T-bone1

Here is a great (20 second) political quiz that scores people on two axis. The vertical axis is libertarian/statist and the horizontal axis is conservative/liberal. One can be a libertarian (small government) liberal - which describes most libertarians I know - or a big government conservative (neocons). The idea that being right wing and being for small government is a false correlation. The democrats have traditionally stood for big government so libertarians are against them, but that doesn't mean they agree with the republicans, especially since the republicans are also for big government. http://www.theadvocates.org/quiz

Investment banks will sell you an option on anything, it will just be a one-off derivative contract rather than a standardized "listed" option. Whitney Tilson did this a while ago to get LEAPS on BRK. For the right price, and if you are a big enough client, I'm sure someone would write you a derivative on FFH, but I doubt it would be worth your while as they would likely charge a high price (high implied volatility). My take is that this was all a lot easier to get done before 2008. The guys from "The Big Short" (cornwall capital I think) did the same thing to buy 5-8 year LEAPS.

There had been some discussion (I think in the FAIRX thread) of MBIA. Basically, Marty Whitman lent MBIA a bunch of money, MBIA gave it to their insurance sub, and then told Marty that the entity he lent the money to was BK. The insurance regulators went along with this because it made the insurance that had been sold safer and helped contain the problems at MBIA. I (and Marty Whitman, who is suing) think this is a textbook case of fraudulent conveyance, i.e. you can't take out a million dollar loan, give the money to your wife, then declare BK . . . this transfer would be considered fraudulent and clawed back in bankruptcy, much like the money Madoff paid out to "clients" over the last 6 years. Credit Sights (who I think is a very smart group) apparently thinks that Whitman will lose and that there is now precedent for the insurance regulators superceding existing bankruptcy and contract law. They wrote: "We believe there is a somewhat high probability of the split being upheld given the recent precedents of insurance law favoring decisions made by the Superintendent. However, if the decision is overturned, we believe the entire company will head into run-off mode, as the lack of capital will not allow the maintenance of ratings necessary to write new business. Current liquidity at the holdco can only support debt service and repayments until about 2015. " I guess this is Berkowitz' thesis. I don't agree with it and I think it is a terrible precedent and one more sign that America is going to sh*t, but CreditSights and Berkowitz have more knowledge and resources to handicap this court case than I do. I have the utmost respect and admiration for Berkowitz, and I have no position in the stock, but I hope his MBIA goes to zero for the sake of law and business in the US. If your largest shareholder lends you money to help your company avoid catastrophe, you shouldn't be allowed to steal it with the help of the US government just because it is politically expedient

ELNK FTR PDLI CIM FBK.to FFH.to CHK SD SENEA HDNG SPMD 2012 Leaps on MHP and KGC

Turar, what is the advantage to a pager over just getting a text message? don't these people all have cell phones? As far as the yellow pages, I don't use them either (although I do occasionally use superpages.com). The point is, we are not their customers . . . the advertisers are. The advertisers know they aren't going to reach you and me. They will reach old people, and a smattering of others, but what they all have in common is that everyone who looks up plumber (or lawyer, or pizza, etc.) in the yellow pages is litterally about to buy that product. This makes it a very cost effective form of advertising, albeit to an older audience. The advertisers know who they are reaching. And as the SPMD's of the world are able to start printing up less books their costs will decline.

Beerbaron, for practical purposes the goodwill doesn't have value, its just a placeholder . . . a guess at the discounted cash flows that SPMD will be able to make due to their market position, customer and consumer relationships, etc. The value of the goodwill is the answer to the FCF question, not a starting point.

I think its important to note that SPMD provides a great value proposition to their customers - a much better return on their advertising dollars than almost any other form of advertising. USMO and ELNK (which I own) provide crappy services (pagers and dial-up internet) to their customers at inflated prices. Their customers really only use them because they are lazy or dumb. Some portion of their "customers" don't use them at all, they just haven't bothered to cancel their contracts. SPMD will be around as long as their are yellow pages - and the online superpages.com is a growth area with great economics. I agree that it doesn't pay to be overly optimistic, but I think its worth noting that FCF could potentially increase, or at least flatten out for 10-15 years. If you pay USMO or ELNK this year, you are a sucker and you should quit, die, change your credit card, or stop living in the past. If you pay SPMD this year, you are a lawyer, plumber, restaurant, auto-body shop etc. that is reaching valuable local customers who are looking for your service. You are very likely to remain a client next year and the year after. etc.

