Viking

Here is an update on Fairfax equity holdings at about the 1/2 way point through Q3. My math says equity holdings (tracked in the spreadsheet below) are up $1.21 billion since June 30. About $250 million is mark to market ($10.50/share) and $950 million ($40/share) is not mark to market. (The $950 million more than offsets the $803 million deficiency of fair value over carrying value of investments in non-insurance associates and consolidated non-insurance subsidiaries that existed at June 30.) Movers: 1.) Atlas $430 million 2.) Resolute FP $237 3.) Blackberry $140 4.) Recipe $123 Fairfax Equity Holdings Aug 12 2022.xlsx

Some new news from EXCO Resources. 2 new additions to the board. Sale coming? Or is EXCO looking to perhaps be a buyer? EXCO is largely a natural gas producer. If nat gas prices spike further this fall (as Russia puts the screws to Europe) nat gas producers will continue to make windfall profits. Could be a great time for Fairfax to unload an asset like EXCO (i think Fairfax owns 44%). ————- August 10, 2022 DALLAS, TEXAS – EXCO Resources, Inc. (“EXCO” or the “Company”) announced that the Board of Directors has increased in size to seven members. Paul Aronzon and Harold L. Hickey have been appointed to the Company’s Board of Directors. Mr. Aronzon has over 40 years of experience, as lead advisor, in mergers and corporate reorganizations, including extensive experience advising companies, boards and board committees, independent directors, sponsors, debtors, creditors, parties acquiring debt, assets or companies and other parties in corporate transactions. From 2008 to 2019, Mr. Aronzon was the co-managing partner of the Los Angeles office of Milbank LLP, an international law firm, and co-leader of Milbank’s Global Financial Restructuring Group. Mr. Aronzon was also the Executive Vice President and Managing Director of Imperial Capital from 2006 to 2008. Mr. Aronzon has advised companies, boards, board committees, independent directors, sponsors, parties acquiring assets, debt or companies and others in transactions across a wide array of industries. Mr. Hickey is Chief Executive Officer and President of the Company and has more than 40 years of experience in the oil and gas industry. Mr. Hickey has been the Chief Executive Officer and President of the Company since 2015. Since he joined the Company in 2001, Mr. Hickey has served in various senior management roles, including President of North Coast Energy, and Chief Operating Officer, President and Chief Executive Officer of EXCO. Before joining the Company, Mr. Hickey worked at Mobil Oil Corporation, in various technical, commercial and managerial roles from 1979 to 2000. Mr. Hickey has extensive knowledge of the Company and the oil and gas industry as well as significant operations, engineering, and executive leadership experience, including senior management roles in multiple acquisitions and divestitures and complex energy joint ventures. About EXCO Resources, Inc. EXCO Resources, Inc. is an oil and natural gas exploration, exploitation, acquisition, development and production company headquartered in Dallas, Texas with principal operations in Texas, North Louisiana and the Appalachia region. EXCO’s headquarters are located at 12377 Merit Drive, Suite 1700, Dallas, TX 75251. - http://www.excoresources.com/exco-resources-inc-announces-appointment-of-paul-aronzon-and-harold-l-hickey-to-board-of-directors/

Not sure if this interview July 25 with Digit CEO has been posted. Good update. There is so much going on with Fairfax today it is easy to forget about Digit. This company is shaping up to be a real game changer for Fairfax shareholders. - https://www.moneycontrol.com/news/business/startup/will-assess-timing-of-ipo-based-on-market-conditions-digit-insurance-chairman-kamesh-goyal-8881791.html ——- In FY22, Kamesh Goyal’s startup Go Digit General Insurance became the fastest general insurer to cross Rs 5,000 crore in annual gross written premiums. The next pit stop for the company, backed by Canadian billionaire investor Prem Watsa’s Fairfax Holdings, is to go public soon after the company completes five years in business this October. Per Insurance Regulatory and Development Authority of India (IRDAI) norms, promoters cannot sell a stake before five years. However, the insurance industry veteran has larger plans to build an insurance conglomerate. Digit has applied to the IRDAI seeking licences to set up a life insurance and a reinsurance entity. Valued at $3.5 billion, the company raised a total of $284 million in 2021. Besides Fairfax Holdings, the company counts Sequoia Capital India, A91 Partners, Faering Capital, TVS Capital and cricketer Virat Kohli as its investors. In an interview with Moneycontrol, Goyal said that the company will assess the timing of its IPO at the end of the five-year tenure, based on market conditions. Meanwhile, he believes that the tough macro environment owing to rising interest rates and inflation will slow down the pace of growth for the general insurance industry. Goyal worked in both life and general insurance before founding Digit in 2017 and has 32 years of experience in the space. Digit is an insurance manufacturer and provides motor, health, travel, fire and other small-ticket insurance. The company has an overall market share of 2.4 percent and a share of 4.7 percent in the motor insurance space.

