Yet Another Value Podcast - Jeremy Raper on the event driven market July 2022

Episode Date: July 11, 2022

Jeremy Raper of rapercapital.com makes his record 7th podcast appearance to discuss a host of event driven situations.Jeremy's letter to EVO: https://rapercapital.com/2022/07/03/an-open-letter-to-the-board-of-evolve-education-group/Chapters0:00 Intro2:45 What's the current environment like?9:20 SHLX19:00 TRQ34:00 SAVE43:00 VTNR58:30 CLMT1:19:30 Wrapping up with HRBR and FAR

Today's podcast is brought to you by Delupa. Delupa's database of over 2,500 models contains the most KPI's for each company, along with non-gap adjustments and guidance specific to the business and the quarter. Clients use Delupa's existing data to construct their own models faster and ramp up on new names more readily. Coupled with Delupa's plugin, which automatically updates numbers and formatting within your model, you'll never need to input numbers manually again. All of Delupa's data points are contextual, audible, and accurate. Their AI algorithms allow them to collect the most data on their companies at the greatest speed

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with me today i'm happy to have on for v record setting seventh time my first guest on the show my friend jeremy raper jeremy how's it going it's going great well it's going okay i just check my portfolio because i woke up and uh it's going okay i'm happy to be here let's that way. Unless you were invested in, you know, Mega Cap utilities, June was probably not a kind month for your portfolio. But look, I'm happy to have you on the pod. I don't know how many you listen to you, but every guest comes on to say, I'm coming for Jeremy's crown. But you come at the king, you best not miss because you've got quite elite. Let me start this podcast the way I do every podcast. First, the disclaimers remind everyone, nothing on this podcast is investing advice.

I think Jeremy and I are going to run through quite a few names today. We're probably going to mentioned some very small, very liquid names so everyone should just remember. Please, nothing on here is investing advice. Do your own diligence, consults financial advisor. Keep that in mind. Second, a pitch for you, my guest, the pitch speaks for itself. You're on seven, this is your seventh appearance. I don't think anyone else has hit three or four. So if that doesn't speak for you, I don't know what it does. We wanted to have you on because, A, you just launched another new activist campaign. The company there is evolve education. The ticker is EVO. It trains at Australia. I think we'll mention that towards the end of the podcast. But the other reason we want to talk is

that you and I've just been exchanging Twitter DMs and there's so much interesting going on in kind of the event, small cap space, that we just wanted to run through a bunch of names. So I'm going to stop talking. I'm going to turn to you. What names should we start by talking about? Wow. I mean, I hope you put enough tape in the recorder because this could be a really long pot. Yeah, I mean, just, I think just it's worth making a few general comments just on the environment. So, I mean, the last time I can remember this kind of juicy environment from a special situations event perspective was obviously March 2020. That came and went in a matter of weeks, less, probably.

And there were a few things to do, but man, it's kind of like drinking from a fire hose right now, in all that. March 2020, people have thrown that out me and people forget, A, it was really fast. And B, we didn't know if the world was going to reopen. People were like, am I going to be stuck in my apartment for two months or six months? People were talking about GDP went down 33% in one quarter. People were talking about like the world stopping for six months. This is not that.

Absolutely. Absolutely. So you're right. The environment is quite different from a, I mean, look, financial conditions are definitely tightening. Credit spreads are blowing out. At the same time, the sanctity of a signed merger contract is still the sanctity of a signed merger contract.

So I think it's really important to understand base rates when we talk about some of these things, right? So someone on Twitter point out, I think it was Julie. Julian Yochko. Anyway, he said that in 2008, they looked up all the announced signed deals. The number that actually fell through was under 5%. Under 5%. Now, that includes deals that got pulled for regulatory reasons or whatever.

This is not people walking away. One out of 20, you know, buyers get buyers remorse and walk away and somehow the deal doesn't close. It was literally 5% of announced paper deals failed to close. And I would guess the vast majority of those was for regulatory reasons. So that's kind of the base rate when we talk about some of these spreads that we'll get to. Like the amount of uncertainty being priced into a lot of these deals is frankly mind-boggling for event, I mean, as it should be, a signed definitive merger agreement in most all states of the world will close. If I could just throw it, COVID, people forget during COVID, a bunch of people tried to walk away from deals. And some of them got out because at the time, like, pandemics hadn't been carved out of merger agreements.

but many of them ended up having to close or Tiffany Louis Vuitton's the one a lot of people, if we talk Twitter, I'm sure we'll point to. They took a choke and haircut to close, but the only one that somebody really managed to walk away from was Sycamore Victoria's Secret managed to walk away because Victoria's Secret sued Sycamore for walking and they oversued and the merger contract said, if we walk, you can only sue us for X and Victoria's Secret sued them for X, Y, and Z, and they were able to say you broke the merger contract route. And that's the only real one I can remember where an LBO walked during COVID.

Absolutely. Look, I think you did a lot of great work breaking it down with Chris on the last pod or the pod before one of your recent pods where you went through kind of how difficult there is to break a deal and also the historical precinct for invoking a MAC and how material adverse change clause and how extremely difficult the legal standard is for proving that and how that kind of informs every other. kind of potential MAC clause discussion going forward. So I don't want to go over too much ground. Just keep, I think it's worth for everyone listening to keep that point in mind. The base rate on deals failing is very, very, very, very low, even in much more strenuous circumstances when we find ourselves today. But the second point is one I've been trying to focus on with my own merger event investing. That is I have a huge preference for one paper deals, not rumoured deals or in negotiation deals, right? I don't think you need to, as we saw with calls, for example, but

there's been a few other examples, like Alphamin, right? There's just no, you're not getting paid to bet really on unannounced, unpaid deals. And two, I have an almost overwhelming preference for strategics, not financial buyers. Yep. Even though either, like, so for example, there's a paper deal. Apollo's agreed to buy an auto parts company called TNCO, T.M is a ticker. It's super levered. It's a pretty crap business.

The price is wrong. But it's a paper deal and they don't have many outs and it will probably. closed, but even so I don't think you're getting paid to do that kind of trip. I have a unique thing where I will put my flag out there. If you read through the merger agreement, because I've been back and forth with people on this, if you read through the merger agreement, they need Russian regulatory approval. And the merger agreement specifically has a break fee if they don't get Russian regulatory approval. And this deal was announced after Ukraine. And anyone who follows, like, all of their

peers are down 50% since the deal was announced and the deal was announced at 100% premium. So my bet is Apollo's just waiting for the merger to timeout. And then they're going to say, we didn't get Russian approval. Here's your check. We're gone. So that's my personal belief. I know people who think I'm being too crazy, that Tena-Kocos shoot. But that's my out-there belief on that one.

I have looked at that one. You mean Apollo would actually use the minutiae of a given deal to wriggle out of a financial obligation? Kel-sur-Prize, Monomie, Kel-sur-Prize. I've done a lot of work on that one, though. So I just wanted to throw that out there because every now and then something comes my wheelhouse and I got to show, I'm not napping during the day. I appreciate it. You definitely are in the weeds and all of this stuff.

So look, I'm not involved in that spread, but what I'm just trying to say is focus on strategics over financials, focus on paper deals over in discussions. I'm about to break that second rule, as I'll explain. But in general, like, there is a lot of, there's a relative amount of stress in the financial markets and some of these acquires I know they're overpaying. But if you're a strategic who's buying an asset for 10, 20 years, you can live with that much easier than if you're a polar trying to squeeze out, you know, a couple of squeezes a little lemon before you dump this in three, four years. If your entry price is just wrong, you're just screwed, right? So, look, so,

I mean, we can, where should we start? You want to talk about Shell, S-H-L-X? It's actually violating one of the rules that I've mentioned, but it's not an announced deal yet. But it's close enough. It's close enough. one one of my absolute favorites right now the ticker there is shlx that's shell midstream partners uh this is an nLP which people should consider that there might be uh some things to consider for tax wise we're not tax people so people consider that but yeah i'll flip it over to you what's going on with shell yeah so look i just mentioned you should only stick to paper deals it's not technically a paper deal it's a minority a majority a majority owner of an mLP buying out the minorities so shell owns

a majority in Shell Oil, EMP, integrated ENP owns, I'm sorry, integrated large oil company owns a controlling stake in the midstream entity. They bid $1289 a share in February. And the way it works is because it's a controlled entity, it's not as if you ask for a vote of shareholders, whatever. There is a conflict committee that will examine the bid and enter negotiations with the parent and come up with a price that they deem to be fair. Now, the stock today is trading at $14, just over $14.

