Yet Another Value Podcast - Lake Cornelia's Judd Arnold provides his 2024 outlook on offshore drilling + activism

Episode Date: January 19, 2024

Judd Arnold, Lake Cornelia Research Management @CorneliaLake, joins the podcast to discuss the offshore drilling space, $TDW update, activism, $VAL, $RIG, $NE, Petrobas risk, macro risks, reflecting on recent positions with lessons learned and what Judd is focused on for 2024. For more information for Lake Cornelia Research Management and Judd Arnold, you can can Follow on Twitter/X @CorneliaLake: https://twitter.com/CorneliaLake Chapters: [0:00] Introduction + Episode sponsor: Fundamental Edge [2:24] Offshore drilling space and $TDW update [13:12] Offshore drilling space - market correction? and $VAL $RIG [22:56] Why $VAL might not exercise options and Judd's newsletter explaining why $VAL should ($VAL ultimately did) + discussion on activism [35:38] What's it going to take for $VAL to start working [40:25] New build [43:48] Petrobas risk? [45:19] Macro risks: OPEC, Oil prices, geopolitics, US Election [51:52] Gulf of Mexico [55:48] What Judd is focused on; activism; reflecting on recent positions and lessons learned Today's episode is sponsored by: Fundamental Edge You’ve probably heard it’s an “apprenticeship” system, or that you’ll “learn by osmosis”? But what if there was a better way to learn the equity analyst job? Fundamental Edge is re-defining training on the buy-side. Use the code "10YAVP" for a 10% discount. Website: https://www.fundamentedge.com/ Whether you’re already in the seat or looking to break in, the Analyst Academy from Fundamental Edge offers a thorough and flexible path to developing the tools and frameworks employed by leading hedge funds. Breaking in: https://www.fundamentedge.com/breaking-in Check out the Academy syllabus and sign up for future free content: https://fundamental-edge.ck.page/academyinfo

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Fundamental Edge alumni get access to exclusive webinars, case studies, and an invite to their first annual analyst spring training conference in Arizona. If you want to fast track your byside career, go to Fundamentedge.com for more info. That's Fundamentedge.com. All right. Hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker, also the author of Gentr ValueBlog.com. Meet a lot of great subscriber review wherever you're watching or listening to it.

With me today, I'm happy to have one for a repeat appearance. One of the people's favorite guests, Judd Arnold. Judd, how's it going? It's going great. It's going great. Great to see you. Great to talk to everybody. You know, you look incredible.

You compare it this year to last year, the before and after. Let me start this podcast the way to every podcast. Quick reminders remind everyone. Nothing on this podcast is investing advice. Please do your own work, consult a financial advisor. Always true, particularly true today because Jed and I are good. Oh, I thought you said something. Always true, particularly true today because Jedd and I were talking before, we're going to go through the offshore space.

We're going to go through some specific officer names. We might go through. We talked about four or five names just off the cuff before. So we'll be going through a lot of names. Just remember. Let me add a little disclaimer. I have to add a disclaimer too. I got more lawyers.

So some of all the securities we discussed may or may not be suitable for you. Investing in the stock market contains risk, gluing risk of loss. Everything's for discussion purposes only consultant and investor advisor before making any financial decision. Do your own work. Some or all of what I say may be wrong. All right. We're good. Look at you.

Who's the host? Who's the guest? Anyway, Judd, the reason we wanted to have you back on A, because the people are always demanding a repeat appearance, but B, wanted to just quickly start by going through, you know, regoing through the offshore space, you know, almost exactly a year ago. You came on, you and I did a long podcast going through all the offshore space. You know, it was a real example of alpha because you specifically said, despite how many times I asked, what about Phalera? You're like, no, Tidewater is the best play. You know, Tidewater, they're the shortest cycle,

the best management team, all this sort of stuff. And I tweeted out before a chart, you know, Tidewater's up 60% over the past year. XLE, down, Valeris, down, Rigg, down, SPI, up 20%. But, you know, that is a real example. So I just wanted to start by asking you, let's go through, you know, early 2024. How are you looking at the offshore space in general right now? I now segmented a little bit more granted. I think tidewater is in a world of itself.

I think it continues to be the best one. I think a lot of our thesis has proved out. I think the things I would emphasize even more. the shareholder alignment with Rabadi on the board and the management team being incredibly shareholder friendly is I think that is massively played out and underappreciated it's they're going to do what is right now we may have a commodity cycle move against us we may have a lot of bad things but I think that's big I think the cost of capital and access to capital which was a question has really played out the bond they did it was a five-year bond not called two maybe it's not called

three came out at like 10 and a quarter percent or 10 and a half. I think that's trading at like 7, 8 percent risk right now. And I think what you're playing for now is they have really restrictive Norwegian secure debt piece too. It was issued in Norway or something. I think you're going to see a full refy there. I think you're going to see the ability for those guys to issue all in, all in debt, you know, debt capital and, you know, 7, 8 percent, maybe not at the worst, which really gives them a nice way to continue to roll up the fleet. You saw buyback, max buyback this year, the working capital is really going to unwind as it always does every year in Q4, so they're going to show a very nice cash balance.

And I think in terms of competition, this is another thing. It's not just that it's short cycle. We're going to get, I'll get to the rigs at a sec, the optional rigs at a second. You look at the top 10 OSV guys, and most of them are still very much wounded Matt. And you, so the ability for tidewater to come in and keep rolling up the space at attractive price. Because it's not enough. We say, how many times do we see this energy? Great, we're rolling it up. Oh, awesome.

You're paying. And that's not great for me. But if they can keep buying, you know, decent boats and $15 million a boat, even $20 million a boat, when, yes, they're 10-year-old assets. And another part of the call is that I think these 10-year-old assets are going to run for 40 years in total. So you still have 30 years of duration, which is different than the last cycles where you had new build and whatnot in her retirements.

And then you're going to see all assets, not just OSVs, but rigs. You're going to have 30 more years of duration, which all, sequel in for the for the finance geeks out there you do a single ship or single rig DCF you start at year 10 you add the extra special surveys if you think that that thing is done at year 30 you're kind of i think it's about a 14 15% on lever cost of capital that means you should pay fair fair value about five times you've adopted in year 10 if you think you get another 10 years that gives you another you know three four is a return to a turn that you can pay today um so it's kind of nice and i mean the math i do on tidewater do build economics i can

I think it's, you know, a $25 a share free cash flow story. Stocks now, what is about $65. I think you go through a new build and I think it's playing out. And I just, I think you're going to end up between buybacks, dividends and whatever you want to call it. I think you end up, you know, with a standard deviation of probably $25 to $50 a share one way or the other. I think you end up in 200 bucks of value for Tidewater through the cycle and we'll see. Let me be being in a few questions there, right?

So, number one, and I've asked, I mean, look, right before I had you on, I had Quinn on to talk about Tidewater, right, or just the space in general. I love the roll-up story, but one thing he's always emphasized to me is, like, at some point you get dis-economies of scale on this business, right? It's not Facebook where you can have every user on the planet on your, and I kind of wonder if after the last deal, if we're at the point where I do hear you on, there are sellers here, but after the last deal, are we at the point where, hey, there are, you're just, you can't add any more boats to this or else it becomes inefficient. Possible. And I mean, I think this goes to Quentin and it goes to Robadi, which is, that's a really hard question. And like, I think Quentin and Rabati, I just trust like that they're going to, they're going to be thoughtful about it. The debt's a really good weapon.

And they have the ability to do it. And if they think that is better served with buybacks, I mean, we're still at 15 million bucks a boat, is what you're paying for this darn thing. So half of this, half of the other. I think they're thinking about it all the right way and they're going to be incredibly sure of who they're relying and they're going to do what's right. Okay, next question. You have, I've listened.