Dexterra reported Q2 results. Top line is growing nicely; profitability was off due to modular issues (expected) and inflation. Based on how the stock traded, results likely hit expectations. When Dexterra did the reverse takeover of Horizon North right before covid hit the management team set an annual goal of $1 billion in revenue and $100 million in EBITDA. Beginning in Q3 Dexterra could hit $250 million in revenue (for sure they will be there in Q4). And my guess is they could be close to $25 million in EBITDA in Q4. Dexterra also expects EBITDA conversion of 50% to free cash flow. Modular has been a big disappointment but should return to profitability in Q3. And inflation pressures have hit the business hard but cost increases are coming so this headwind should slow some. My guess is inflation will remain a headwind. Bottom line, despite experiencing their fair share of adversity Dexterra looks to be on track once again to growing both its top and bottom line. And as a Fairfax shareholder i am happy they will be funding their growth internally with free cash flow. - https://dexterra.com/wp-content/uploads/2022/08/Q2-2022-Analyst-Presentation-Final-Aug10-2022.pdf

here are some random first impression thoughts: 1.) Allied World is looking like a pretty good business: as a Fairfax shareholder, yes, it would be great to own more/all. 2.) how much is Fairfax paying for how much of Allied World? 3.) what are savings each year for Fairfax buying back Allied World? Minority shareholders were getting paid a pretty decent sum every year i think. 4.) US$750 million is not a small number. Does this push Fairfax total debt too high? 5.) Why not use proceeds from pet insurance sale to do this? Perhaps this is still being done (and both Allied minority shareholders will be bought out). 6.) Fairfax has a lot of large transactions on the go right now: - pet insurance sale ($1.4 billion) - Atlas take private (no new cash from Fairfax) - Resolute sale (will close in 1H 2023; proceeds US $600 million + $180 duty lottery ticket) - Stelco dutch auction (will Fairfax tender any shares?) - Recipe take private (@ C$475 million to take out minority shareholders) - today: buy back chunk of Allied World

Article from today on SPR. The last sentence in the article is priceless: “The withdrawals have pushed SPR's supply down to 464.6 million barrels, the lowest level since 1985. Turk said the department will use money from current sales to buy oil back at lower prices.” Turk is Deputy U.S. Energy Secretary. He needs to open a hedge fund… - https://finance.yahoo.com/news/nine-companies-oil-u-strategic-183803786.html

Interesting… chug, chug, chug… https://www.trg.com/who-we-are/#who-we-are OUR LEADERSHIP TEAM RiverStone is a highly experienced group of professionals from various disciplines. The RiverStone Group is a group of insurance, reinsurance, and service companies specializing in the management of legacy and run-off insurance businesses and portfolios. As an industry leader in claims resolution, reinsurance recovery, and dispute resolution, we employ over 350 professionals, operating across multiple offices and affiliates spread throughout the US. RiverStone comprises a highly experienced group of international professionals from various disciplines, including finance, actuarial, litigation, claims handling, technology, and HR. Our team has worked on numerous high-profile, global run-off transactions, and our executives typically have more than 25 years of industry experience and on average have been with the company for over 15 years.