So it's trading at a, what is it, call it a 7, 7.5% premium to a deal that is theoretically unannounced. I'm not already breaking one of my first kind of rules I mentioned. But what's interesting here is I cannot recall in the last two, three, four years a parent entering a discussion to buy out the minorities in NRP and then subsequently just dropping it. what's generally being the pattern is they've entered the discussion, they've entered a negotiation, it's been three to six months, they've come to an agreement, they've closed the deal another two to three months thereafter. So while this isn't actually a paper deal, and I think Andrew on your site, you wrote this up in some detail, there are a huge number of incentives for Shell to actually close this transaction at this time. Some of them are financial, some of them are strategic. There's a lot of funky stuff in the background here where, the managers of SHLX, so the midstream entity cut the dividend with interesting timing last year, mentioned they thought the stock was very, very cheap, started buying some in the open market, and then very shortly thereafter, Shell came with a zero premium bid at 1290. So there's that. The other point would be typically in situations like this,

the Conflicts Committee or the Board of the Midstream entity will at least extract a team's percent premium to the original bid. That's kind of like par for the course. So if you just, if everything else was vanilla and kind of average compared to to any other MLP minority buyer, you would probably expect a price even north of where we are today, even north of $14,000, maybe $1450, maybe slightly higher. And then there's a few other wrinkles, which are a bit more technical. I'm not sure we want to spend too much time going into, but essentially Shell has a bunch of assets that aren't really earning anything, colonial pipeline. For various reasons, the fees are being legally under dispute or discussed.

And so when you look at the actual earnings power of Shell, the number upon which Shell based their bid, SHLX's earnings power today is far less than it would be in a normal pre, you know, 2019, 2020, state, state number. But even that understates the earnings of power because they have all these escalation kickers in their contracts for inflation. And because inflation has been so high, essentially their take rates are going to be going up 7 to 10 percent.

in the next six plus months. Anyway, so the idea is Shell's doing a no premium bid on a bunch of assets where 10 to 15% of the run rate EBITDA is offline and not contributing to earnings where management had cut the dividend for minimal reason, then said the stock was really cheap,

but nevertheless got this bid at her premium shortly thereafter. In a situation where the parent has never really walked away once they said they're going to buy these kind of things and we were already four and a half months into the negotiation, that's the key. If I can just add some stuff because this is one of my favorite stocks, companies, situations right now.

I've done a lot of work on it. I like to think I had no small part in this becoming one of event-driven Finchwitz favorite names. I've done a lot of work here. I've done more work since I put it on my premium site. People can go check that out if they want. I've done work since then. And the two things that say is, A, their assets are a lot better than I had originally thought. I was just like, oh, generic MLP, a lot of these assets are offshore pipelines.

pipelines and offshore pipelines, you know, like if you have an onshore pipeline, it's really, really difficult to go build a new pipeline. Like you've almost got, but if you've got an offshore pipeline, never get, like almost certainly never getting built again. And if they did, it'd be billions of dollars investments. These things are just unbelievable. The Gulf of Mexico is kind of having a little mini resurgence. And then the other thing you mentioned, oh, the conflicts committee, I think that they've, as you said, four and a half months they've been fighting. I think that's a good sign that they're not just going to roll over. And then the third thing, as you said, like they cut their dividend last year.

Management talked up last year how cheap the stock was. I know I've communicated the board. I know a lot of other shareholders have communicated like, hey, if you take a bad deal, like there will be recourse to you. You will get sued for, I don't want to say sued. But there are people looking at this who care that this is a, it makes sense as a deal for these to go private, but it needs to be at a number that's fair to minority shareholders.

And if not, like, we're going to use your own words against you in the past. And I would just say, if anyone's looking at this, again, this isn't financial advice. but I encourage you, contact the company and say, hey, yes, this makes sense, but the price, the current price is too cheap. You need to pay a fair value for the company. So, I kind of rambled there. No, no, no, no. I feel like you've done, you've done a lot more work on the actual assets and the fundamentals. I focus a lot more on the setup for these kind of things. So maybe it's fantastic. It's worth highlighting why this is so attractive, why you can knock on wood swing big at something like this. It's not really so much about the upside. I mean, yeah, there are scenarios

where this could be close to a $20 per unit stop, okay? In fact, I would also recommend, I think, a firm called Wolf Capital, W-O-L-F-Wolf. It did, yeah. Put out a public letter that broke down valuation in quite a nice way. Some of the numbers are slightly dated, given what's happened to the Illyrian MLP index, but nevertheless, a very good open letter explaining why the valuation disconnect and why Shell's really underpaying. But just from an event kind of set up perspective, okay, basically the worst-case outcome

in 95% of the outcomes on the table. The worst case outcome is you get 1289 plus a small bump, like a smaller and current bump. The worst, the worst, worst case scenario is, of course, Shell walks away, but again, it was a no premium bid when oil price was much lower and it's still an 8.5% yielding stock. So who knows where the stock could go short term,

but capital impairment risk in a scenario where Shell just walks and says we'll come back to it later, given all that we know about the assets, the earnings trajectory, pre-deal bid specifics, and current valuation. seems very, very low. The most likely kind of, not likely, but the most punitive base case outcome

in which I don't do very well in a situation is basically an outcome where I get my money back. 1289 plus some kind of bump that's disappointing essentially gets me my money back and I've just put in a lot of effort and time and capital and I haven't lost anything. In this kind of environment, if basically the worst case outcome is you're getting your money back

plus 2, 3% or whatever it is, sign me up, sign me up. And I will talk about one of my largest positions later on, maybe, but it's a kind of a similar situation where I think that basically the worst case outcome. I really have to start breaking things really aggressively before I get to a place where I lose money. Now, Shell's very liquid for most retail investors. S-HLX is a, you know, $25 million a day stock. Yep. So that's, that's highly, highly interesting to me in this kind of environment. You could make, you know, 10, 20, maybe even 30% upside lower outcome potential. But we're talking about something should get resolved in six weeks, six to eight weeks. And I don't think you lose money. Those are very attractive.

The other thing, you said six weeks, and I do think the board has, is going to have some, I think there's an active negotiation going on. I hope there is. But I do think there's some reason to get the deal done sooner because if you get the deal announced right now, the next dividend will get paid in August or something. So you'll have to pay one dividend. 30 cents. That's 2% of deal value or something, right? If you don't get the deal done until, let's call it late August, early September, you're going to have to pay another dividend because these things never cut their dividend before they go private, right? So if you don't get it done until September, you have to pay an extra dividend. So in effect, you're paying an extra 2% because

you stalled. So the longer this goes on, kind of the more those dividends add up. And, you know, last year, Herkane Ida hit some of their offshore facilities. And the longer this goes on, the more the Hurricane Ida facilities come back online and kind of just highlights the undervaluation of the company. So, yeah, totally. And I mean, one final comment on that deal that I always like to kind of look at when we have a relatively small piece, important for a small piece of a very large entity, like Shell's EBITDA is what north of 50 billion pounds, okay, this year.

I'm just looking at consensus EBITDA. This is a five plus billion market cap where they're being asked, essentially to pay a, call it 20% premium over the initial bit, right? We're talking hundreds of millions of dollars of incremental, call it even at the upper end, five to seven hundred million dollars of incremental payout for the shares they don't own against an entity that is a couple hundred billion market cap, right? So, I mean, you're right. The guy who's running this negotiation is not Chelsea, you know, probably and has a smaller

remit than the entire value of the company, but at the end of the day, we're still talking, you know, it's like you and I arguing over the 10 cents we find on the suburb. And Shell borrows at what, even with the rise in interest rate, 4% debt, which is tax deductible, right? And they're going to buy, let's say they paid $15 per share to Shellex. That's an 8% dividend yield with a $1.20 annualized dividend. So they're buying an 8% yield that they're currently paying out, which is pre-tax. And they're using after 4% which will get tax deductible to get it. So it's this great financial arb as well to take these guys out.

Definitely. So that's that's S.HLX. I mean, so that that fits the mold of kind of a strategic, very long-term perspective, power mismatch between the size of the buyer, size of the seller, and kind of a very asymmetric skew. There is another one that I like, which is in a similar rule, but it's nowhere near as asymmetric, and that's TRQ, turquoiseville. You're the one who turned me on to this. I love this idea, but it is certainly not for the faint of heart. It's a bit more high octane, just given And it's, I mean, okay, so very, very high level. TRQ is a Canadian listed company.

They own a, well, they, yeah, I guess look through basis there in half of the OU Tolgoy copper project in Mongolia, which is currently, I think it's the fifth or sixth largest copper mine in the world, but with the expansion, it'll become the second or third largest copper mine in the world. The balance of the project is owned by Rio Tinto. Rio Tinto is 50.50.1% owner, and they're bidding to take out the minorities. Okay, so they bid 34 a share Canadian. It's also listed on the U.S. Stock Exchange, but all the deal terms are being done in the Canadian dollars.

So I'll use the Canadian dollars as kind of the reference point. You could trade it either way. It just trades with FX differential. So maybe it's 34 CAD a share in, and I have to look it up. So I'm shooting from memory for all this stuff. But at least three or four months ago. Yeah, it was, you know, mid first quarter. At the time, it was a decent premium.

I mean, the stock was mid, low to mid-20s, CAD. So it was a good 35% plus. premium, but on an NPV basis, it was, you know, a very, very low number. I think a number of minority shareholders came out. Basically, the minority shareholder owns 10% of the company, so 20% plus of the minorities, given Rio Tinto owns 50.1% came out and said, this is ridiculous. The invested cost of Rio's stake is $60 share. Now you want to buy out the rest for 34.