I remember texting you in, I think it was October, when you did a Twitter space and you were just like, look, we're at some point, now this was more on offshore. Yeah, yeah. But, you know, we're talking to share of economics and it all applies to Tidewater Venture. But one of the things you've consistently emphasized, like, look, these, if you can't handle a 50% drawdown in these,

maybe that supplies to every stock, but specifically these, you shouldn't be in the sector. Like, these things are designed to be a little bit traded. You take a view, but you want to trade around them. I guess my question to you would be, I started, hey, Judd, alpha call up 60% a year. Anyone would love a stock up 60% in the year, right? But all the peers were flat or down. And yes, they're loose peers. Why is it now where you and I should be saying alpha call?

This has been a big run, pullback. You know, oils come down to 70. None of the peers have really run. Yes, they did some great deals, all this sort of stuff. But why aren't we sitting here talking about, hey, let's trade around this, let's reduce, let's wait for the next pullback. Does that make sense? And that's more tactical than I think I ever say anything on this podcast. But as you said, like, these are terminal assets at some point, right? Like the boats, 100 year from now are zero or a scrap value. So you do kind of have to trade around. If this was 600 instead of 60, we'd certainly be trading around. But what do you think about people would say, hey, Tidewater was the winner. You need to be kind of looking at the other names right now.

I think that's fair. Generally, it's a fair comment. I think we got involved with. Tidewater, you know, starting in a high teens in 20. And at that point, I was completely macro. I was like, I don't care. You can blow up the world without losing money. And we're now, all these things, you got a lot more eyes on them. We're deeper in the sect or deeper into the cycle. Like, they're going to, you are exposed to macro, you are exposed to micro, you're exposed to all this stuff. And the sizing that you can get and the convexity that you can get is way less. And I think that's certainly something that you need to fade, you know, fade rallies a little bit. I mean, these things are all going to be, you think of a train going from both, you know,

the Sella from Boston to D.C. People get on and off at every stop. And who's to say that they're right, they're wrong? There's a lot of space for a lot of people of these things. And I think I go a little bigger picture than the company specific. And I think this is really a portfolio management decision, which is, for me there's a size okay there's what i would trade and what i would own with what i would own there's a size that i want to have throughout you know throughout this cycle and how it plays

out and everybody's going to have a different number there and some may have a number of zero then who's to say that those people are wrong not not i i the core call across all of them is that i think that we are still in the very early endings of a long cycle and these things are very difficult to trade when they snap back. You typically have a really big snapback in a couple of days. So I think there is a reward for taking pain, so to speak. But there's a lot to be said. I mean, well, I'm sure we'll talk about rig in a second.

You look at all the hot money in rig. It's a very liquid stock. You got day traders. You got a lot of all jackeys with the converts. You got all sorts of stuff going on there. And when the RSI gets elevated, you know, yeah. Like, all the above. I hear you because I'll disclose.

I had a position in Tidewater. I have a position in Didewater. But I, you know, to me, as you said, they could announce a deal and the stock can go up 15% on the day in the good deal because most of the deals, all the deals they've done have been great. And the stock market's kind of picked up on that. But, you know, I probably like traded this too aggressively. Like it got strong, but the story was so good.

It's so cheap. Like if you've just got that long-term view, I don't know. Is Tidewater still your way to play this? Yeah, I say Tidewater is my number one. And like when I tell people, look, I'd buy all the title. If you want to play the space, Tyler is my number one, pick your number. It's much more at liquid now. We were talking about this a year ago.

Some of the biggest pushback I got is like the thing doesn't trade. You know, it was a $20 stock and if it traded $500,000 a day, you're like, wow. So I think when he's gotten better, the distress guy's gotten out, but they're still like, look, it's also OSVs and all sorts of stuff. Then I'd say the bigger question for people playing the spaces. I'll call it the big three and a half which is rig, Val, noble, and then the half is C drill. Not that I'm besudging them,

but like, look, you got some distress set guys in there, you got some holders liquidating. And Diamond offshore is just sitting over here saying, what do we have to do to get, we're just here for sale, all the time for sale, what do we have to do to get into Judd's big three and a half?

Okay, well, look, diamond, look, I would presume that people make money in Diamond, if we make money across the rig space. I think the biggest problem you have with diamond is your time to get equity is kind of gone because you look at what that equity check would be from a big guy. And like for TransOcean,

like they're going to give up, what, 20, 30% of their equity to add a couple of rigs that are, you know, your transosia, you're kind of like, I don't need to do this. Like, why would I do an equity? Like, this doesn't do anything for me. I think you can say the same thing. For all of them,

be Cedro, but I think you're going to have this bid ass spread. And if I was, if I owned 100% of the equity of diamond, I would actually be going around taking a discount on my equity to get equity in somebody else. I think that's a long term best. I would be, I'd do it no premium to a slight discount deal. I think that's the best way to make money over the long term. And that's hard. Like I just don't see how it plays out. But I get people who are there, they're going to route, you know, we're excited that we have one BOP and a few rigs and, Okay. Let me back up just because I'm worried we dove, we know very deep just talking specific deals.

I do want to. So people who look at, you know, me, total tourists, just looking at this. Now, I, maybe I'm mismerching myself because I have done quite a bit of work on the industry. But, you know, I look at Valeris and Rinn. And both of them are down in 2023. And if you had told me, like, we are, by the end of 2023, we were seeing multiple, uh, multiple rigs pricing at $450,000 day rates. Like, I think some were even touching into started with a five,

Now, you know, it depends how you account for some different stuff. But like, if you had told me at the start of the year, we were going to be ending the year and just seeing every rig that was getting taken off going for a four and a half, I would have said, okay, great, these stocks are really starting to work. And Valeris rig, they were both down on the year. And you had this, we should talk your suggestivism in a second. I think people got a little bummed out with Valeris's capital allocation towards the middle of the year.

But, you know, overall, I look at these and say, hey, the stories seem to be working out. And aside from Tidewater, none of the stocks are wrong. working out? Is this just a timing thing? Or obviously, the market's a discounting mechanism is the market discounting something that I'm kind of not seeing yet? I think the market corrected a previous, this is like a Buffettism, or there's just like an interview from in like the 60s where it's like the market's down 50% in it. So I said, is the market making a new forecast and said, well, maybe correcting a prior wrong forecast. And there's something to be said for that. So the way I think about there's multiple layers to this. Okay. And this is sort of like

people get on and off the bus, right? The people who drove, let's say, rig up to $8.59 bucks. And just for math for people on rig, at $450 a day terminal rates, you don't cover the debt. And 500, sorry, at 550 terminal rates, you're a $10 stock. At 600 terminal, you're like a $15 to $20 stock. When I first started looking at it, I was like, hey, you know, I sell people I like Blair, I like type order. And a lot of people said, dude, if you like the sector, you just play rig.

They're levered to the hilt. And if it works, it's going to work. And this was when rig was like three, to be fair to them. If it works, it's going to work. And if it doesn't work, none of them work. So, you know, it's all kind of the same. It's just, it's very levered. It's very levered.

It's very levered. And I think, so you got a lot of people, as the stocks start working, these become momentum plays, they always overshoot to the upside. I think the negative thing that played out for the year was one, commodity prices came back a lot. And obviously, you are now, it is really hard to make money in offshore. I mean, Tidewater, notwithstanding, when Halliburton Slumberjay and Baker Hughes are down on the here, like, you're, you're in the oil services bucket. Like, you're just not like, you're always going to struggle because this is oil services beta times two.

