMBTU. Now gas prices are under four bucks and the stock's higher. Like gas has literally gone down 40, 45 percent and the stock's higher. So to your point, like, of course, you would rather have higher prices. But last we were chatting Unit Corp, you know,

they couldn't get a deal done because gas prices were too high. no one wanted to capitalize well guess what if they actually tried to sell their assets now there's a bidder with gas prices and more normalized levels and there's still a ton of value left in the equity right it's still probably a hundred dollar stock if they can sell anywhere close to anywhere close to like pv 10 of their of their business even on like four four four four dollars gas or fifty gas i think that's all right people can go i did a great podcast uh with dib bastion on unit corp if anybody wants to listen to that but look i i i really like that one i like the management team. I like the dividend. You know, it's funny because they filed the dividend with

FINRA first, right? So I was getting all these texts. I was like, units paying a dividend. I was like, get out of here. Stop teasing me. And that was crazy. I was asleep. I was asleep. I missed it. The stock went, you know, up seven, six, seven dollars during the day before they even announced. It was crazy. You know, Sue, the $10 dividend was nice. And the stock went up a little bit. And I do think the market was a little efficient. This is a pinkie stock. It's not the nice, the actual real part of it, nobody talks about was they said, hey, not only are we paying the $10 dividend, we're paying the $250 dividend after that, and it's going to be a variable dividend. And basically, we're not keeping cash in the estate. They're dividending out. And look, what I love them to buy more shares,

yes, but this is a supery liquid stock. I'm sure they will if they can. But the fact they're not keeping cash, they're divining out going to increase your IRA, reduces the odds of them kind of going on an empire building thing. And I think it sets them up really nicely for a sale. Because if you're a buyer in the stock's 60 with $20 per share in the balance sheet and you can pay 70. Yeah, it sounds nice, but it's a bigger headline. It's harder to get through the board. If they dividend all out and now all of a stock's 30 and you have to pay 40, bigger premium, but less of a check to write to the board. Like I think all that's pretty. So yeah, I like. So you still think the most likely outcome there is kind of a slow motion sale because that's kind of where I am too.

like I didn't necessarily think the dividend of the of course I'm pro it but I didn't necessarily think it was them prepping for a sale I do think there's certain pieces of the business that are obvious sale candidates right like the the midstream piece obviously has a kind of process that's going to kick off as soon as as soon as the contractual period expires in April and then look it's a very strong market for drilling I mean no one talks about the drilling business that was a great podcast you did with David I really love you love that. He was kind of understated. I thought he, you know, he had this dry laconic style that maybe undersold the value of the equity. Like it's a very interesting story. Like that drilling business, $80 WTI, like these guys are going to be caking it, like leading edge rates. You've done a lot of work on, you know, tight water and offshore support vessels. I mean, it's conceptually, it's a similar concept. Like they don't need $100 WTI, right? 7580 is like prime, you know high enough to motivate more spending on rigs whatever and not too high to stunt the desire to invest so like that should be a great spot for the next 18 24 months um yeah there's a few clues

in the filings with regard to leading edge rates that says that business could be extremely profitable and justify most of the EV in the company today um and so i think i would be very interested to see who once sorry i keep last thing they they they'd be very interested to see who or what kind of price they could get if they did put those rigs up for sale, but I don't know if that's on the horizon. You know, I think rigs would be, you probably could, but I think it would be tough because right now rates are going so parabolic. And when rates are going parabolic and you've got a shortage, it's almost tough because, A, you saw this with gas when gas was 10 last year too, right? Okay, somebody's going to come and nobody's going to underwrite that curve.

And so when you've got the super parabolic prices in the short term, you're getting such a huge cash gusher that so much of it is how long the current cash gush lasts it's really so much of the enterprise value it's actually really hard to sell because you're just basing it off hey i believe it's going to be two weeks you think it's going to be six weeks i think it'll be like it's really hard it's almost better to let that super normal cycle play out take all that cash love it love it and then sell it at like a normal value once it happens but guess what either way we're going to get that super normal cash flow and as long as w t i's here i think we're going to be getting it And I think people are going to be really surprised Q4, Q1.

There was an article in FT. I linked at the end of the Tidewater post. It included a little bit on shale drilling costs. And if you looked at rigs, like starting in November, whoo. So I think people are going to be really surprised by the cash flow that's going to be putting out in the near future. Excellent. Mate, we've already been talking for an hour and I know it's getting slightly late there. Should we call it here and that you get off and we can.

We'll call it, but you're going to have to promise me we're going to do another one in the near future because we haven't even talked about your last. letter to last minute. Oh, wow. Okay. We should to wrap it up because if I get this under an hour, then it's much easier for me to turn around and I need to get this out quick so that we can make sure people hear about it before the vote. So Jeremy, great having you on. Looking to have you on. Thanks, bud. And we're going to talk. Always a pleasure. Definitely. Thanks, man. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor.

Thanks.