In my post i forgot to mention that the SPR release is set to end in October. So that will remove about 1 million barrels/day from global oil supplies. Where will the new supply come from? Not OPEC - as i discussed above they have no spare capacity. And despite what the White House says (see below) i am doubtful that US producers will be bringing that much new supply on to the market that fast (oil CEO’s on Q2 calls did not offer up and new barrels of supply to offset barrels lost when SPR releases stop). ————— Regarding the SPR, the next really good question is what is the plan to replace the massive draw down that has been happening over the past year? And any oil taken out is to be replaced (in case it is needed to be used for a real emergency like a war). The current use hardly qualifies as an emergency. Regardless, replacing the oil that was removed from the SPR will simply add to global demand in the coming years. And make the current supply/demand imbalance worse = higher prices. ————— The record-high release of crude oil from the U.S. Strategic Petroleum Reserve will end as scheduled this fall, the White House's Special Presidential Coordinator for International Energy Affairs Amos Hochstein told Yahoo Finance. "We can't be an oil supplier. It's a reserve and so we have to keep that," Hochstein said, adding that he did not expect this to lead to price spikes because the oil industry was already preparing to increase production once the SPR release ended. "There's a little bit of hysteria at the moment in the analysis of oil markets," Hochstein said, adding that he had had conversations with oil companies and had their word they would increase production to replace the oil that is currently coming out of the SPR. The plan, announced in April, saw a total of 180 million barrelsof crude being released from the Strategic Petroleum Reserve to counter the inexorable increase in oil prices amid a tight market, at a rate of some 1 million bpd. - https://ca.finance.yahoo.com/news/u-spr-releases-set-end-133000190.html

Speculation is OPEC currently has minimal spare capacity. Why do investors in oil care about OPEC spare capacity? The purpose of spare capacity is act as a shock absorber for the price of oil. Oil production is very volatile. It is quite common for 1 million barrels of production to get taken off line for periods of time. Spare capacity allows OPEC to fill in where needed. Why does OPEC want smooth pricing? Smooth pricing results in a more stable environment. OPEC nations need to create and manage national budgets - health, education, military etc - and a stable oil price is very helpful. A stable price also makes investment decisions easier for producers (wickedly volatile oil prices up to $120 and then down to $90 does not encourage investment). Extreme price volatility = less investment. ————— I read OPEC historically targeted to have 5% of spare capacity. Global demand today is about 100 million barrels per day. So this suggests a target of 5 million barrels of spare capacity in a normal oil market. It sounds like only 2 OPEC producers have any spare capacity today: Saudi Arabia and UAE. And it is around 1.5 million barrels per day. So low that it WILL NOT BE TAPPED unless a true emergency arises. Why so low? Just like oil majors, OPEC members have been underinvesting in new oil production for the past 7 years. Bottom line, there are no longer any shock absorbers for the price of oil. People better pray there are no major shocks to demand…. (We have our own Game of Thrones playing out in Europe and winter is coming…). ————— So what did we learn today? Shell just shuttered 400,000 barrels/day of capacity in Gulf of Mexico (pipeline leak). A couple of days ago, Russia turned off a pipeline running through southern Europe (it has since been turned back on). It is also hurricane season - which usually results in some Gulf of Mexico production getting shuttered short term depending on the paths taken. We also know OPEC currently has minimal spare capacity. As a result, any material reductions in the supply of oil will likely quickly push prices higher. The oil market is very tight. And will likely remain tight for years. ————— Shell says oil output halted at three Gulf of Mexico platforms on pipeline outage - https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-shell-says-oil-output-halted-at-three-gulf-of-mexico-platforms-on/ Oil major Shell said it had halted production at three of its U.S. Gulf of Mexico deep-water platforms after pipelines connecting the three were shut. Shell, the leading operator in the U.S. Gulf of Mexico, said Mars, Ursa, and Olympus platforms have been shut-in. The three are designed to produce up to 410,000 barrels of oil per day combined, according to data on the company’s website. The platforms deliver Mars sour crude, a grade prized by oil refiners in the United States and Asia. Shell said it was evaluating alternative ways to move the oil to shore.