So, or three or four or five, whatever. Like, it's a lot more. So I think there's that trading dynamic that the whole space, energy struggle. Energy is still the best performing. Exile is the best performing sector on a, I think, and on a three-year basis, one, 21, 22, 23. But you look at 2023, it was one of the only ones negative as like, you know, I think it's still up. The XLE, I think it's up 150% over that period. So I think you had a little bit of consolidation.

I think one of the things I miss read in the moment was, you know, certainly at the Barclays conference in September, a lot of the, you know, managers were saying, we need to consolidate, you know, rates can't really super. Flack basically until the end of 26 or sorry, an end of 24. Yeah, we were in 23 because we still have, depending on how you want to count it, let's call it 10 to 15 rigs that are either stacked or stranded yard rigs that have to come in. And the fleets roughly, I want to say about 180. So those guys, when you have a stack rig or a stranded new build,

it's not really stranded anymore. If it's new built, we're putting it on the water. But you're all of people, those guys are going to take a lower price on contract. because they want to get term and they want to just get the rig out there. And that pricing dynamic, basically what the message was as time played out. I think a lot of people, you know, smart up to this myself, you know, sort of figure it out as well. Like, okay, we're like if we end 24 at 550 to 600 a day, that's great. But we're not, I think we started 23 with the hope that this was going to like start really moon inflecting.

And it's going to be more linear. and it may even be like a shallower slope and we're just sort of you know and then you interplay that with the contracting profile of all these assets and you're like okay when am I going to eat you know or feel or get the full earnings power even if spot rates go to 550 a day when am I actually going to see that in earnings and all of a sudden if you miss this sort of 18 month contracting window and you're stuck at 500 you're now all of a sudden you're saying I'm going to get even if rates go to 600 by the end of 24 I'm not going to get that. that until 27.

You're giving a very long and coherent answer to what you said. If I summarized your original Tidewater thesis, hey, everyone else is long and it takes a really long time for these rates to flow through to them, right? Whereas Tidewater, they were coming out on their calls and they were saying the market's really tight. Seven month contract duration with Tidewater. The market's really tight. We think it's going tighter.

We're taking a bet. We're betting on ourselves. And we're going to stay short because we think rates. have to go higher. And, you know, there is risk in that, right? If they were wrong and race went lower, it's not great. But they were right. And as you said, this is why they're the best play. And that is why they were, that is one of the reasons why they were the best play. Yeah. I think the go, now going back to the big three, we'll just exclude. I'm excluding Ced drill for people just because it's still a stock in transition in terms of ownership and

portfolio. Like, rig, Val, and Noble don't have to buy anything. And I think what it is is what it is. Seedrill, I think it's incredible, like, it's a smart management team, it's smart shareholders, but like there's clearly additional corporate actions that are going to happen. This is not what that company's going to look like in three years. With the big three, Ray Bal, Noble, I think I've had this question. It's both a question and prediction. It's rig is clearly, you know, round numbers, Rick, I forget where it is now. Let's call it round numbers 400 million to 450 and offshore a deep water asset. You have to like go with an assumption for the jackups, but like for the premium.

stuff you're paying about 400 for val and noble you're paying like two well val is like 250 noble about you know 300 so there's this discount and it sort of made sense or at least i was rationalized i think other people were too with rig didn't file for bankruptcy it's the one people know it's the most liquid and people are just comfortable with that one and the other two have distressed debt holders less liquid blah blah blah blah blah blah blah blah blah blah you know whatever that discount should appear as, you know, but for the leverage tour through the cycle. And at some point, you know, I kind of figure, look, if you're really right on this and you close your eyes for five years, that you're supposed to make the most money on Vow just purely based on math. Like,

you buy, you're getting the assets. Well, you're 40% cheaper. I agree. And that is why Val was my favorite of the offshore names, is my favorite of Austrian names. But there is, hey, if it works, like, Rigg going from 400 to 440 on their balance sheet versus VAL going from 250 to 450 to 450 on their balance sheet, you might make more on Rigg, to be honest, just given the letter. Yeah, but like the counter to that, though, is like, if you really get term at the top, you're going to get the reverse effect of, you're going to get a re-leverging of VAL. I'm trying to think of what the word is.

Rig, it's obvious that you have the torque. Val and Noble, the torque is there. Like, they're going to keep adding debt to do levered buybacks, and that's how you're going to get it. So, one, once it, you know, rigs a debt play down. It's effectively a public company, LBO of a rig company. Val and Noble are, like, unlevered. You're going to get shareholder returns. Now, Val, you also have ARO, which is the jack-ups of a city.

Saudi-Jatka play. Yep. Yeah, that one's been a little bit of a bummer because I thought you were going to get the $440 million box of third-party debt that you were in as 75 million shares, I bet, just for reference. Like it actually kind of, you're like, oh, man, I'd love to have that money back. You're looking at a $66 stock. You're like, dude, just buy, like, it's kind of nice. And there's equity value beyond that. I think what they're, what I've heard is they're going to, the IPO is more likely, you know, over the next two years on the Saudi exchange.

And a debt refi is just going to come concurrent with that. And that whole thing might be, I mean, that might be a billion of value or maybe, you know, I don't. Like, it's going to be a big number. So I think, you know, as time goes on, my gut is to more be in Val and Noble than it is in rig, just because of the mass more in your favor. And this rig premium, which some of it I thought was technical and just unnecessary. Brett Coffron, founder and lead trainer of Fundamental Edge, barely remembers his first year as a hedge fund analyst.

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We've given deep, deep into the weeds here. But let me ask another question on, I think it was Jalot, right? For those who don't know, Valeris, because of their bankruptcy, there were two kind of stranded new build assets at shipyards that Valeris had call options on, right? And I'm simplifying a little bit, but they had call options on. And these are brand new offshore rigs, seventh generation, super new, like premium assets. And in, I think it was July, management comes out on an earnings call and says, hey, we don't

know if we're going to exercise these options or not. You know, we're still assessing. We're not going to do it unless we've got contracts. We're not sure. And the stock was down like from memory, 10% in a day. You wrote a letter and published it online the next day that said, what are you guys thinking? Like, you are buying these offshore assets so cheaply. And I don't know how you could not exercise these options.

And management eventually got what religion and did. So I just want to ask, you can correct any part of that story I said, but I just want to ask, like, what do you think management was thinking when they said, hey, we might not exercise these options? And just after you publish that letter, what were you hearing from other bowls around that options, around Valeris, all that type of stuff? I thought the most likely thing that was going out is management was playing this cutesy game of thinking that they can create uncertainty with the yard to get concessions, i.e. Because most of these yards and the options, so a deepwater rig today, if you want it, we don't know what it costs. The estimates are somewhere between 1.1 and 1.5 billion and five years to build. If you say go build it, it'll take a lot of time. And these yard options, one was for 110 million, one was for 200.

Now, keep in mind, the actual price is much higher because that's the standard menu of stuff. Then you have to do all the upgrades right away because people want the first person in contracts that's going to want all these special things. Maybe you need to tweak this, that. It's another like 50 million or 75 million bucks of upgrades. and then you got to move the thing and whether you get mobilization or not like let's just call up like ad for really silly math

just add $100 million to both and that's like the all in at your you know at first person place yeah so you're still you're all in at 200 to 300 like what are you doing? I think what the gist of the letter

the best read of it was I and it was more than just that it was every call you hop on with bad the guys like Nancy negative and I get why you need to be Nancy negative and I kind of wrote it like dude he just took the stock and I think it wasn't July I think it was

March or April or something like that but like this is cartoonish now like if you're playing this game to like pressure the yards and like do this will they won't they? I go it's already gone because there's other people who will buy the bricks in fact there have been so

stop with the QC game the worst read of it was they actually weren't going to do it I mean, that was my worry. Like the value was so clear and they're like, you know, too conservative, as you mentioned, like a lot of these are distressed debt holders and distressed those are very smart, but they normally have a win by the time it goes to public equity. So they try to play it as conservative as possible.