I'm not sure where you are getting this liquidation value from. Their assets are mostly goodwill, so it can only be valued on cashflow. Their "customers" are the businesses that advertise with them, and I think this is unlikely to keep declining at the rate of the last few years. They have a great value proposition, and the customers that have stuck around are likely to stay . . . i.e. they know who they are advertising to (old people, whoever else still uses the yellow pages).

almost $300 Million in unfunded pension liability. I have too look up what assumptions they are doing. the debt is term loan at LIBOR + 800 with a 300 floor (11%) that comes due in 2015 - it was their exit financing. There is a mandatory cash sweep of 2/3 of FCF that must be used to pay down debt (which they would do anyways). I think they are holding the $300 in cash right now because next year they should be allowed to purchase their debt at market rather than par, its trading at 80% of par I believe.

I've tried to normalize SPMD's financials to remove the effects of fresh start accounting, which are very significant right now. Because they sell advertising, print books, and pay sales commissions 3-6 months ahead of actually delivering the book and recording the revenue, they have a lot of deferred revenue and expenses which they recognize over the course of the year. All of this was written off and converted to goodwill at the end of 2009, effectively turning $500 million in operating income that would have hit in 2010 into a $500 Million goodwill entry. My estimate of adjusted/normalized 2010 earnings is: revenue of $2,090 operating expenses of $1,508 operating income of $582 interest expense of $275 earnings before taxes of $307 taxes of $111 (I assume they pay at 36%) Net Income of $196 for the year . . . or $12.67 per share I am long the stock and it is trading at $13.10 today. Obviously the stock price has a lot to do with the leverage, but they currently have $300 Million in cash and are throwing off a fair amount of cash to pay down debt (which is expensive at 11%), so interest cost will fall. They paid off $177 Million of debt in the first half of this year, but some of this cash was generated from working capital

Jordan Daniel, the SD Director who bought 75k shares last week bought another 50k shares yesterday

Shahad, I also have been adding to my position. I was discussing SD with a friend last night, and I'll just paste the email with my current thoughts: "I think the stock has been hammered by uncertaintly and liquidity/solvency concerns, but I am convinced there is nothing to worry about. The ARD acquisition should ensure that they have no covenant issues at the end of next year, which was the short thesis prior to the ARD acquisition. They could only really get into liquidity trouble if they did something stupid and risky like trying to grow production too fast without hedging - and Tom Ward is the largest shareholder so I don't think there is much chance of him bankrupting himself (CHK history aside). They have a cash-flow machine in their low-decline rate Pinion field - this is high CO2 natural gas that they treat at their Century Plant (ramping up now). They sell the CO2 to OXY and keep the gas, the economics are very robust, but the real key is the low decline rate (around 10%) - this means they don't need many rigs and wells to maintain production once they ramp it up, so this field will throw off a ton of cash. I think investors are very upset that after waiting a few years for the Century Plants to be completed, SD has just now decided not to ramp up Pinion Field production as planned. The simple reason for this is that drilling Permian Oil wells is a higher IRR activity right now because of where gas prices are (they have to pay a $0.25/Mcf penalty for OXY for not producting CO2, but this doesn't effect this no-brainer decision). They also had a number of one-time items this year. Water inclusion caused production declines at a legacy non-operated GOM well, and they needed to do $4MM in workovers on existing Permian wells. This raises costs and lowers production by a small degree and is temporary, but made them miss earnings. In short, this is a very cheap collection of oil and gas assets (mostly oil), which doesn't use fancy rigs or technology, is all in the same place, and owns most of their own rigs and services (very little cost inflation). It is highly levered, but with such long maturities that the shareholders are basically PE investors. I don't think they will have any problem with covenants or liquidity. Some good stuff that no one cares about right now: they have 500k acres in the midcontinent which is non-core, has no associated production or reserves, and could probably be sold for somewhere around $1,000 an acre (some more, some less). They have 20k acres in the midland basin where CHK and others are very active and 30k in the delaware basin (these plays are on either side of their central basin platform "core" permian acreage). They should probably keep this stuff, but could probably sell it for $5k per acre if they needed to. They can also sell their Pinion midstream into the MLP space. They have extensive natural gas exploration targets (all field size) in their West Texas Overthrust acreage. Also, in case the sh*t totally hits the fan, Fairfax Financial owns almost all of their preferreds. Fairfax brought Tom Ward to their own annual meeting to introduce him to shareholders. Their investment team refers to SD and their assets as "we" and "our". Fairfax has $5-10 Billion in cash equivelents something unexpected happens and they need liquidity. They will be tough but fair and consider Tom a partner. I don't think this will ever matter, but I consider it a plus. There is a lot of uncertainty right now, 2010 is crappy, and they haven't put out guidance for 2011, 2012. I own a bunch of stock and have been buying more down here. I'd be interested to hear your thoughts."