Lightening up on some of my oil positions. Went way overweight a week ago when they cratered. CVE is up almost 15% in the past week. MEG +17%. Oil is still my largest weighting. If oil sells off aggressively again i will be happy to get overweight again. Gotta love the crazy volatility!

i have 2 daughters… would their opportunity set be the same if they lived in India or China today (or would they be subservient to the males in family or at work)? What about LGBTQ community? Do they have the same life/opportunity set in India or China? (They might..l i just do not know). How do Uyghurs in China feel these days? How well are Muslims getting on in India these days? What minority group is going to be targeted next? The eye opener for me, and i hate to sound like a broken record, was watching how China handled the outbreak of covid. It seared in my brain the core differences between living under an authoritarian system and living in a liberal democracy. Liberal democracies are flawed. But what i saw happening in China made my skin crawl. It was horrific and frightening. It made me appreciate the wonderful gift that me and my family have been given - the privilege of living in a flawed liberal democracy. I remind my kids of this fact lots.

i also wonder if the margin for error is smaller in Canada. Most provinces have high and generally increasing minimum wages. My guess is regulation and taxes are higher in Canada than the US.

CARA / Recipe has been a terrible, terrible long term investment for minority shareholders. And this stretches back to before Fairfax was involved and the Phelon family/CARA were in charge. There are important lessons in the previous 10 years history if Fairfax is open minded. The restaurant industry tends to be a wealth destroyer over time - except for the most well run operators (and clearly Recipe is not one of those - that long term history thing). It will be interesting to see what Fairfax does… learn from the past? Or double down on a failed strategy? Decisions like these will inform my decision of whether Fairfax continues to be a trade or becomes a more permanent holding.

Agreed. Lots of misses on my part (i sold my Recipe shares after Q2 earnings for a nice, small gain). Fortunately, also a few home runs (over the years). The key is to stay in the game and get ready for when the next fat pitch is thrown your way by Mr Market.

So how much will Fairfax spend to take Recipe private? I am using the ownership % provided in Globe and Mail article from today. Recipe total shares = 58.8 million Fairfax = 45.8% = 27 million Phelan Family = 22% = 12.9 million - Fairfax will buy up to 4 million shares from Phelon Family (if i am reading things properly) - so assuming Phelon Family stake will fall to 9 million shares Fairfax buys 23 million shares @ C$20.73 = $475 million Fairfax owns 85% Phelon Family owns 15% ————— Total market cap of Recipe = $1.2 billion. From Recipe 2019AR: “Free Cash Flow before growth capex, dividends, and share repurchases under the Company’s normal course issuer bid (“NCIB”) for the 13 and 52 weeks ended December 29, 2019 was $44.3 million and $155.9 million compared to $47.3 million and $158.7 million in 2018, respectively.” ————— Now what does Fairfax do with Recipe after the purchase goes through? I really hope Fairfax does not provide any additional funding for Recipe to expand into the US. If Recipe wants to expand make them fund it with their own earnings. I would love to see Fairfax use Recipe as a piggy bank (kind of like Berkshire) and use Recipe’s free cash flow to fund growth into better returning assets as chosen by Hamblin Watsa. I hope Recipe does not turn into another version of the Abitibi/Resolute frankenstein.

You are correct. Atlas shares have been a big underperformed recently compared to peers in the same industry. Modest upside in strongest market ever. And now getting crushed as sentiment in industry wanes with investors. Well, Atlas stock was getting crushed until this take private offer surfaced. Atlas is trying to do two things: re-invent itself as a finance company and double in size quickly. Mr Market/analysts were not drinking the Kool-Aid. Going private makes a ton of sense for Atlas given feedback from Mr Market, their current situation (crazy aggressive expansion) and the state of their industry (lots of uncertainly about where capacity and rates go from here).

In the 2020 bear market Fairfax was playing defence. They were not able to take advantage of the low prices offered up by Mr Market. Fairfax is playing offence in this bear market. They can play offence today because they are in much better shape financially. Operating income has spiked higher… they are earning +$500 million per quarter (from underwriting and interest and dividend income). Pet insurance sale will bring in +$1 billion. Sale of Resolute will bring in even more in 1H 2023 when it closes. Recipe is cheap and C$20.73 is a very good price for Fairfax. Recipe’s business is improving as Canadians return to restaurants. Fairfax’s timing with this deal looks good. The John Keels transaction also was opportunistic. Of course we also have the Atlas take private offer currently on the table. It will be interesting to see what Fairfax does with the Stelco dutch auction: tender shares or own a much bigger % of Stelco and its future earnings. 2022 is shaping up to be another active and very good year for Fairfax. With 4.5 months still to go… what else will Fairfax do in 2022? My guess: 1.) Fairfax India dutch auction once IIFL Wealth deal closes. This will continue the trend of Fairfax increasing its ownership stake in Fairfax India. 2.) Fairfax dutch auction once pet insurance deal closes. Or perhaps simply ramp SIB and start buying back 1 to 2% of shares each quarter moving forward.