And I was worried they were just like, you know, maybe the options that I think one of them's 165 and the ship's worth 300, not good enough. You know, let's just return that 165 to shareholders or something. Like I was very worried about that. I mean, look, all their things going on. Like, I was telling TransOcean at this point in time, you should do a $2 billion convert and buy every stranded new build. Like, because Transocean at this time, I think the stock was like six or seven. And I was like, look, man, and this is one of the things I kind of learned when I was the multi-manager, like, talk to some of the black guys.

Like, man, when Vols that elevated, these guys are just Vol jockeys. Like, you can end up with like a capital structure when you have high vol and you can make it to you like an up 75% up 100% convert. Remember the beautiful times of early 2021 where you'd have like Spotify trading at 300 They'd sell a seven-year convert you know zero percent interest rate that converts at 400 like almost free money like a beautiful time Rick could have been doing that great time Yeah so I I knew like part of my angst too was like I know there's private equity and indeed there have been like a bunch of these rigs have been bought by other people and you know TransOcean bought the one but they had the partners and then they had to swap anyway but look there were a lot of layers to that I was like look I can write something and I went back

and forth what do I do because I'm a nobody but if you write compelling stuff and that's why the letter I was like this is the letter that I can see other people writing and that was something I picked up through the course of my career seeing all sides of activism which is the number of people who can write a letter is actually various the number of people who can forward a letter to management and scream at them on behalf of your letter is actually very large and And look, to Vow's credit, I got on with, I got on the phone with them a day later. And there were some other things, too. Like, I was really annoyed with the debt.

Then they were like, we're not going to refy the debt. They needed a revolver. And I was like, this is just monkey. I don't know what math you guys are running. Like, you got to clean this thing up. I got on with them, you know, it was like the typical activism result, which is you're an idiot. You're wrong.

I'm like, okay, we're on the phone. You can tell me everything that you're disagreeing with. And sure enough, on the next call, much more, I wouldn't say positive. I would say much more realistic commentary. Because I'm not saying be bumpy. I'm just saying like it was cartoonishly negative how they were talking. And to your point, you're creating uncertainty among shareholders when cost of capital is everything for no reason and no apparent benefit.

And if you think you're getting one, you just look foolish. So we got the outcome we wanted. And the letter, to be fair, to management as well, it was also really addressed to a lot of the Distressed Act guys on the court because coming from that world, there is a point of view for some people that there's a right way to run an offshore company. And I'll just say, I don't disagree generally, but the distressed debt people aren't the people who are going to put the highest value on these stocks. And at a certain point, you need to accept the fact that the driver, the equity guys that are going to take these stocks to 15 to 20 bucks in the case of

Rigg, Val, like, you know, $150 to $200. It's a not a distress debt guy. It's somebody who's going to say, oil's going higher, day rates are going higher. I want to own this stock. I just want to go back to one thing you said earlier that I thought it was really insightful. You said, hey, the number of people who can write these letters is small. And look, I mean, yeah, I'm sure there are people who actually like just aren't good writers, like obviously being a better writer really helps with the set of itself. But I think if I could interpret what you mean is a lot of the, a lot of the, you know, two to four 4% holders for a lot of different reasons.

They can't write a letter to management, especially a public letter, just lambassing them. Maybe they can get on the phone and be like, hey, guys, like, but they can't lambast them. But as you said, they can forward a letter and be like, this guy raises some interesting points. And it's something I've been like really surprised just having a very minor online presence where, you know, you write something and I've, I've had to get a lot less flip-ins and a lot less, oh, I looked at this for two seconds and this company's dumb because it gets forwarded to management. And then the management teams call you. And I was always like, why would people forward? And the answer is exactly what you're saying. I'm a 3% shareholder.

I can't burn my relationship with this company. You know, I'm at a bigger organization. My higher ups don't want me to start burning this company. But I can certainly forward Andrew or Judd's letter and say, this guy makes some interesting points. Can you help me address them? So I just thought that was really sharp. And I kind of like that model as you're evolving into it. Yeah.

And I mean, look, we can go down this road like another big point of leverage that I sort of learned. And this was through the Kano experience. And look, I did nine podcasts in Kano. I was out of the name. I had a small position, but like I felt obligated and like, you know, people can see what I've done with Plagaya as well, like these names like you advocate, I feel like my name's out there. I feel responsible, even irrespective of how I'm going to trade something, which I have to obviously put myself in my clients first, you know, we like to be proactive.

But that aside, with Kano, beyond even the holders, what really came out to me that was really instructive while I was doing all this podcast was the employee reach. you out. And I think it's a dynamic of activism that's really fascinating because you look at like, let's take Facebook and Facebook was sort of my analog from Pagaya. Like Pagaya people were like, you know, so it's Israeli fintech. Look, I made a little bit of money. I was up a lot. It's a tough name. It's got an a big sheer structure. It's an interesting space. Like we can do all this stuff. But most people, 10 years ago, people would say you're out of your mind to even attempt to do anything. And we get, we today, you know, we're doing this on a two, it's Tuesday right after Martin Luther King.

They just announced, I'll say 60% of what I wanted. They announced they were going to do. And what the analog was from, from meta, meta's got impossible governance as well. And that stock went from what was at the COVID peak, 400 down the 80, 85 bucks. And you had like Brad Gersner, the, what fun is he at? He's a big Silicon Valley. Altimeter. Altimeter.

You know, he's like, I'd see NBC watching his world blow up. Like, we are writing letters to Mark and all this stuff. What crystallized for Mark, and there's a lot of companies that this is true, more so and less. And also for about, 10 years ago, the employees would never even know, like, Carl, icon was coming after the company. If they did, like, their ability to understand, they would just know, like, Carl, bad, management good, but, like, they couldn't process it. The employees with social media now, if you put out compelling stuff, and I think that's really the key, which is, people don't like I wasn't successful with vow because I'm smart like I'm advocating rational stuff other people are agreeing and management is getting growth pressure from

investors as well as employees of the company it's like hey okay you shine a spotlight here maybe maybe there's some merits of this stuff because things should end up where they go with the employee dynamic and going back to sorry I lost the that point I love it when you play your employees with this much stock and you're a talent based business Mark ultimately, he pivots from, I'm going to like money on fire with the Metaverse to, hey, man, a few employees came to me at 85 bucks this year and they're like, I don't want to work here if you're going to pay me 50% in stock. I had friends who were at Tesla and Uber, right? And now Tesla has been a rocket ship, but I remember, you know, the stock sold out for a little bit, went down during COVID. And Uber especially, and these are like highly, these are the type of people you want. You know, these are PhDs and name your physics. computers, whatever you want, you know, these are the people you want to hire. And they got vested stock at, let's say, Uber 49 when the, when it was public and it was bull. And, you know, in

2022, the stock's at 30. And I've got friends who are like, hey, I might be, I'm probably going to leave because a big piece of my package is RSUs and those are way underwater. And if I go somewhere else, I'll get a new RSU package at that place. And unless Uber, like, turns it around. So I, you're, I think you're 100% right. Now, that is tech companies versus Valer. where, you know, Valeris, if you're, aside from the upper management, they probably don't have much of an equity culture, whereas meta, you know, it's running up and down through. But I think it's an astute point. Yeah, I think just to close the point on it, the biggest thing, if you put out compelling stuff, somebody at some, like, you are enabling and empowering. You don't know

who the people that management's going to listen to. They're not going to listen to you. You're most people who are super successful, who's this troll on Twitter? And even if I ran a $10 billion act this bond. How many times is Bill Ackman or Jana or Elliott until, you know, go pound sand, buddy? Because that's most people's first reaction. You're an activist because you totally disagree with what a smart person is doing. They're a smart person because they run the company and like, it's hard to get to these positions anyway. And they don't, you know, you're hoping to catalyze a process where somebody who's adverse to changing can convince themselves through a rationalization that they are still correct, but they're going to do what you want. And you

you need some person that you don't know who that person is to like get through to them while the stock price is sort of doing it. So, you know, it's, but it all goes back to you have to be compelling and you have to like feel the situation out. Some of them work. Some of them don't. But I think traditional governance protections are in a way almost useless because they have to be responsive. Like nobody wants to really look like an idiot. Stocks have to go up because of stockcom. And, you know, so I think it's interesting. Let me turn to a different point.