If you think this is such a good deal, I'll buy Rio's shares at 34, is basically. And then another active, sorry, another minority came out. From the get-go, and by the way, this is in the context of copper prices at the time, and they made the bid probably 410, 420 a pound. After that, they went up to 450 a pound, and now today they're trading at, what, 3.50? I think that's right. I'm trying to pull it up on my screen right now. They're off about 25, 30% in the last two weeks or three weeks.

So copper's been absolutely smashed. So in the context of then copper prices, maybe here's a white way to think about it, In the context of what Rio Tinto and Outsu or Turquois Hill said about the NPV of the project, true NPV when you dilute for the Mongolian government interest, all that, is probably north of 50 CAD, a share, admittedly using probably a slightly high copper price. I think long-term copper price they used in the original scoping study or feasibility study was 375, 380, something like that, maybe even closer to $4.

At least $10% higher than where we are today. So this has gotten a bit hairier in the last few weeks, but the setup is reasonably similar to what it was when they announced a deal. And that is $34 per share is not a price that gets a deal done. The minority position may have changed slightly versus, you know, three, four months ago because copper is off so much. But, you know, they were asking for $60 a share. They're not going to just hit a bit.

bit at 34. Rio Tinto, not only they own 50.1% they're the operator, they're developer of the underground mine. This underground mine is key to creating a huge amount of value, essentially almost all the value in the project, really. And it theoretically, it's on track and relative. There have been some cost overruns,

but not large relative to two or three years ago when they had some massive cost overruns. That should be done and dusted by early next year or first quarter next year. after the underground mine should be operational and absolutely gushing cash, even at current copper prices, even at lower copper prices, but cash costs should be extremely low, low first quarter. So this is a mine with a 30 plus year life. Rio Tinto is obviously in almost no debt, a couple hundred billion dollar market cap. Copper is one of their future facing metals where they've stated to grow.

This is one or if not, not the only, but one of their few pure low risk brownfield expansion projects where they can contribute meaningfully to mid-long-term EBITDA growth. So the question is simply, is Rio willing to negotiate to get a deal done now, even in the, by the way, a month ago I would have said the odds are hugely in our favor as TRQ minorities that they would pay up to get a deal done. Now the balance of power is shifted slightly, but the prices also come down. So right now the price is trading essentially at deal price, maybe slightly under deal price.

I need to pull up the last ticker. But, you know, this was trading 10%, 8 to 10% north of deal price. Essentially thinking that Rio would have to bump the deal at least, you know, 25% plus to even get minorities to the table. So right now where we stand is we're in a similar position to S-H-LX in that the board is in negotiations with Rio. They've commissioned an independent valuation, which has not been released, even though it was commissioned, what, three months ago, two and a half months ago, quite a while. I mean, they definitely have not that hard to value this kind of thing, given that the full feasibility study was only published in 2020. You just have to update the numbers. So I'm pretty sure they have the numbers. I think the only real explanation for the

delay is they're talking to Rio. And if you talk to the management, they're quite, they're quite straightforward and say, listen, we, we are, you know, negotiating with Rio. And I think they are relatively open. They're looking for a bump. I mean, they've, they've put out some material suggesting that the bid from Rio is still reasonably below comparable transactions, which tend to take place at a premium to NAV, whereas Rio's bid is still a slight discount to NAV, I believe. I'd have to pull up the slide. But I think what happens is if you'd ask me a month ago, this, Rio probably would have paid up a fair bit to try to get it done. For example, they would have paid to say 41 to 45 range. Now I don't think that's feasible, but I still think

Rio is much more likely to offer a bump to try to get it done just from a strategic perspective. This is basically the last chance I believe that Rio can try to take this out at a big discount to fair value like copper's on its knees at the moment, but what happens if the Fed pivots and all of a sudden we're back off to the races and copper goes back up to where it was. Then they've missed their chance to buy out the minorities because, you know, we're basically going to see first production in nine months from today.

And people can argue like there's a there's a bare case for oil that oil. is going away in the next five, 10, three, whatever time frame, oil, and that guess, like, copper ain't going anywhere, right? This is a critical component of everything you do in life. So if you're Rio, you're looking at you're saying, hey, this is a really strategic asset for us that we already own. Getting the minorities out is great for us. And it's almost like, hey, if we're buying now, we're buying at recession prices, like at kind of troutish prices, that all works, that all looks really nice for you. And as you said, the difference between 36 Canadian and 44 Canadian is not huge for these guys in the grand scheme of things. Absolutely. Absolutely. I mean,

there's a lot of detail in the background here that it's probably relevant if someone's really interested in the case. So for example, Rio is the owner operator of the project and also the majority owner of Turquoise Hill. Turquoise Hill is essentially just a holding company for the portion of the asset they own. Rio has inside information. So Rio is, is the one building the mine development underground mine at the same time as they're bidding for the state they don't own. So that's curious timing. Secondly, they had a, what's called a heads of agreement where they came into an agreement with the Mongolian government on all outstanding issues, put them all to bed literally a month before they bid for the minorities. So the number one,

the two biggest risks in something like this are one, massive cost overarms lag on the project, which historically wasn't an issue. And two, Mongolia just screws you. There are the two issues, okay. And both of them hopefully behind you at this point. Both of those theoretically were behind you like literally a month before Rio bid for the assets. So that kind of, I mean, the downside is worth talking about the downside. So just not to cut you off, but the risk here is there is still a funding gap for finishing the mine. Yep. And the, again, the governance is not great, but essentially Turquoise Hill committed to raise equity financing for their portion of the finishing costs of the underground development, which are substantial, by the way, which could be a couple, I think the equity component was going to be $600 million, with some additional debt laid on top of it. But I mean, $600 million against the minority stake here is still, you know, we're talking greater than 20% dilution. Then you'd have to assume it would be done at a discount, right? So the downside case is they can't come to agreement or Rio plays really hardball. And you're looking at equity offering in a tough copper market.

You know, when probably there aren't so many buyers for a copper equity given where tech and all these other guys trade. So that might be priced at 20 bucks a share, 20, 20, 25 bucks a share, something like that. That relates to the most common pushback I've heard from people is they've like, oh, look, we think Pentwater is going to ask for $100 per share, $120. And if Rio bumped to, I'm going to throw a number out, 75. They're like, I don't know if Pentwater would take 75.

And I just keep looking at it and be like, look, the market's down 20% this year. I don't know what Pentwater's returns are, but the market's down 20%. Are you really going to go to your LPs and say, hey, we had a deal in hand that would have given a big position a 30% bump. And we turned it down and sent the stock down by 50% plus needed to throw more money into the company for the equity raise. We turned all of that down because we were hoping for some pie in the sky thing where a controlled company was worth 2x what we turned down for it three years from now,

like I don't think that's going to fly. I agree with you. I also think there's there's the negotiation posture, which we are both aware of given the great Canadian precedent. So both you and I were involved in Great Canadian, which is the casino company that sold themselves for a song to Apollo. They did sell themselves for a song. That would have been worth quite a lot of money nine months later.

Yeah. And then this guy got on the call, furious shareholder. You've never heard such venom. He was irate. I mean, he used language you wouldn't hear on a street in New Orleans to describe the board and their conduct with regard to accepting this bit. And then he rolled over a 10% brief. Literally is what happened. So look, I'm not trying to say that's what pentwater would do. I think the more interesting way to think about it is whether or not pentwater would actually take a 30% bump. Isn't it? in Rio's best interests to try, right? So from a pure trading perspective, stock's at 34. If Rio comes out and says, okay, we're going to bid 42, 43, 45, 42 plus some kind of CVR for the copper price or something, I don't know. And then, you know, obviously the stock will trade up and we'll price that into some extent. Then even if you think Penn Board ultimately rejects it, you should probably still own the shares today. I mean, not to get too cute. And the other thing is you could apply some price pressure, right? So this isn't an illiquid stock by any means. Pentwater owns, I believe, what is it, 9, 10%. You need a majority of the minorities to pass the deal. So Pentwater is

extremely important, but they're not the be all and end all. And if enough shares did trade at or around or close to the raise bid, Pentwater would have to worry the deal would go through anyways. Do you remember there was some stock, there was some company that Oracle was buying a few years ago. And it was at a big premium. And it was like T. Row and Brown and Brown or something owned a big share. And everyone was like, oh, are these guys going to tender or not? And they kept saying they weren't. They kept saying they weren't. And at the last second they caved because look, when it comes down to it, if you put a bid out at a 30% premium, it's really hard. It's really hard to turn that down, even if you think it's worth a lot more in the future. And like, do you remember at home group? I know a lot

of shareholders there who were like, this company is getting stolen, voted down, take appraisal rights and that stock is like, I think the bonds are in distress right now. It's like, look, when you've got to deal at a big premium, it's really tough turned down, especially if it's a controlled copper miner where Rio could do some really funky things with accounting and equity issues and stuff. I think it's going to be tough to turn that down. I'm sure there was a more interesting one. You missed good old Houten Mifflin. Hufflin, your favorite, HMHCs, the publishing company. You had a guest on a few months ago to talk about that. deal and the tender and it got through at a crazy price, like seven, eight times three cash flow

normalized or something? When everyone was saying, we're going to vote against it, whatever, and the tender was very close. At the end of the day, half the guys just took the money and run. So you're right. I mean, I think in that sense, a lot of people give me that negative feedback, like, dude, how can you own this? The downside's scary if it doesn't go through. And I think, look, I have a very strong view.