What could possibly motivate energy companies to grow production today? Patriotism? No. That, of course, is stupid. But politicians will try and play that card. (It never works.) SPR release is a short term fix that eventually reverses and becomes a big, big problem (it needs to be re-filled which simply adds to future demand). Oil is a commodity. Want to know where the price of a commodity is going to go? Not that difficult. Follow supply and demand. What is going on with demand? Growing by 1 million barrels per day every year like clock work. Need to re-fill SPR demand (after the election) will add another 800,000 barrels/day to demand in 2023. What is going on with supply? Growing by less than 1 million barrels per day. Demand growing greater than supply = higher prices. As we get through Q2 earnings calls what are we learning? $90-100 oil prices are not high enough to solve high oil prices. Oil companies are not growing production. Why? 1.) Labour. No one wants to work in oil and gas…. As the government reminds us every chance it gets… oil and gas is not the future…actually it is the devil… 2.) ESG: debt and equity continue to flee oil and gas. Money to finance long life producing assets is gone FOREVER. 3.) stock prices are in the toilet. Why invest in new production when you can buy back stock at much better risk/adjusted returns. Oil companies are trading at crazy cheap valuations. What is the solution to the current shortage of oil/high price of oil? THERE IS ONT ONE SOLUTION.. MUCH HIGHER PRICES.

I think many people are completely missing what is going on with Atlas. Since the news first hit all of is have learned more. ONE is offering up $1.4 billion to take Atlas private. ONE is the driver of this deal. Everyone, take a deep breath and think about this. This is not a Fairfax deal. Or a David Sokol deal. For Atlas this is a kick ass offer. Because going private offers many big big advantages for Atlas, especially in its current state (big time expansion). Public markets are a big pain in the ass. For the other large shareholders (like Fairfax) going private is also a big win. So what do you do? You support the proposal. It is the rational and right thing to do. This is not screwing anyone. This is how business is supposed to work. i am sorry, but i do not get all the anger on this site about this proposal. It is a business deal. Not that complicated. Atlas stock was stuck; mired in the toilet. Shipping rates could drop through the floor in the coming months. Actually it is pretty likely that shipping rates will come down. Atlas stock could easily have fallen off a cliff from here. For anyone who was paying attention, the stock tracks what is going on with container rates. NOT Atlas as a finance/leasing/capital allocation company. Mr Market WAS NOT DRINKING the Kool-Aid. And despite all the talk about how cheap Atlas stock was pretty much nobody on this board was buying when the stock was trading below $11.00. At least i wasn’t. The bottom line is current Atlas shareholders have been given a gift. An opportunity for a quick, sizeable gain. In the middle of a bear market where the funds can easily be re-deployed into lots of other great opportunities. ————— Many years ago when Odyssey was bought out by Fairfax a majority of my net worth was in Odyssey stock. I welcomed the news of the buyout. At the time i expected the buyout offer (unlike the current situation). Was Fairfax being opportunistic? Yes. Smart bastards. My only mistake was not waiting for the the small bump Fairfax delivered to shareholders to close the deal (very predictable in hindsight).