Just on, you know, we just going back to Valeris and Rig, right? So, again, it will take longer. They have to roll these contracts, but they are successfully rolling these contracts, right? You're seeing the, the contracts coming in at 450, 500. They're doing it with oil at 70, 75, not oil at 100. I mean, it took the industry tightening, but, you know, people are writing these with oil at 70, unless oil goes to 55 to 50, I don't think any of that's changing. I guess when people sit here and I'm biased, I look at Valeris to say like, Judd, what's it going to take for Valeris

to start working, right? They are buying back the shares. They are exercising options. They are realizing the thing. Is this just the sector is so like overlooked? It's not going to do it until all the contracts have rolled and it's just really beating you over the head how cheap these are or is there something else that kind of encourages that self-catalyzes this year? I think you need to see day rate momentum. I think part of what we're working off right now. 450K isn't enough. It needs to get up to a five.

It's not about an absolute level because the levels are high enough already. Like people should see it. But what we had go on is you had the market start pricing in too high of a day rate momentum trajectory. That did not materialize. Those losses happen. Those people came out. So now we have a shareholder dislocation. New money has to come in.

With Vow, you still have, I think, 10, 11% of the things still distressed at guys. With Noble, you still have Mariscounting, 20% of that company. So that still has to come out, too. From a seasonality perspective, you know, contracting seasons Q1, Q2. And, you know, commodities sort of mixed. I think you need to see the space to have a tailwind. You know, the sector beta is usually a bigger deal than the company beta. But I think these things where they are right now, it's really hard for me.

If you're correct on the view that offshore cap-ex is going to keep going up, that will drive day rates higher. The reason it will drive day rates higher, I think one of the things that people miss conceptually is day rate ranges beyond just the number are reflecting negotiating dynamics. We're still in what I would call marginal cost discussions. At $450 a day, this isn't about like the phase after marginal cost is percentage of new go back inomics. marginal cost discussions, which is where two years ago, it was, which is where it had been for five, six years, it's, okay, what does it cost to run this thing? I'll give you 50 bucks more a day or nothing more a day. And, you know, so called 200 a day, 250. And you get more, you get more. And even at 450 a day, you're still, that's not reflective of the capital. Nobody would ever build a new rig at 450 a day. Well, if you believe a new rig costs a billion, right? What is it? It's 750,000 a day is kind of what you would need to believe, maybe even higher. for new build economic i think over a million a day but so i i think the driving force of this this is just classic supply demand you need offshore capax to be high enough to demand enough

rigs then a vet that there isn't somebody to undercut everybody where they're like okay four 50 day 450 day everybody's like we're sold out guys that that's what it'll get us to 550 and then there's this jump point somewhere between five and six 50 is a jump point where it stops going linear because all of a sudden, you're totally sold out. And the next price is it from 650, it doesn't go to 7. It goes, and I'm not sure whether it's 650, but there's a number that the curve, the pricing curve jumps where the rig guys become self-aware that there aren't enough rigs versus the demand for those rigs.

And then they can say, 800. And the first time that gets hit or 750 and everybody sees that number, the whole market just repriced his step functions higher. The way you put it on the Twitter space that I just loved, I tried to get this in, I did a bunch of write-ups on this in January, you go from marginal economics to kind of bidding attention to, you start going from percent of well economics is where you get. Yeah, we've never been to percent of wealth.

So we've gotten a percent of new bill. So after marginal cost, it's like percent of new build. Hey, I'll give you this. I can always build a rig. This cycle, I think it's incredibly likely if it keeps playing out, then we go to a percent of wealth. So like, because there is no new bill or we'll get new build. And if we stay in the new build percentage new build, you should usually peak where we usually do is slightly above new build economic parity to give you value for the fact that it's still like, you know, it used to take two years to get a rig.

So it'd be like, I'll give you 50% of two, you know, give you one extra year of value because that that's my indifference point. Like, that's how we're going to share. You theoretically could get to a point with no new build and demand higher where people are like, like, where should they bid this stuff? I don't know, 25% by LairR. And I can really get you to higher rates. Now, the reason you think there's no new build is right now, nobody's incentivized, right? Where it's are way too low to incentivize new belt. But I think the other reason you think there's no new build is, you know, there's questions on technical capabilities, how long it would take to ramp up.

But I think a big question is, hey, if a Rick's supposed to last 30 years, you know, if you ordered one right now, it wouldn't come for, let's call it three years. And then you need to depreciate over 30 years. I think a lot of people would say, I'm not sure if we'll be drilling in 20, 25 years. or I don't know, like, the pricing I get for 20 or 25 years on this. So I can't go to it. So the reason you go to percent of well is because, hey, you know, in the past, people have incentivized and do new belts. Now, if you're questioning the terminal value, you know, it's a beautiful, it's a

sunset industry, but it could be a beautiful sunset is my favorite note on this. And nobody's going to want to build it because they see sunset and they say, hey, in 12 years, this thing might not be running anymore. Am I kind of thinking about that correctly? I think you are. I would phrase it slightly different, which is it's not going to be a binary. and I'm not presupposing that you were suggesting a buying it. You've got a fleet of 180 round numbers, okay?

How many more rigs at most do you think are going to get built in the next 50 years? Let's assume capital was infinite, like maybe 20 at most. So you think about that, you're like, okay, that's just like two more years of additional demand at worse. And part of it too is we talked before about the financial things, which is, you know, a billion five a rig, man. Look at market cap of these companies. Look at the enterprise. Like, who can order five more of these things? It's like the whole company.

You're just never going to do it. A common bear point I will get is, hey, I understand the, none of the shipyards are building these anymore. Nobody wants to build them. I had for a few people would be like, what about China, right? China wants to, they want to put out jobs. They want to, they want to harvest resources, all this sort of stuff. Like, could you just see China, China come in and subsidize a bunch of new builds at Chinese

shipyards? They would control it. They'd be able to kind of extract resources on their own terms. Does that even enter your consciousness or your worryiness? I think it goes back to the prior point, which is you can convince yourself if you're a Chinese employment, bureaucrat, whatever. Then we're going to build cape size vessels, as Suez Max vessels. We need some VLCCs, the oil tankers, and some algae tankers, whatnot.

But like, if you're going to commit 300,000 people to building something in a shipyard, you kind of want to feel like we need a lot more than 20th. So that's where I sort of go back, which is, are you really going to ramp up for 20 rig? Like, you would just need a lot. Like that guy's going to say the social impact because we already saw this in China and Korea. All the yards in 2015, 16, 17, 18 had to lay off. It's like almost half a million people lost their job between Korea and China. It's a huge social thing.