Rio wants to get it done. I have a very strong view that they've postured like they're willing to offer a bump. I mean, in the deal documents themselves, they say, look, we want to engage in negotiations. in good faith. We will be price discipline, but we want to engage you on this proposal. Again, Rio, a couple hundred billion market cap, or maybe $150, you know, $30 billion to our business. No debt. I mean, we're talking hundreds of million dollars, cents on the dollar almost, in terms of whether it's a 10% bump or a 25% bump. And I'm taking a view on the behavioral biases of the actors here, more so than the near-term market dynamics. And that is,

is not for everyone, but, but I think, I think that's, that's perhaps the right way to think about this one. I agree. And like, as you, it's not MLPs where, as you said with MLPs, I'm not aware of a single example where a parent did for an MLP or put out an offer for an MLP and didn't close bump, close it in some form. Like, I have seen Stubbs not get taken up, but it's pretty rare once the parent puts out a offer that they don't at least sign the agreement and bring it to shareholders. It's extremely rare. I, I can't think of any off the top of my head. I'm sure it has happened, but it would be, it'd be pretty shocking if you didn't get hit, hit something here. I'm sure we're going to, we're going to talk about enough names. I'm sure we're going

to get done bad on at least one of these names. I can feel it. So, I mean, look, what I would say about TRQ is, in the conviction stakes, this obviously has to be a much smaller position, from my perspective, it's a much, much smaller position than SHLX, just the downside upside skew is quite different. I do think it's have a positive EV, positive expected value from this level and I really do like it. But again, the position size is much, much smaller than SHLX for me. Just look for everyone's information. Let's switch over to one that, you know, it might get dated by the time this podcast post, but I've been really fascinated by the spirit frontier jet blue little merger triangle. I know you've written some great stuff

up on it. I mean, I feel like you've traded this one so, so well. And, options are risky. Everyone should again remember. But every week I was getting like little options trades and I feel like all of them, you just, you just destroyed the premium on those and everything. So let's talk about Spirit because as it stands right, well, I'll just flip it over to you. Where's it stand? What's the history here? How are you looking at that? Yeah, this is a pretty complex one. I don't know if we have time to go through all the background. It's essentially a three-way love triangle. Spirit Airlines, SAV is trying to sell. themselves to Frontier Airlines, ULCC, ULCC is the ticker for Frontier Airlines.

That transaction has gone through various iterations. It's currently, honestly, I don't have the documents in front of it. It's a majority stock deal plus, I think, $4.13 of cash, plus an enhanced reverse break fee if the deal gets blocked for regulatory reasons, plus a prepay. And of that, excuse me, of that, I think it's at 3.50 midden at the moment, the reverse break. I think it's about $3.20 a share, reverse reverse break fee. I think it was bumped to 400, but I can look that up while you're talking. It's, let's say, that's a save currently trades at $24 a share. Most all the value is in stock,

but you're going to get $4 plus of cash. Plus, if the deal doesn't get approved by the regulators, you're going to get $3 plus of reverse break fee. But of that $3 plus of reverse break fee, you're going to get prepaid some amount of $1, $1.50 or something. Yep. Now, that's the current deal from Frontier. To refresh everyone, Frontier offered an almost all-stock transaction a few months ago. JetBlue came over the top. JetBlue came over the top with an all-cash deal at a huge premium. At the time, I think it was 30.

It was 33. The first bid was 33. Spirit was printed at like 20 when that went through with all stock. It was like a huge, like a 60% premium to the implied value of the Frontier deal. Nevertheless, Spirit Stonewalled hard, really hard. got really ugly. They both started slinging mud at each other. That's JetBlue and Spirit. And since then, I mean, things have progressed. Essentially, there've been one or two overbids on both sides that vote on the deal. So at the moment, sorry, to kind of bring everyone

up to speed, there is a paper transaction, meaning signed between Spirit and Frontier, which was scheduled to go to a vote most recently June 30th. That got pulled for the second time and delayed to July 8th, mostly because Spirit is worried they don't have the votes to pass the Frontier deal. They don't have the votes. I don't think they're worried. I think they know they don't have the votes. So they don't have the votes.

So they mean expending a huge amount of energy trying to denigrate Front. Excuse me, JetBlue's deal. Look, it's a very interesting situation. JetBlue has shown themselves extremely creative and extremely tenacious to highlight a couple of the points that you and I have picked up on. One, they put out a very comprehensive pro-deal merger deck where they actually said, look, if the deal goes through at the other side, go to, go to appraisal, exercise your appraisal rights and tell the judge that we offered to pay $33 cash and you'll make them pay you $33 cash,

which you and I have never seen in a merger competition before. I'd never seen that. You know, I've never seen the Jep Blue when they, Spirit kept saying, hey, when Jeff Blue put their initial deal out, they Spirit kept saying, we don't think this can go through. and JetBlue said, all right, that's fine. Here's a reverse breakup fee, and we will fund part of it as soon as shareholders vote on this as one of the dividends you're talking about. I'd never seen that before. Like JetBlue's been extremely creative.

I've been extremely impressed with how they've communicated this whole thing. They've put out these great decks. I just think A for effort for their PR strategy, whatever team who's doing this. A for effort and also, again, like a lot of the value, I think, in Inventus, event investing is really not so much about the fundamentals. It's more about picking up on the signals the players are giving you. So when you see a deck that is clearly cut, cut and dry from a McKinsey pitch book deck 40 pages, extremely detailed, extremely thought through with these kind of creative solutions, it tells you, doesn't tell you JetBlue is going to win. It tells

you they're not going to, it tells you they're not giving up without a fight, which means that's the kind of information that gave me the confidence to do things like sell push. So sold a bunch of puts because it was the implication to me that the market was pricing was close to the front-y deal price. But my view was, look, if it actually comes down to the vote and it's close enough, JetBlue's going to bump. They've put in too much effort. This is too central to their plans.

And they've evidenced that with their communications. So that's kind of how I try to. When the market was melting down in mid-May, late May, early June, whatever, you were the one who was saying, look, I was getting worried because JetBlue, you know, you can look at the stock price. JetBlue stock is down. They're bidding 33 and the spirit stock is that would be like 15 standalone. And I was like, oh, well, JetBlue doesn't have a papered over transaction. They're probably going to walk full. And you were the one who kept saying like, no, these guys are thinking long term. They're not thinking. They put this deal together. They've obviously been thinking about it for

months and months and months. They're not going to walk because of a little short term volatility or something. They view this is, this is the last asset they can buy. They view this as their last chance to get much needed planes, much needed pilots, much needed. And I mean, you were just absolutely spot on. And again, that's why you like strategics more than financials because strategics are playing a longer game than market to market. What can I get right now? Absolutely. I mean, look, if I can put this in the context of one where I actually lost a bunch of money where I got it wrong was the Bally situation where there was a massive overbid from a financial player, again, from standard general, a financial buyer and I gave far too

much. This is a recent situation. This isn't like a year. It's a painful one for me and it's still ongoing. Yeah. Yeah, but I mean, that's kind of, I learned, I tried to learn a little bit of a lesson there, and that is, look, I mean, the word of financial player is, you know, the words of a hedge fund or an Apollo, they come and they go, but when you're jet, I mean, there was actually, there was another article that came out regarding JetBlue said they've been planning this deal for a very long period of time and that they had a five to seven year plan for the spirit integration. And I mean, it's quite obvious when you look at the specifics of the transaction that even if they were to win and convince the board to give them the keys to the Spirit Kingdom,

this is an 18 to 24 month regulatory process. And also, I should mention, the hostile tender docs have already been filed. So it's not as if this is, you're right, it's not a paper transaction, but it's an airline merger. I mean, these are not things you just pop on and pop off. These are multi-year kind of drawn-out battles. So without taking a specific view on who wins with this deal, I think Spirit Vol, 90 vol for literally 90 vol for for downside puts where the stock was trading I was saying buy to my kids they're going to school where they where they're you know where it's trading

basically at the break price for the for the frontier transaction with no upside a quarter for any jet blue overbit optionality that that just seemed wrong now to bring us up to speak where we are today I actually I mean look most of my puts are either expired or out of the money I mean look I think the most likely outcome is still spirit can't get the deal done with Frontier. I think that's the most likely outcome. But I don't really have a strong view on the equity itself at 24. I kind of want to see how the vote goes. Now, if the stock comes back to 1920, look, I wrote a bunch of puts around that level, right?

I would, and I also wrote some calls because I thought the deal would trade very wide to any announced deal, even if JetBlue got over the top. Those were a bit hairier when JetBlue started overbidding, but the vol was high enough that I did okay. But yeah, I think if the stock comes back closer to 20 bucks, it's probably worth another look. But again, this one's changing. This one's moving so fast.