btw, I just saw the poll at the top of this page . . . I'm not sure what is meant by the "environmental impact of hydraulic fracturing" . . . I don't think there is anything unsafe about fracturing, nor is there any serious negative environmental outcomes (all extraction industries have some negative environmental outcomes). I agree that some of the chemicals in frac fluid are toxic . . . most chemicals are. If a company operates in a safe manner there is almost no chance that they will ever contaminate anything. Moreover, the industry is working on this, for instance they are replacing some of the most toxic frac chemicals (meant to inhibit bacteria growth in the fluid) with powerful UV lights inside the system. If properly cased and cemented there is no way for these chemicals to get anywhere near groundwater. There is the problem of water disposal. Sometimes the wastewater is pumped deep underground into abandoned drillholes. This doesn't make me feel all warm and fuzzy, but it is safe (there have been very rare istances of this activity possibly causing tremors when done in a fault zone). Hypothetically a containment pond could leak before the wastewater is partially evaporated then treated and disposed of, but this is like anything else . . . as long as a company is responsible there is no problem. Bottom line, there are environmental concerns with fracking just like any other extractive energy technology, but these concerns are currently overblown and are less serious than nuclear waste disposal, fly ash disposal, coal mining, deepwater drilling, etc.

Bronco . . . I did mention that all of the drilling and fracking equipment would need to be trucked in (teamsters) I realize you are kidding, but I hold a similar view of our corrupt government. The democratic governor of Pennsylvania, Ed Rendell, put 5 of his deputies and staffers in charge of studying a state excize tax for natural gas extraction - like other states have. One year later, there is no tax and all five of these staffers are working for natural gas companies. I'm not saying this is a good thing, only noting that the gas companies have gotten tired of being out-lobbied by the coal companies and started playing the game. There are shale plays in about half the states right now . . . thats a lot of congresspeople and senators. XOM, BP (not a good thing right now), Shell, DVN, HAL, CHK, ECA, are major players in shale . . . thats a lot of influence to be throwing around. Bottom line, I think some combination of lobbying/bribery, job creation, and rural economic development will ensure that the federal government doesn't do anything stupid.

I don't think there is any chance of a ban . . . maybe in a few wealthy suburbs of New York, but not in economically depressed areas like Western Pennsylvania (Marcellus Shale), Eastern Lousiana (Haynesville shale) etc. Shale Drilling for natural gas is one of the few areas of the economy producing jobs, and the fears of groundwater contamination are severely overblown. I have never heard of a good operator contaminating groundwater, and the BP fiasco shows that it is in the economic interest of these companies to behave in an enviromentally responsible fashion. I watched that documentary, "gasland". It is a little funny to see people complain about seeing nothing but natural gas rigs out of their windows after they themselves just leased the (previously worthless) land to the E&P company for $thousands an acre. Each well needs local crews to build a drilling platform, lots of truckers to bring in the rig, a crew to drill the well, a crew to frac the well with associated equipment, they need to source and likely buy water locally, buy cement, drillpipe and casing, they need to dispose of the wastewater and remediate the land when they are finished. They also need to build and bury small pipelines ("midstream") to get the gas to a gathering plant (that needs to be built), where the gas can be treated and compressed and then put into a pipeline. We are talking about a great deal of American jobs, as well as the only plausible path to any sort of cheap domestic energy and associated energy security.