So the yards are going to have the same long-term contracting requirement effectively that the rig guys. are, which is going to put even more pressure on the guy, the EMP companies, which is, hey, BP, hey, Exxon, you want me to build all the stuff for you. Like, I need, I need a 20 rig 10 year commitment. Otherwise, I'm not going to have these people do that. And which just further inhibits new build. But again, like, actually, look, at these valuations, you don't even have to address any of this. We're trading at like a third of new build economics. Hey, I'm just asking, question. I've got the expert on. I can ask any question. You know I'm with you. One more question. So much of the industry, so much of the new tendering has been done by Petrobras, right? How much is there a risk of Brazilian disruption? Right? I'm sure Petrobras is doing this because they see great returns and everything. But they're taking a heck of a lot of the tenders. They are the one who are driving a lot of these tenders. You know, name your, name your disruption. Brazil political turmoil. Petrobras gets a lot more bearish. Petrobras has an internal scandal. Like,

How much is there, it sounds crazy to say Petrobras could affect an industry, but if Petrobras wasn't bidding, it would look a lot different to me. How much are you, like, kind of concerned about that Petrobras risk? No, I'm not. Like, they don't have an alternative, all their oil is offshore. Oil is destiny. It is the linchment of their entire economy to get more. I think where you have to be concerned, and I forget what Brazilian production is. Now, I think it's like, oh, God, I have to look this up because I have to wrong. No, no, it's fine. it's like two or three million barrels

resilient now you can look it up to here Brazilian oil production this is a huge point hold on because I do have a number that this matters oil production

okay three million barrels a day Judd Googling stuff this is the exciting stuff people listen to it's like I have too many numbers under the head and it's like you get older too and then you like remember the wrong numbers and whatnot I'm very happy

not you Pete I want anyone who's listening on YouTube go look at Judd last year and look at him this year. He looks like he's D.H. 10 years. They shaved head. He's been hit in the gym. Looking good. That becomes, I think Brazil has to start at 6, 7 million a day. I think you have to start asking yourself some.

Like, this question, we're at 3. And they can, like, the prisoner's dilemma, like, this is an issue for the Saudis. Okay, Brazil goes from 3 to 7 million barrels a day. What does that mean for Saudi? What does that mean for Russia? And is this one of the reasons that oil price? Like the real risk is this prisoner's dilemma, you know, you have, oh God, now, and Kola just dropped out of OPEC, there are like a million barrels a day.

They're also an offshore guy, which is our oil, right, you know, the Saudis are, this is, well, I'll set the table with this. This is the, we have Middle East conflict, shoot, it's a shooting gallery with the Houthis and the Iranians, and oil cannot catch a bit. I was actually going to ask you this. Like, you know, a year ago, if you've been like, hey, Andrew, like, we're not in a recession. We've got huge, huge turmoil in the Middle East. There's still an ongoing Russia-Ukraine war.

What do you think the oil price was? I don't know. And the Fed pivoted. This is the thing. Again, no recession. The U.S. economy is doing great. And I think what it is. And I think this is really the risk.

So it's not, it's, and Cole is going to incentivize the Purdue. They told us we're dropping out of OPEX so we can. literally drill and pump as much as we can. Brazil, their destiny is drilled, pump, get as much oil out of the ground. If everybody does this, all of a sudden, you just have an abundance of oil, and we're kind of already seeing it. Like, not OPEC supply continues to be, which, you know, is still a U.S. shale predominantly, but like, it's still outperforming. And I think that's the risk that we just wake up with in five years that we were really right on offshore in fact we were too right and now you can you can help this i like that your risk is

we were really right we were just too right i like that too right and then all of a sudden we got 110 million to supply barrels per day and we only have 105 in demand like ouch that's that sticks um so we need china to come back on the demand side um yeah it's oil price is hard man and like it's That's why this space is hard. It goes back to sizing. And, you know, all these things have to be trading serenees. The time that you can buy oil and close your eyes, I think we've had it for this. I'm not going to say decade, it's almost half over.

You do decade. You're back to 2014 when oil was 100 or 110 and people were. But like you had, I mean, the COVID lows in oil. I mean, it's going to kill me the rest of my life. I looked at the oxy warrants too and I didn't pull the trigger. And I was partially right because I was so sure I was going to make money and other stuff. And I did. But like, I knew that was anyway.

But you could have bought those oxy warrants, too. And you're like, it's a 2028 warrant. It's got anti-dilution protection. What else is the 2028 warrant that has anti-dilution protection? Yeah. Val warrants. Val warrants are great. But you are taking macro.

The point I'm making is you certainly are taking back. risk here. I don't think you're taking a lot. I think it's a very convex bet on offshore. And I think that the totality of data points point to the core call, which was more than Tidewater, as all this offshore stuff is going to work, is correct. And I think we're just not pricing in much. I do think it is interesting. Like, you know, again, I can't remember what oil was when we talked last year, right? Let's say 80, 70, whatever. Let's say oil is basically flat since last year, which is surprising, given everything we listed. But I do, the notable thing to me is, hey, you know, offshore rig rates have gone up.

Like they've continued the same path we're talking about. And it didn't take oil going ballistic to do it. Like they did it with oil pretty much flat that to me speaks actually a lot of the thesis. It's a validation of the lot of the lot of the things. Yeah. You're a long, you're long offshore cap X. That's the call. And you were just waiting for this moment that, you know, it's like, I wish I had the math of like dollars of capax equals number of rig demand. I definitely, if I still worked in hedge funds, would have to come up with some fake

version of what that all means. I tried it. It's really hard. It's really. I'm obviously all of them. I'm content in my own world that I'm just, I know it's going higher and I get it. We had it. I was a little bit wrong on timing that like the cold stacked rigs and the straight and new builds are really, you know, a little bit of a wet plank in out right now. Once we get through those, I'm still convinced that they're like, this is the wrong word. I've seen the cycle a million times. I know it's coming. I know there's a step function. And all of this and then I guess we ever made this point. Yeah. I'll do it now, which is there's a fundamental premise with offshore and this goes to the percentage of well economics, which is the average offshore well, I think,

even at $65 oil, it's like a 150% IRA. Now, the IRAs were so high because you have to build all this associated infrastructure, the platforms, the piping and whatnot, that's billions of dollars with some costs. And once you go down that road and that stuff's there, in incremental well, Isn't that like, and this stuff doesn't deplete that much. It's like very low to flat rate. It's very oil heavy, not a lot of gas. We're in the Gulf of Mexico. That's another call option that you have this year.

You know, Biden has really been terrible for the Gulf of Mexico. We get a Republican, and I don't know who the Republican is, but I'm not touching that. But you talk about catalysts this year. A Republican win is going to moon offshore because that will open. You know, the Gulf of Mexico, I think when trans ocean blew up, like that deepwater horizon thing in 2011, 2011, 2012, we had 55 rigs offshore in the Gulf of Mexico. Now, some of that was Jack. I said, what do we have now? Like, 12?

I forget the number. People can look it up. It's not many. I think that's the other surprise for this cycle. And this is sort of the other side of the petrobras site, which is West Africa has come back, the Nibibu, whatever, the country with the Nile. I know, I know. Right next to South Africa. that was historically part of South Africa, but I'm going to South Africa.

There's a lot of demand in Africa, part of the Golden Triangle. The Gulf of Mexico has not come back at all. And you get a Republican administration. You're going to see a lot. You have Mexico doing what they're doing in Altamira. Let me ask you, both of Mexico. So I hear you. I mean, look, I've seen politics.