I feel like I can't opine without seeing the news as of the day. I should note that we're talking night of July 5th, the votes July 8th. So this podcast will be up by July 8th, but this part of the conversation could still rapidly. let me turn to a different one. This one, I've done a lot of work on the space. I'm really interested in it. I'm really interested in the space in general. I'm interested in this name because there's a lot of torques at the upside. It's a pretty crazy story. You can see, I could see how like a year from now you and I are doing a podcast and we're saying, oh, that was a stupid idea. Like the risks were obvious in hindsight. But I could also see a year from now, maybe more likely we're saying, yeah, this was a no-brainer hitting you over the head. And that company is Vertex Energy. The ticker. there is BNTR, if I'm remembering correctly. So I just want to talk. Maybe VTNR. I think it's VTNR. I've got it backwards. No worries. I'll do the same thing. So just want to toss over you. Vertex Energy, maybe you can give like the two minute background history, how we got today and kind of what's going on

there. Okay. So vertex energy, I say this in the politest way possible. Former total shit co. absolute shick-co. This was a small refiner of used motor oil that fell into the proverbial gold mine when they acquired Shells, Mobile, Alabama refinery for $75 million plus working cap, okay? To put this in context, they just said,

sorry, I'm shooting for memory on this one is I have a lot going on, but basically they're going to pay for that refinery in one quarter. More than that, more than that. I think they're going to be a hundred million dollars. one month. I think they closed it for one. I think they paid for it by like May 15th or something. Sorry. Sorry. I thought it was, yeah. If you take crack spreads back to more normalized levels,

they probably pay for it in a quarter. As you said, right now it's paying for itself in a month. So they bought an asset. So they bought a old, low Nelson complexity index refinery for almost nothing. So what does that mean? Nelson complexity index is kind of a benchmark metric for the complexity, the sophistication of a refinery. The higher the number, the more sophisticated it is. Normally, you don't want to buy a four NCI. That's a very, very low number. It means it's old.

It means it can't process crude into much other than finished diesel and gasoline. You can't do the more sophisticated naphters or downstream products. Normally, in this environment where plain crack spreads are just off the charts, processing vanilla crude into vanilla refined products, is just a gold mine. And most other refineries, for example, I'm involved in another one, Calumet, we can talk about in a moment. Oh, we will.

They can process much more sophisticated finished products, but they're actually just trying to do pure, prude, I don't even know what the right technical home is, but just the most vanilla form of refining as they can, just given how widespread are at the moment. So just to, yeah, go on. Jeremy's mentioned, but I'll just hammer it home. Crack spread is you take oil and you turn it into some type. of product, gasoline, jet fuel, diesel, whatever it is. The crack spread is how much money you make when you run the oil through your refinery

and put out your out thing. So high crack spreads means we're making money like crazy. Low cracks spreads means, oh gosh, there's not a lot of profit when we do this type of thing. Just so everybody knows that jargon that we kind of threw out there. Yeah, no, that's helpful. Sorry, we were using a few technical terms here. But yeah, so Vertex formerly a very small company, a couple hundred million dollar market cap, you know, serial underperformer actually used motor oil as a pretty commoditized business.

The assets are so-so. They kind of bought this shell refinery for nothing because shell was a force seller. No one wants to buy refraff. I mean, talk about the political overtones and the current environment. There was literally no buyer for this asset major or larger company, smaller companies. So they did this somewhat levered transaction. They raised a bunch of convertible equity, a bit of debt as well to finance it. then what they were going to do is they weren't actually,

the irony is they weren't actually buying it for the refinery. They were buying it to turn it over time into a renewable diesel facility. Now, of course, you know, the first of the current production, only 10,000 barrels a day is actually getting turned into renewable diesel. So that means, you know, 75, 80% more. 80% of production is still going to be conventional refining. But over time, the plan was obviously to up throttle the renewable diesel portion and move away from vanilla refining and turn it into, you know,

green product. Of course, crack spreads exploded and now they're just making it money hand over fist, so they really lucked into it. But look, at the end of the day, the stock is trading at $10. They're going to do $4.50 VPS this year if cracks feds go back to normalized levels. Nothing really unusual about that in terms of there's tons of oil related names, refiners or EMPs trading at, say, two, two and a half times current earnings. What's interesting perhaps is that they are doing this renewable diesel transition. These are kind of much high value projects. They still have the used motor oil business, which should be making, you know, peak, peak earnings, which probably worth a few bucks a share. Yep. And the business has been

so profitable in the last months that they, I think they've almost totally de-levered. I mean, maybe there's some working capital build, whatever. And they're spending a bit of CAPEX to start the renewable diesel transition, which should be probably about a 12-month process. It's not as, not as advanced as cabu-mets. But this is essentially a debt-free entity, massively pure play exposed to refining economics in the Gulf Coast, trading it two times earnings, and yet has 120 realized volatility. It's kind of hilarious. It's also interesting. I've got so many question of this one. So I've started work on it. I see everything you do, right? I'm like, oh, my God, this is a layup, right? As you said, two times earnings. One of the nice things is

they locked in the cracks, half the crack spreads for the next six months, which, you know, when cracks spreads go up every day, it looks crazy. But it's great because it allows them to be lever, pay off the transaction, get the money to do the renewable. So I do have a couple questions here. First, Shell was a force of, yes. Shell had to get rid of old, dirty refineries. But at the same time, I could see like Shell pitching a renewable story. So why were these guys the only person? Because people think this renewable facility when they do it is going to be worth hundreds and hundreds of millions of dollars.

Why were these guys the only one who were willing to go out there and say, I know they Shell sold in 2020, but nobody else looked at this and said, hey, let's do this renewable story, put some money into it and create hundreds of millions of dollars in value? look a lot of the other natural biases remember this is a refinery in Alabama a lot of the other integrated players who are who are active in the Gulf Coast have already announced renewable diesel transitions or in the in the subsequent period they've bought some names exposed to the renewable diesel story look I don't think we should sugarcoat it this is a really really old asset and it's there is what there's what vertex energy said about the asset and what they could

do with it and it's obviously a lack of belief in the market that that's actually doable um but again it's it's not it's not a huge i mean it's not a huge ticket right in terms of the actual amount they're investing through transition i think it's around a hundred million so it's not it's not kneel moving for any of the typical integrators doesn't move it's not big enough 10 000 barrels a day even over time, if they could repurpose most of the 90,000 barrels a day of capacity, it's not really very large. It's unproven. The location, I mean, so I'm involved in Calumet as well.

For full disclosure, I have a much bigger position in Calumet than in Protex. There is a location advantage to something like Caliment, which is much closer to the kind of northwest grain belt and California, Oregon and Canadian regulatory markets. versus the Gulf Coast where you have to rail the product all the way to the West Coast to get all the government subsidies. Because a lot of the value in the renewable diesel

is actually... It's basically getting into California, getting paid by Gavin Newsom and the Greens, right? Or to Canada or to Oregon, right? So it's not the most locationally advantaged project and given the age of the shell asset. I mean, it's a hydrocat cracker conversion. So it's philosophically, it's not complicated

and it's theoretically similar it's what Calumet did. The difference is Calamette's asset was actually built five years ago. It's a brand new refinery. In fact, Calumet's Great Falls facility was the last refinery built in the United States. And it was a massive loser. It was a massive loser until renewable diesel, right, until the transit, and until cracks beds moved in the last six months.

But essentially, this shell asset is, what, 30 years old? I need to look up the exact date. But so, I mean, it's, yeah, I don't want to sugarcoat it. It was and is a fairly junkier asset. It's just the structural improvement in the refining environment in the United States has been massive. So what I would say about Vertics, then I'll let you go, is that if you have, and sorry, you mentioned that they've hedged out a quarter of their production. They've hedged out a quarter of their production at a 25% premium to five-year average crack spreads,

meaning something around $15 a barrel, maybe $17, $18 barrel. They didn't give the number. five-year crack spread average being $10 to $13 a barrel, something like that. Crack spreads today are $40 a barrel. They were $50, $60 a barrel. So, I mean, they hedge, they were willing to lock in economics down 70% and give their forecasts on that basis. And on that basis, it's trading at two times earnings with no debt.

Now, I'm not saying you can't lose. We'll talk probably about a couple of stocks that now trading at one times earn with no debt. But, I mean, if you have any kind of structural view that refining economics in the U.S. is structurally far more valuable now than they were six months ago, 12 months ago. I mean, it's entirely reasonable that in a post-Russia-Ukraine world, you would expect the value of invested refining assets in the Western Hemisphere in the United States to go way up. Like, whatever you thought. Yeah.

That was one of my questions. Go on. Because, look, refiners, their main input cost is obviously the oil, but they run on natural gas. They run on energy and natural gas is what's powering them. And one of the things I've really been debating is like, hey, all these refiners here are making massive profits. You can go look at any of the refiners. They're making massive profits and they trade it very cheap levels because nobody believes these profits are close to sustainable, which they probably aren't this sustainable. But I keep looking and say, well, Europe, Nat gas is 150.

And that gas here after a nice come down is like five, six. That's a huge edge. And all these refiners out here screaming it from the rooftops. And we're never building a refinery in the U.S. again, right? And even if we did, it would take four years to come online minimum. So it's like, hey, you've got this huge structural advantage. And I keep looking at these and be like, all right, they're trading for Vertex, trading for two X earnings. Yes, it's a crap coas, people like to say. But you can go find a lot of other ones. They're trading so cheap. And I just keep looking at and being like, what am I missing? Why are we not just like, you know, it just seems too cheap. Vertex. You mentioned the operationals for getting to crack, to getting to the renewable diesel.