I have been buying a few businesses of this type, including ELNK, FTR, and SPMD . . . The very brief version of my thesis is that the customers who stay get more and more "sticky", just like what happened in the pager industry. If you are still using Earthlink dialup, the yellow pages, a rural landline, etc you aren't likely to stop this year. There will still be attrition every year, but the clients that remain next year will be more "sticky" as a whole than the clients this year were, creating a long tail. These businesses can cut costs (basically lay people off) each year as their customer base declines to maintain margins (I think SPMD's margins have ticked down from 35% to about 30% over the last five years, which is pretty good considering expectations). SPMD is also in the proccess of getting approval from individual state public utility commisions to stop printing the "people" white pages. This will eliminate a major cost for them.

Sorry to hear that valuecfa . . . I'm sure you will land on your feet. If you haven't seen it, you might enjoy this 15 minute stanford graduation speech by Steve Jobs where he talks about getting fired

agree that FFH should serve as a liquidity backstop, but I don't think they will have any liquidity problems. Bank of America downgraded them today causing today's drop in the stock price.

If you refer to the earnings press release (link up top) it states that excluding gains on derivative contracts SD earned $0.23 per share in Q2. Market expectations were $0.12 per share. What impresses me, listening to the conference call yesterday, is that management seems to be acting in a rational manner, reducing gas production when prices are low and maximizing oil production instead. Many other companies are drilling because they need to, either to keep their leases or they need the cashflow. ward seems to be working hard to postion SD to capitalize long-term.... cheers Zorro that is exluding the unrealized gain on derivative contracts. The gain in the quarter was realized when they monetized the hedges. I agree with you completely about the company, but things are pretty messy right now and it might take a few more quarters for them to get all of their ducks in a row

the earning beat was due to monetizing the rest of the 2010 hedges in this quarter. I am long the stock and very bullish on the future of this company, but there was nothing impressive in this report.

A hurricane in the gulf won't have much of an effect, at this point gulf production is only 10% of US gas production . . . ten years ago it was 25%. A lot of the drilling going on right now is to hold leases by production. Companies bought billions of dollars worth of leases (with 3-5 year terms) over the last 2-3 years. They lose those leases if they don't drill before they expire, so companies are drilling one well on each lease, then they will go back and drill 7-15 more over the next ten years. If they didn't need to hold these leases (SD, for example, doesn't have this problem), they wouldn't be drilling for gas right now.

I am adding to my position today. This is going to be a great natural gas company when gas prices recover, with some of the lowest costs in the industry. According to Sam Mitchell this is why FFH bought in. In the meantime, the company is over 50% oil and has a great margins. Their oil properties and gas properties are about 35 miles apart, so depending on prices they can drill for oil or gas . . . right now they only have 5 rigs in their gas field.

They took off the gas hedges because they think midstream bottlenecks in the Haynesville and Marcellus shale plays will cause production to fall before the end of the refill season. One guy on the call asked about covenant issues towards the end of 2011 (the short thesis had been that at current spending plans they would get into covenant trouble by the end of next year). The Arena deal fixed this and they don't project problems with any covenants through 2013 I think this was something of a kitchen sink quarter. There were a number of one-time expenses and dissapointments ($4MM to workover permian wells, a non-operating GOM well was choked back due to water infiltration, G&A up due to merger costs). They also took off the rest of the 2010 gas hedges in the quarter, generating a large one-time gain (which was the reason for the beat). The stock is down because they raised most expense items for the rest of 2010 in their guidance. Again, I think they are purposefully setting the bar a little low. Their permian basin properties (which they added to with Forrest and Arena deals) are generating IRRs greater than 50% right now, without high-grading. They have their own drilling and service units, so the only cost inflation they could see is in diesel and pipe for the forseeable future.

Looks like it'll be a messy year, but even with the gas hedges rolling off, 2011 should look pretty good. It'll be nice to have the century plant online and the noise and expense of the arena transition behind us.

I agree that I would be less interested in the insurance side of they had an average duration matched bond portfolio - as opposed to having the assets on this side also ably managed by hamblin Watsa