I know drill, drill, drill. Every Republican presidential candidates coming on saying that. And obviously, the executive branch has a lot. lot of discretion towards drill, drill, drill in the Gulf of Mexico. I do wonder, like, hey, the Gulf of Mexico, those are big investments, specifically you're going really deep into the Gulf of Mexico, right? So I hear you are Republicans going to be okay with, or Republicans are going to really encourage it, but if I'm shell, if I'm, name your company, do I want to go invest hundreds of millions of dollars into drilling in the Gulf of Mexico when I've got

this much political volatility, right? Because I know Talos Energy feels like the, They announced yesterday I haven't really investigated, but I know they feel like the administration is improperly holding approval of leases from them. And if I'm showing like, hey, okay, cool, I've got a Republican in here who's letting me drill in the Gulf of Mexico now, four years from now, you know, I might have sunk in $8 million and now I'm getting hit with taxes I didn't see or all of my permits are not coming back in return because there's a new administration. Do you think there's like that type of political risk where, you know, stability would be great? It's just a scale. Like, what I'm saying, like, all I'm saying is you get Republicans, and it's not hard to get to say we might have a net demand of five, six rigs in the Gulf of Mexico. And we're so close to that point with only 180 rigs, you know, deep water, man, you had five where there isn't five. Like, that could have a hundred a day impact just on the supply of demands.

It's not there. That's what I'm saying. I agree, like, I agree. But, you know, what we haven't, the pushback to that too, why I'm saying five or maybe 10. is I'm sure the oil industry is going to be very keen to all this stuff. So they'll put new language in. If you get like a sweep like you had with Trump in 2016 or the Republicans control, the House, the Senate and the White House, you're going to get, they'll come up with,

they'll do just what the Democrats do with other stuff. Like, okay, let's let's whack this up. So that like it, it would be hard to unwind. No, I definitely hear you. I do think, I just worry like when you've got something this politicized and I look it's something like, you know, I'm no expert, but the MVP pipe or whatever, you know, when it gets this politicized and you're making, it's hard to make a 20-year commitment when every four years, things can change this much, you know, and I do hear you on the lockup.

I just worry that, but look, I don't think that it'd be great if we got it. I don't think it impacts the things. I don't think you need it. It would just be, I'm just pointing out from a trade agenda. Certainly, that is one thing in an election year, like, not much of what I own is, like, politically sensitive. I mean, it's just also like, look, even more basic. Like Republicans win buy defense contractors, buy energy. Like all the best investors, Fundamental Edge believes that the learning process never truly ends. That's why the Analyst Academy is just the beginning of

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and then they'll enjoy some spring league baseball and the amazing Arizona weather. If you'd like access to all that Fundamental Edge has to offer your career, visit Fundamentedge.com for more information about the next Academy cohort. That's Fundamentedge.com. Well, you say that. I mean, if they're going to drill, drill, drill, jail, you might want to sell energy because historically drill, drill, drill has actually been bad for energy.

Look, at these valuations. Offshore, hey, I have plenty of better energy exposure. And what we're talking about is equipment providers and generally want to buy equipment providers and stretch of drill. We have been rambling for a long time, which I think is indicated if I need to have you on more than once a year. But let me just quickly ask you. You've done several suggestivist letters.

The your most recent was Farm. We mentioned PGI. We mentioned a few others. What are you really focused on these days? Is it farm? Are there other things you're kind of focused on right now? I think at a very big level. Like, this has been a journey for me.

I left to the start of 2020. I'd been with my team, you know, we launched a fund in New Burger Berman with basically the same strategy we had at the pot shop. So like that I've all experienced with seven years. I did, you know, eight plus years in distress debt. I had no idea what the heck I was going to do. And at the start of 2020 and then COVID happened. And it's been me sort of like figuring out.

I had like, I wasn't even on Twitter until 2021. I had like one of my clients, the consulting side was like, you should be on Twitter. I was like, okay. And look at the friendships, Judd. Look at the friends. Yeah. It's, it's, look, it's great. I think I've always been involved in activism because that's just a nature of that's real.

And I think the value, the success, the outcome success of the vow letter. You know, I mean, that tweet had 160,000 impressions on it in a week, and I'm on with the company right away. Like, look, I like to, I'm occasionally a kind of an arrogant guy. Like, did my wildest dreams that I think it would have that immediate of a response and an impact? No. Had it been something that had been pasturing in my mind for more than a decade of like, man, there's like this window that I think I can exploit? Yes. and look a lot of my clients traffic and smaller stuff

and then you see sort of this other piece which is I think we're kind of one of the things going out is like we're in this like pseudo Peter Lynch here you know Peter Lynch was staying over you start the 80s there were 11,000 public companies now I think there's six or seven thousand it's not a lot that might even be high I don't know maybe it's I get the Russell three down yeah but the COVID class if you want to call it we haven't had this many unfollowed followed, underfollowed, small and mid-cap stocks. And to sort of go even more big picture, like the first fund I joined in 2005 was

$5.5.5 billion when I joined in at the end of 05, it was $20 billion when I left in 2011. And I worked in some really big places. I remember like the $5.5 billion fund, it became an issue by 2007. Hey, some of the stuff we used to do, we can't do anymore because it just thought like the return on time doesn't make sense. And when I went to the pot shop, I was really exposed more to like, I had to think about portfolio management questions a lot more than I ever had. And one of the things that I really picked up on, the best guys there ran businesses.

They weren't PMs. And so from a business perspective, they're like, I can, there's this set of trades. The P&L tan is this. I'm going to dedicate this many people, this much time, and I'm going to capture all of it. Does it, if there's positive returns, I'm at a place where I can hire more people. I can do this. And I don't care that if I ran a $5 billion fund that this wouldn't make sense. I run a pod that I have to put up $120 million a P&L a year, finding a business that I can dedicate two junior guys to and make $20 million with a standard deviation of $5 million a year.

Like, I'm going to do that all day. And then you find more and more pieces of this. So I look sort of at the small cap thing. And there's also a humility to it too, which is I think one of the sharpest things that the guy worked for at the pod shop. Newberger said he's like, look, we have to be demonstrably better on things than the guys on the other side of the floor with the long short guys. Like our bar has to be. There has to be a, the event process path has to dwarf the floor of the earnings

relatively, the guys on the other side floor who know the company better. Like, we have to overcome that. And that's kind of the bar. And so I'm like, a lot of what I do, like in energy, obviously I feel comfortable, not super comfortable, but I feel comfortable that I'm not going to like meet a guy at Millennium was going to tell me something dramatically that I don't know about Taiwan. There's not many names that I can realistically look in the mirror and say that about. So I need something, I need to either avoid that conflict with those people by looking in areas

that don't make sense for them economically. That makes sense for me. I need to get smarter on things that I can, you know, figure it out. Or I need to have enough event noise that they're freaked out with their confidence interval and I can, like, find a way to, like, price is better. So all of that stuff sort of comes together. And then the progression of, okay, we put the bad letter out that were, you know, Cano, I made a little bit.

I lost a ton on CARACs. I mean, that whole value-based care thing ended up being terrible. Although all of that on my conviction on TOI, the Ecology Institute, because it really helped crystallize for him. I was like, oh, I finally found, like, the right place of value-based care. You just don't want to take MLR risk. But where I'm going is, I see this, like, like with farm, look, my only thing with farm other than, look, I like the stock. I think my, I'm going to buy this today versus not is I think

they're going to beat earnings and I think the event guys who've been in it since 2020 are like tired and exhausted. They've all lost money and that's why they're selling. I think they're going to be and I think I can bring eyes to the name by highlighting it because it's underfollow. Okay. You know what? There's a lot of names like that and you can take that positively negative. You can say like, you know, One guy on Twitter was like, you're besmudging your pedigree or something. Let me tell you. I don't even know what that means. I'm 42.