So you don't think, because one of my worries was similar to TRQ, you get this massive, massive cost over, and you think this is pretty buttoned up. They'll get it relatively on time, relatively on budget, all that type of stuff. I think it's almost irrelevant at this point, right? I mean, whether it costs $100 or $150 million in the context of the money they're making, I'm not sure. Like, I guess another way of kind of asking what you're asking is what's driving the stock price today.

Are people buying or trading vertex because of the renewable diesel exposure? Definitely not. I think that's completely faded into the background. That was the reason they did the transaction. That was the reason the stock probably went from three, four bucks to seven bucks. And now people are just here for this huge supernormal profits right now. It's just a trading sardine on refining margins, just a trading sardine and refining margins. And at some point, you would think that at some point, there should start to be some real investors come into the name or in the space in general, like if the market stabilizes, right?

I mean, people, this is kind of not a unique refining comment. It's more commodities common. It's more like unless prices stop moving for some period of time, even if they go lower first, people are just so afraid of the theoretical fall to come. They can't they can't capitalize anything, even though these stocks are trading at one times earnings or two times earnings. I have this argument with people a lot of time like, well, okay, let's take pricing down 50%. Let's take it down 70%. Let's take it back to five-year averages and just look at the pro forma enterprise value, the pro forma balance sheet of the entity. happens in three months or six months. And then let's put a normal through the cycle multiple on it. What would you pay? I don't know. What would you pay for a crappy one refining asset in Alabama

and given all that we know? And if it was making five-year average market, two times EBITDA, three times you better? Okay, that's still a $20 stock. That's, I mean, that's the point, but no one wants to own it. So, and by the way, this goes for any ENP, any, you know, gas name, a lot of coal names, right? So it's a, it's a, it's a philosophical issue where the markets is having a huge amount of problem capitalizing anything at all. And the only way to really get through that is to see the cash flow and be paid the cash flow as dividends or buybacks or whatever. Or for pricing to just kind of stabilize. I mean, it's hard when oil goes up and down $10 a day, frankly. Last question on vertex and then I want to talk Calumet

because I'm very interested in Calumet as well. The CEO here, right? You mentioned this used to be a crack coat. And I have not talked to him. I've heard different things from different investors about him, right? But I do look at it. I'm like, look, he got the deal of the century buying this asset. I am listening. I just have to let someone in the door. That's fine. He got the deal of the century buying this refinery in 2020. He's got a vision for the diesel. He bought the, he bought the oil. He took public the old wholesale refiner, the whole wholesale recycling oil piece. And I just look at him like, is this guy great? Or is he like a typical Crapco manager because he owes like $70 or $75 million of stock at this point.

And I believe he said he wants to turn this into a platform. So I'm just kind of looking at him and wondering, hey, how do I look at him and think about him? I wish I had a vet of view on the CEO and his track record. I can't pretend that I know a lot about him or his skills or his, I agree, he has all the incentives in the world to make it work. But I'm involved in another stock where he also owns like 30. 35 minutes of stock and, you know, hasn't necessarily hit it out of the park lately. So, so I think it's, yeah, an industry bet almost as much as an asset bet here with a bit of an

asset level wrinkle. So you can keep talking. I just have to let in one person into the house. Go ahead. Go ahead. If you think it's going on the vertex thing, it was just interesting because I know people who, again, say it's a typical Cropco manager, but I look and I say, well, he kind of like rolled this industry up and he rolled the old industry up and he got somewhere with it.

And yeah, it wasn't easy, but then he bought this deal and he made a fortune. So anyway, Jeremy's letting someone in, but I'm going to introduce the next company I want to talk about. That company is Calumet. The ticker is CLMT. Jeremy has done just unbelievable work here. He, I remember he wrote it up in like mid-year 2020 when the stock was at two. He liked it. I liked it.

I think we got it off Vic, actually. And then it ran up to around five and you exited. And I was like, I don't know. I think there's upside. but I exited. Now the stock's 10. It's come down from 15. It's been crazy. I know you're back in and I'm starting to ramp back up again. So Calumet, there's a lot of different pieces to the story here, but just want to flip it over to you. And this might be the last talk we talk about. What are you seen in Calumet? Let's talk through to some of the parts and everything. It's really interesting.

Okay. So, dude, you said the stock was 10. It's nine. I would tell you. It had a real big sell off today. Yeah. I mean, it closed at nine on three million dollars. volume, something like that. I need to look at how much it traded. But basically, it's a, it's a very illiquid. So look, Calumet is a, again, an MLP, a non-dividend paying levered MLP. So the natural ownership base of the equity is zero. Probably about as large as my Japanese apartment. It's pretty small. Look, it's a, it's a very complex story. It's a combination of specialty chemicals businesses of various degrees, various quality degrees, that is, that go into things like automotive lubricants, inputs to paints, waxes, white oils, all these kinds of specialty chemicals

that touch upon commodity grade chemicals as well, that they make it a couple of specialty refineries, mostly in Shreve, Port Louisiana. Then they have a merchant refining business that we're talking about Montana, a great false refinery in Montana that largely put in Canadian crude and largely puts a heavy asphalt cut that tends to go into the construction business locally. Now, that asset is going through a transition as we kind of touched upon. That's kind of key to the story. And then they also have kind of a traditional refining, refining piece of the business as well that is highly profitable right now and responsible for most of the non-renewable diesel earnings or the non-specialty earnings, and that kind of comes and

goes with the cycle. But really, the key to the story is this was a levered kind of hodge-podge of assets, always tried to claim they were kind of a specialty type chemicals, business, and deserving of a high multiple, chronically over-levered, chronically poorly managed, they kind of acquired the wrong assets or acquired them at the wrong time. And then it got rolled up for a few different businesses. As I said, the Montana refinery asset was actually the last greenfield refinery expanse refinery built in the United States. They invested from the get-go. They lost a bunch of money, had to write it down. And then a few years ago, they decided to pivot to renewable diesel, meaning diesel created from seeds, corn, quote-unquote, green sources,

or, you know, not taken out of a refined barrel of oil. And in order to do that, they, as we kind of touched upon with Vertex, they're taking their oversized hydrocracker, which is essentially a piece of the refinery, and converting it to put in things like canola oil or soybean meal, or I think tallow is another product they're considering using as a feedstock. And the reason you would do that is because the gross, margin per gallon is just so much higher than traditional, not just traditional refined diesel,

but even bioethanol or biodiesel. I should say, sorry, biodiesel. And the reason for that is simply subsidies. So the reason the government wants to encourage the production of renewable diesel is because it's a much better product than biodiesel. You can port directly into a diesel engine instead of having blending limits. The problem with biodiesel is you really need to have blending limits where you need to have a different specs in your engine. So it's really not that usable. You can just pour renewable diesel straight in as a straight substitute. I'm not here to make the green case renewable diesel, you know, you're taking essentially what should be a food product and turning it into fuel. But the fact is these subsidies aren't going away. Okay. So if you just

look at the gross profit per barrel, or sorry, we should look at on a per gallon basis. The gross profit per gallon, you see this historical spread, no matter what them are conditions, and there's a good slide in the Calumet that you can pick up, where Calumet is, well, sorry, renewable diesel producers are able to stably extract a huge spread over typical biodiesel margins. So this is the spread that you would hope to capture if you're a Calumet. That's the spread of the gross profit level in terms of pickup versus biodiesel. That's why you don't make the eyes deal. But if your input costs are actually structurally lower as well, then you can make even more money. Now, why would you input costs to be structurally lower because you're located in the better position.

So, for example, they're located in the Northwest Grain Belt. They can get all these seeds and grains directly from Montana, from Southern Canada, from North Dakota, what have you, from Iowa's right there. And so you get your pick of the best products to create a similar yielding renewable diesel product from much lower input cost. Secondly, you can also rail it to the West Coast much cheaper than you can rail it from the Gulf Coast where a lot of the other facilities are actually located in the Gulf Coast, if that's where refineries happen to be.

They were historically. There are a few facilities in California that are also getting converted by the majors. But essentially you have a transport infrastructure advantage and you have a feedstock advantage. And those two points should underpin a structural cost advantage for a facility at Great Falls. So they came up with this plan.

They're almost, I mean, the facility is going to start pumping renewable diesel from September. September should be first production. and they went through a few various transitions to finance the transition. They raised a bunch of money from Oak Tree, which was kind of expensive form of non-recourse debt, really, with a conversion option into equity. And then the credit markets closed the last two months. They haven't been able to refinance that out.

So I think a lot of that's weighing on, I should mention, this is a very levered entity. And the credit markets have kind of gone, not haywire, but definitely got a bit, got a bit, it's gotten stormy out there. And so when you have 1.4 billion of debt against an entity that LTM only did, you know, 100, 150 million of EBITDA and even this year. So renewable diesel hasn't come along until September, right? So even though that theoretically could do $25,300 million of EBITDA, that's not coming online until September.

And, you know, the specialties business has been beset by supply chain issues and cost inflation, as you could imagine. So, you know, you're looking at entity that's looking seven, eight times levered at the moment on LTM or whatever. So that's why the stock's being killed, but you wanted to talk some of the parts. And I've been rambling, but I think that's really important. Some of the parts is if renewable diesel can generate, you know, what we think it can generate, which is kind of 250 million EBITDA base case could be a lot higher, but kind of 200, 250 million shouldn't be a stretch. Then Chevron took out a pretty similar entity, Reggie, REG, I, at nine times forward EVEBIDDA,

when a lot of that business is actually not RD, not renewable diesel. A lot of it is other renewable piece of the business. Renewable diesel business is only going to grow rapidly in the next few years, but they paid nine times before EVEBITDA. Notwithstanding that, you know, these renewable diesel assets tend to trade, or until recently they traded well north of 10 times EVEBITDA, but even if it's to trade high single digits, EV EBITDA multiple, we're talking north of $2 billion without a stretch

for an asset that should be in production in a matter of months. And so that covers the entire EV right there, just right there. Because the EV today is 1.4 billion debt and say 700 million of market cap. With the Oak Tree investment, so they did, well, they did $200 million into this convertible. How does that work on the convert? Because I've been trying to build out the model and figure out how much equity, like, you know, if you think this is worth $1.5 billion, how much equity value in MRL is the Montana renewable? How much equity value is actually going down to Calumet? I had assumed that would be refinanced before it ever turned into equity.

So the docs state that if there is an equity transaction, if there is a sell-down, for example, of a percent of MRL of the renewable diesel piece, then they would have conversion rights at said valuation. But they didn't specify how much they would get. So for example, if, let's say they put in 200 million face or whatever, right? So that plus 10, was it 200 million? Was it more? $200, $200, $200. The point is, if that was done at, say, $2 billion, then they would get 10% of the equity. Gotcha.

Right? Maybe slightly more for the make hole or whatever. Yeah. But it's that at their option. They could also just take cash, right? Gotcha. Okay. I think that transaction was announced in November last year, so quite a different market

environment. And I think at the time it was seen as a bridge. So basically they needed a couple hundred extra million dollars to one to de-lever and two to finish construction of the project. Now, since then, the credit markets have basically shut, but the business has actually generated a ton of EBITDA, because they're exposed to pure play refining, right? So keep in mind, especially business, still not doing very well,

exposed to input cost inflation and not so much issues on the demand side, but they've been really dinged by supply chain issues most of the last six months, maybe even nine months. but they just guide it to 100 million of EBITDA on the most recent quarter, almost all of which is coming from either the refining businesses in Montana or the crew refining business out of Shreveport where they're trying to run vanilla refining as much as possible. And so look, in terms of near term, the balance sheet is very levered, no doubt about

that, but there shouldn't be really any liquidity issues or financing issues. And so the reason it's very interesting now is the market is sleeping on the fact this is a special situation. They're actually running a process for the renewable diesel asset. Everyone kind of assumed, well, you'll only sell 20, 25%, and yeah, you'll raise maybe 500 million, but all that 500 million, a bunch goes to oak tree, and then you pay down a bit of debt, but then you still have a billion of debt, and then the specialty business is still very macro sensitive, so, and it's still a busted MLP. Everyone's kind of assuming that's the base case outcome. I think, I think we're actually a very interesting place here. I think given the implied

community of cost of equity capital for this thing. They might just sell outright. They might just sell Montana for $2 billion. Now, if they sell Montana, so in my sum of the parts, I think at $2 billion, by the way, I think it should be worth a lot more than $2 billion, maybe $2.5 billion or more over time. But if they just take a mercy bid, let's say, from a strategic that wants the asset, I still think the stock's worth mid-20s. It's a mid-20 stock, even with very kind of not-aggressive assumptions on the remain code, right? And you take that $2 billion. You repay all the debt, all the oak tree, oakry gets taken out, all the residual debt at Holt Coe gets taken out. And you still have, you would still have, you know, $5,600 million of cash thereafter to either re-intervest

into specialty or more likely, you have fully recapitalized, you turn into a C-Corp, and then you just sell the other pieces. It's more likely. But either way, for a stock at $10, I mean, the market's kind of pricing this, not quite like a solvency risk, but it's getting there. And I think a lot of that is due to technicals rather than actual fundamentals. So what kind of got me back interested was you've been talking about for a while. And then the stock, it's gotten hit a lot harder recently, but it got hit, it's been hit quite hard, 15 to 10 to 9 today. But they filed this, it's not even an AKA. They filed an investor presentations with a Q2 update that was basically like, hey, we're, we're, we're,

minting money and Montana, I don't think it's fully in line, but it's like, it's on the verge of coming up like fully online, fully operational and everything. It's like at this point, most of the execution risk is gone, you know, like, you're just, you're just there. On the, on the sum of the park. So you mentioned getting to mid-20s, they've obviously got the slide that's like, it's in one of their decks that says, hey, we value everything that's not MRL at nine times EBITDA, we value MRL at 12 X, that gets us to a 37 to 64. dollar unit price. You think they're being way too aggressive with the non-MRL pieces. Yes, they're being too aggressive with the non-MRL pieces. The problem they're making is one,

that was done six months ago, those comps. Two, they're using non-MLP, non-busted actual normal C-corps as the comps, mostly. So like, if anything, this most recent volatility has, I don't want to say it's been positive because it hasn't been positive for my opinion at all, but it's demonstrated to management at this company that, there is literally no, I mean, it's uninvestable. These equity is just uninvestable to the vast majority of investors. The only way to really fix the cost of capital is to do something strategic, because the market is never going to give you bad.

Like if it can trade off, it's traded off 40% on a total of $15 million, something like that. For theoretically, a billion dollar market cap company. It was a billion dollar market cap company three weeks ago. It's trade off 35, 40% on maybe $15 million. So it's a very powerful argument that the sum of the part's argument, really needs to be unlocked via, I mean, it's one thing, I think I was talking with another shareholder, they said it's one thing to create value. It's another thing to realize value.

Yep, yep. They've done a great job creating value through this asset transition. There's no denying that. And yet the stock, I mean, and by the way, the stock's at nine, so three years ago, it was three bucks or whatever, but it was 17. I mean, it was 17, six months ago, right? So realizing that value for shareholders are completely things all together. And I think they're starting to get it, just talking to, talking to them and talking to show. That was going to be my next question, because Heritage Group owns 15% of this or something, and I believe Heritage Group is associated with the, now I think he's former, but associated with some of the old management team itself. And I do remember a lot of the knock on this

company, but Heritage just doesn't get it. They just don't care. They're going to destroy value. They did, I mean, starting Montana until they got this renewable Hail Mary was, it was not a good decision. I think the track record of acquisitions, you know, I'd have to go back through my notes, but the track record of acquisitions been like, this is going to be great. And then six months later, the market turned against us. This is awful. So you think the market gets it? I know there's a new CEO in here. You think we're set for value on Lockyer, though? I hope so. I hope so. There has been a slight changing of the guard. So the former head of heritage, I believe, retired. It's currently being run by the daughter, a lady called Amy Schumacher.

I mean, look, they're based in Indiana, Indianapolis. and they're quite, they're quite quiet. They don't really say what their intentions are, which has been a big problem. Like, they haven't made it clear what they want to do with this entity, how they think about it. But the, I mean, the liquidity is just so horrendous

and the discount has just been so hideous. And moreover, they've delivered in the asset transition, right? They've delivered almost to a T on time, on budget. And yet the equity has done absolutely nothing. So there was this idea that if you can deliver, deliver on the asset transition, show that the value is there, then the market will eventually give you credit. That argument is largely being proven incorrect, given the structure of the entity and leverage, right? So I think they do need to do something. There have been some rumblings

that heritage has passion projects that require capital, like in the renewable energy space. I'm not familiar with them, but apparently they need capital. One way to do that would be to maximize value here because this is, I think, one of their largest investments, if we're the largest. Yep. And obviously, it's more in an asset harvesting phase once, value harvesting phase, once the asset gets up and running. But I don't know. I don't know. But that is the thing, like, hey, you've managed to somehow turn Montana into something that's actually, it seems like it's going to make a good deal of money if they get the renewable and like they get the multiples you're talking about. But none of these businesses are super sexy to own. Like, cool, you own a

refiner? Who wants to talk about refiners? Maybe. performance brands is kind of sexy zone, but that's a very small piece of the overall value here. Like, it's not like you own the Nixom Rangers. Why not sell this to, like, these are more gritty businesses. Sell them for the mules. Get rid of this headache, the MLP, all this, get rid of it and go do things that you actually care about and that are probably a little bit easier than running refineries. I agree. And I know many shareholders have made this point to them. What I would emphasize, or I guess something I've come to learn recently is management So the former CEO has become the executive chairman.

Yes, that's what I mentioned. And the current new CEO is a no-nonsense operator guy. I mean, the former CEO is the guy who really, it was his brainchild, this asset transition. He kind of stepped in when the former former CEO, Tim Go left to go back to Holy Frontier, now Dino, Dino. He kind of tried to sell a few things. He's not the best manager. Steve is, I did a very, very nice job. he's still the chairman.