I got a five and a half year old kid. I got a woman. I was amazing. We never got married. She's an amazing mom. We get a long of 95% of married decisions, which most parents, most down married people. Pedigree sounds like you're like part of the royal family. It's like, hey, you know, there's 700 years of history here and you're bespudging the history by, you know, going activists on small caps.

I don't care. I mean, my, look, my goals in life are, I want to have fun. I want to be an LOSC challenged. A great realization I had a couple years ago, which is different from in my 20s. I was like, I'm going to retire by 35. And you get older, you go keep doing it. And some people leave this industry. Me, I had the realization, I look at my dad who's going to work until the day he dies.

And for him, it's not work. He loves it. And especially with the kid, I look at like what interests me, I love it. And the realization that I want to do this in some version for the rest of my life and that the process is the that is the victory. And so you become like, how do I construct a way to do this in a way that's sustainable, intellectually and stress, which basically is you can't be a pot-shop guy because there's no way you can caught quarters for 30 years.

Yeah, and then it evolves. You see stuff and you go for it. So I'm going to be all over the math. I see a place that I can create value that makes sense to me. And I'm going to pursue that. I'd love to find stuff that's super scalable, that like a 20th, $20 billion fund could put $2 billion into. But I think there's an arrogance to assume that I couldn't even do that.

And I may be wrong in a lot of the small cash stuff. I mean, look, my virus also been all over the board. Yeah. Just on the small cap stuff. I mean, to me, what you're doing is you're taking like concentrated bets on things. I don't want to say high variance, but high variance, like, I've followed you for a while. I know, hey, if Judd's pitching name, there's a decent chance it's down 80% over the next year or there's a decent chance, it's a three-bagger.

And, like, you can slugging percentage average that out, and that works really well. But I think you're, like, finding things that are half hair on them. Tidewater had less hair than most, but there was certainly aversion to it. But I think you're finding things that have hair on them that have high variance outcome. And, you know, it's one of the things I push myself on. Like, I keep looking to be like, hey, Andrew, you have a position of this thing that's, like, a compounder that you think is going to grow earnings, you know, it's trades at eight times refashals and you think it's going to grow earnings 5%? Like, that's great. But are you really going to generate, like, alpha, alpha there?

without an event, without some hair, without a controversial opinion. And what you're leading into is like, Zimvi, hey, for sale, spin off. I mean, I looked at that four times and they blew that up. And like, you made a killing on that. Or, yeah, there are some that you haven't made a killing on, but you average it out. And hopefully it works. Yeah, I look, the realization that I'm going to get a lot wrong and being mentally okay with it, that I don't actually know, I know that I'm dancing.

It may have just being incorrect approach, but like at this age, not that I'm like a watching about it but like you can only be the man that you are and this this is where i like to travel this is what interest me and i get that sometimes on like i'm i'm dancing around this line and sometimes the right side of that line when i call it right with the zimbi and like zimbi we got tested man i got in that thing at 550 right i remember yeah yeah came down to seven and then like they did what i thought and you know we get 18 but like and i i think that's not too still works up to the like north of 30 but like that's possible and it's just as possible for me to be right on cano out of the gate and then wrong at the end and i got

care max i was just totally wrong uh catapole was one of the worst oh god what an idiot i was i just got married a long fun yeah you would me both there but like i i think one of the fair criticisms that a lot of people around me have given me is you know because i get too attached to names and part of that is a legacy of being a senior analyst and singer p.m. front where you only have somebody at bats a year you feel like you you know convinced the billionaire you have to really really believe and now I have the ability to just find another thing and like feedback I always got when I was down and I lost money and I've had a lot of ups and downs and like people have been like dude you always find names that go up 5x so you don't need to be as concentrated there's always

going to be another name and like with the guy I look I started I'm like very happy that like I was able to mentally pivot as I did and I had a lesson that I've learned many times which is hey, I feel a need to reach out to manager because it didn't start as an activist thing. Like I highlighted things in the additional memo that I wrote in July. Like you need to do all this stuff differently. But it was really just basically an orphan capital markets trade. You know, nobody else. And nobody realizes it and whatnot.

And it sort of became something where I felt the need to reach out. And I ultimately wrote a, you know, an activist letter. And the answer, when you go into think not as an activist, when you want to be an activist, the answer is usually you should just sell. and being aware of that I put it on the short fuse I know it was going to be hard you said that and I got an instant headache

because every time I've been like I need to go activist on this thing I would have saved myself so much heartbreak and so much L in the P&L by just being like move on you don't earn 5% of this company go to the next one it's time to move on

you're just very insightful yeah and look the first year that I sold it ran up after the letter to like 170 I sold a bunch because Flane the Jim Flores spam And look, things at 12 bucks, I'm pretty sure it's going to get approved. I don't know if it is.

Like, those warrants could be zero. I saw those warrants there. And I'm like, you know, I got cash. I bought the warrants I could. I was like, you know, the guy is at 160. I can buy these warrants like 110. I really am. I think the warrants might have a better risk for reward.

I was like, you know, I could take off a bunch of hide water. Or sorry, a bunch of a guy. And I think a new mental lesson that I need to do because it really catalyzed for me, your body tells you I'm old enough that I need to listen to my body more and I'm good at picking up signals and man I you know you sell 10 15% and you're like this feels good and I kind of already was there because I knew when I was writing the letter like low probability I was like let's see what response we get I can bring a spotlight to this company and somebody can get through to this is really good that's all I was hoping and like I was I thought it would be the employees but you know I did that I sold and I'm like you know and then after you sell a little bit you've already gone down the road where it's you're It's funny, you saw a little, and it's a lot easier to sell the wrap. It's a lot more. And then you just like, look, we're talking about this today on a Tuesday. They just announced 67% of what I in that, what I wanted.

Stocks up. I don't know what it's up now since we've been talking. But it's like 20%, but it's like well below my average exit, right? And people this morning were like, how do you feel like, I feel like how I felt a week and a half ago when I was largely out, which is I'm going to find five more things. It's January. I don't need to win this game. I can win plenty of other games.

I'm in a game against, make my clients happy, make me happy, make money, pay for my kid, you know, live a happy life. I'll find another one. I like it. Well, hey, Judd, this has been great. Unfortunately, you know, I know you're hitting the gym nonstop. I used to, but I got some physical therapy I've got to run to because you and I've rambled for a long time.

I really enjoyed it. This was great. Thank you so much for having me. I hope everybody enjoyed. Yep. We're just going to have to have you on before a year this time, but this has been great. I mean, the offshore thesis is great, everything else. And as you know, I really love the suggestive as a mangle you're going.

And I just want to keep encouraging you to do it and maybe do it on some companies that I'm long as well. We're welcoming all ideas from people. I got a lot of ideas from the network. So if it's something I want to look at, I will throw this out there too. But one of my, you know, I do goals at the start of every year. My goal for this year, one of them, I don't know if it's going to happen is I want to raise an SBB for a suggestivism thing. I don't know whether I'm going to do it, but it's, I'm very scar. from my hedge fund experience, they did like 300 IR meaning to raising a font.

But, well, we'll talk about that. So really, I'll remember everyone because we talked about so much different stuff. Just go consult the disclaimer at the front of the podcast. Jud did one. I did one. I always include one at the back half of the podcast, too. None of this invest advice is against all that. But Judd Arnold, this has been great.

And we will have you back on in the near future. Thanks so much. A quick disclaimer, nothing on this podcast should be considered an investment advice. Guess or the hosts may have positions in any of the stocks mentioned during this podcast. please do your own work and consult a financial advisor. Thanks.