And if you can make, he's very, I mean, look, they've made a lot of effort with investor outreach. I spent a lot of time with me, spent a lot of time with other investors. And they've been very clear in their communication. The limit, excuse me, the GP has not. Heritage has not. And that's a big overhang. But they get the structural discount.

They get that there's only so much they can do on the execution side. And that if the market just doesn't get it, doesn't get it. So I believe that conversation is being had. And as I said, Lazard is running full process. So I believe they will consider. alternatives. And not only me, many investors have impressed to them the benefits of taking the bird in the hand rather than selling, say, 25% for a few hundred, 500 million, whatever, and then trying to turn it into a $5 billion asset in five years. And my message is then, like, look, Chevron

took Reggie out at a nice multiple. But as you said, like, these are based on subsidies. And you never know what happens with subsidies. Like, you are a small player in a subsidy-driven market. Like, take the bird in the hand and get out while you can. Because who knows? knows if five years from now, like, this renewable diesel is going to be here. Who knows where crack spreads? Anything's going to be like, you want to take the bird in the hand if I was them and diversifying to whatever you care about. Totally. So look, I like that one because, again, it's very near term. Like, they've been running this process now for two and a half plus months. Earnings. I expect there should be an update with earnings, second order earnings, but either

way, you should get some kind of update on that process within a matter of months. It has a lot more leverage, okay, so it's not as clean as some of these other things. No, it is levered. $700, $750 million market cap at current prices, $1.4 billion of debt, only $1.1.3, but still more recourse debt than equity and certainly more overall debt than equity. But my kind of working assumption is they do this renewable diesel transaction and the balance sheet issues are solved. Not the structural discount issues, that's another topic, but the balance sheet is solved and that alone. I mean, I can't see why I should trade. If I think some of the parts is 25 to 30. Using my numbers and they do a transaction where you crystallize, you know,

70% of that sum of the parts, surely it won't trade at 9.10, right? Do you like Calumet more than vertex? Do you like Calumet more than vertex? Is it the leverage just gives you so much more upside or do you just think the renewable diesel story at Calumet is so much better than the vertex story that that's why you like it? It's the catalyst. It's the catalyst. I mean, the valuation of verdicts is undeniably cheaper and it's a clean balance. essentially. But as I said, there's, the thing with vertex is it just looks like a ton of other E&Ps or colony. I mean, there's tons of energy names trading at two times earnings that I can't explain why they trade at two times earnings. So what's going to change? They're not going to sell

vertex. It's probably because I own them. They trade at two times earnings and I bought them at three times earnings. Exactly. Whereas with with Calumet, I actually think there is a decent shot. They sell the whole shebang. I mean, the renewable diesel piece. And even if they didn't, let's say they sold 51%. Okay, let's say this whole 51% got a billion dollars, billion and a half dollars. Then balance sheet cleans cleansing event, no credit risk, no nothing. And all of a sudden, they turned the distribution back on.

And with the balance sheet cleansed, it's a, it's probably dollar per share distribution. I'm doing that math right off the top of my head. But it would be a big distribution real fast. Exactly. So, Vertex, I think when you'll still get paid over time, but yeah, I mean, what's the catalyst? The market doesn't care about earnings because they think they're one time

and what is the catalyst? It's an excellent philosophical question, maybe for half my portfolio. We've been going almost an hour and a half at this point. I've probably got to get out, but I know we've got a list of like 12 names. Do you want to go through one more, or should we just call it and we'll have you on

for part eight in another couple weeks or something? Yeah, why don't we just do why don't we just do one or two more very quickly before I think of it literally five minutes just because I got questions about them on tour okay so yeah let's do it we got to keep the short of people laughing HRBR harbor diversified so this is air Wisconsin yeah full disclosure I currently do not have a position okay I is no no change of the fundamentals kind of name that should do very well in the environment actually the stock has held up much better than almost all peers having said that it's all about opportunities

opportunity cost, right? It's all about opportunity costs. I think base case outcome for this equity is still kind of a quasi-liquidation where you get close to $3 a share in value. That's said, at $2.15 a share with no communication from management and no real articulation of when that's going to be realized or in what fashion that's going to be realized. We're talking about IRAs of, you know, 30%, let's say, maybe slightly better than that. Oh, the horror. The horror. But my point is I can deploy capital. into things like Far Limited, where I, you know, I mean, not to, I'm not trying to talk my own, but I have a very large position in Far. It's by far my largest position. I own for over 3% of the

company. So take that for what it's worth. But on my numbers, Far is a 50% IRA where I'm actually, you know, where I have a very strong line into management and feel I have a lot of agency in what actually happens. So why would I invest at lower IRAs in a dark company with less liquidity than also a quasi-liquidation at higher IRAs where I actually seem to have much more of an input into what actually gets done with the money. It just doesn't make sense. So I've basically taken all my money out of HRBR and put it in FAR, that kind of bet from that makes total sense to me. The only thing on HRBR, I have been wondering because it's not lost on me that the share price is held in well. And it's obviously what I follow because quasi liquidations

are really interesting ways to get market neutral returns, right? I have been wondering if it's holding up so well because the company is just, they've got to very active share repurchase plan. The stock has risen a lot, but I've been wondering if they've just been hammering the share count to the extent they can, given the illiquidity. But if that's why it's holding in. Yeah, no, I don't, I don't dislike it at all other than that the environment has changed. And there's, you know, I try to be like a pick at the trough mentality. I go where the most juicy opportunity is for the given level of risk. Now, I think HRBR, your downside, everything goes perished. Your downside is still about $1.95 a share. Two dollars a share. Maybe

less. So I don't think you lose money. But I also think that about other stocks. And I think you can do a lot better in like a far where, yeah, I mean, I mean, just like, let's say, let's say so far is the workout scenario, workout situation, Australian. We did a whole podcast on a people. Yeah, we did a whole part. And Jeremy's done great work. He's done updates. I mean, I can give the update, right? Like, the story is we've got management change. It seems like we're on the right path there? It seems like we're on the right path. It stocks at 75, 80 cents with 50 cents of cash and an earn out, and earn out deep, deep, deep in the money, earn out worth another 70 cents plus some optionality on a few other bits and bob that could get you up to a dollar,

$20, $1.25. The point is, if you forget all the other optionality on the Gambier assets, if you put the discount rate on the woodside earn out at 20, 25%, not 11, 12%, right? If you just absolutely get punitive. You just take a hacksaw to it. And if you assume they don't do anything accretive with capital, meaning you just keep the cash on balance sheet. They don't even invest it, even though most of it's in term deposits and interest rates are going up. So actually they are making a bit of money. Even in that scenario, you still get 90 cents a share. And they've actually given you a few signals that they're basically going to do the unwind, right? Like the CFO is hired on a contingency basis month to month. Very unusual. They're buying out the long tail of minority sharehold

is 78.5 cents a share. They specifically said in their, they specifically said in their documentation that cleaning up the long tail of shareholders will make any subsequent capital management exercise much less painful. Now, they're not moving as fast as I would probably want them to move, but there is some political sensitivity around the discussion on the last asset disposal. But, look, oil price volatility being what it is, I can't see how they're able to enter into any transaction other than one that creates a little bit of value. Or they just just, you know, if they just don't get anything out of Gambia, it's not great. It's not the end of the world because then there's nothing else to do, but give all the money back.

Yep. So, yeah, I mean, again, I size these things based on downside, not upside, really. And even in this case, though, I think, you know, this is a 75, 80 cents stock. I think maybe it's probably off today. I haven't checked the market, but it's probably a 75 cent stock where I think base, base case outcome is north of a dollar, and you get it all in 12 months, under 12 months. Oh, and by the way, that assumes no, no pull for. forward in capital returns to juice your IRA, right?

Yep. I actually think you do get probably within the next three, four months, you probably do get a third year money back or something like that. So, and that, you know, back end upside, if Woodside works out, then goes up from $1.5, whatever, to, you know, a dollar, $120 plus. Moreover, it's all a U.S. dollar denominated asset and it's an Aussie dollar stock. So the fact that Aussie dollar is gone from 73, 74 to 67, 68.

Ooh, that's pretty juicy. Yeah, that's really juicy. It's kind of like a little hedge there. So, I mean, I'm talking my own book big time. You should do your own research. I own 3.4% of the company, and I've been adding. I've been adding even in this market because I think it's a superior risk reward. I really do.

But do your own research. That's fantastic. Well, hey, Joni, we're going to have to wrap it up there. We'll have to have you on in a couple weeks to do podcast number eight because there's seven names I'm looking at over here that we were trying to get to that we didn't hit. But look, Jeremy, again, to bring it back, Jeremy just launched a new activist campaign on Evo. I'll include a link to that in the show notes. So people can go check that out.

Jeremy is very active on Twitter. So you can get a new bottom there if you've got questions there, Farr, or any of these other things. You can hit me up on Twitter too if you want. But Jerry Raper, thank you so much for coming on. And we will chat soon. Thanks, man. Appreciate it.