@glider3834 so it looks like ONE is the driver of this transaction. I am VERY happy to see that Fairfax is not putting any new money in (at this time). I am hoping Fairfax does a big buyback of their own shares when the pet insurance sale closes later in 2H (so it looks to me like this is still in play). As a Fairfax shareholder bringing ONE on board likely makes Atlas a stronger company. I like this ALOT. Atlas is Fairfax’s largest investment. ONE has very deep pockets. They are a shipper. What i do not understand is why ONE does not buy all of ATLAS. Right now shipping companies are making obscene profits. If you want to keep the shipping market tight (and rates high) you use your profits to take out other players… you DON’T use your profits to add to capacity. That is largely what you are seeing with lumber and steel producers in North America (i.e. Stelco is not using its profits to grow steel production… it is using profits to dramatically reduce share count). Atlas was the shipper adding the most new capacity (i think). This deal makes lots of sense for ONE. It will be interesting to learn exactly what the strategic aspects of this deal are for ONE and how Atlas’ strategy possibly shifts as a result. Will ONE be a silent partner? Or not? Bottom line, I am quite happy to see another deep pocketed investor now involved with Atlas. i wonder what the other 5 shippers are thinking about this transaction (all of whom are bigger players than ONE). Could we see another larger shipper come in with a higher offer all of Atlas? From one of the other consortiums? The Altas conference call will be a very interesting listen. ————— ONE is the natural partner for Altas of all the big shippers. ONE is Seaspan’s largest customer by far at 24% (up from 16% Dec 31, 2017). ZIM is #2 at 17%. - https://filecache.investorroom.com/mr5ircnw_seaspan/1231/download/Atlas Investor Presentation May 2022 - vF.pdf ————— ONE is part of THE Alliance, which also includes Yang Ming and Hapag Lloyd. Combined, the three shippers represent 39% of Seaspan's TEU. - https://www.container-xchange.com/blog/shipping-alliances/

@nwoodman i think we need to see how this whole thing plays out before we reach any conclusions. I am trying to figure out why ONE is part of the deal. That makes no sense (given Seaspan’s historic practice of doing business with all shippers).

@nwoodman my read is the shorting strategy was the final nail in the coffin for many investors and Fairfax (in terms of reputation). The losses continued year after year for 7 or so years. And they were big. The other things Fairfax does that drives investors a little batty were just icing on the cake. My thesis for a few years now has been that i think Fairfax has turned the corner. And i do think investors will come back into the fold. The first problem was covid. That set the ‘new Fairfax’ thesis back 12 months. And now we have a second bear market in equities in 30 months. The losses in the equity portfolio we saw in Q2 are an all too familiar reminder of the reality of investing in Fairfax. Will the Atlas deal hurt Fairfax’s reputation? My guess is not much. And that is mostly because Fairfax restoring its reputation is still a work in progress (the bar is very low right now). I continue to be optimistic moving forward. Fairfax needs to continue to deliver exceptional/very good financial results for its shareholders - grow earnings per share and book value per share. Year after year. I think they are on track to do exactly that and so i expect their reputation to also slowly improve in the coming years. ————— i have less confidence in the multiples the publicly traded equities Fairfax controls will trade at. Fairfax India is perhaps the best example. I have no idea exactly why it trades at the extremely low multiple it does today. It looks like a broken stock to me. Performance, which has been very good, does not seem to matter.

@Xerxes What you say makes complete sense. What i am wondering is if we are not seeing a trend at Fairfax. A shift in strategy to owning private businesses again. For the past 3 or 4 years Fairfax has been on a mission to get its privately held businesses into the public markets. To ‘surface value’. Grivalia Properties was a large private investment made in Q2. ATCO take private is a huge deal if it happens. Stelco makes sense after the dutch auction closes. Fairfax India is another take private deal screaming to happen (for years). My early read is Fairfax likes to hit the public markets when they need cash but they prefer private markets when they are in good financial shape. ————— For Fairfax 2022 is certainly playing out far differently than 2020 (the last bear market). Back in 2020 Fairfax’s stake in Resolute dropped as low as US$40 million; Resolute’s sale will deliver $600 million to Fairfax + $180 kicker (potential future duties payout). In 2020 Stelco fell to C$50 million and today the position is worth $470 million. The swing in EXCO’s value (their 40% owned nat gas business) the past 2 years must have been massive. Bottom line, even though today we are in the middle of another bear market Fairfax is likely +$4 billion better off today than the bear market lows of 2020 - just looking at its equity holdings.

My math says the consortium needs to find $1.165 billion to take ATCO private: 252 million shares x .32 x $14.55. It is clear to me that Mr Market is not buying the ATCO value proposition and has not been for years. Mr market is not going to value ATCO as a finance/lease/capital allocation company. Despite ATCO’s attempts to ‘educate’ investors. ATCO is being valued today as a shipping company. Further, because of the new builds coming on line the next couple of years it will be nice for ATCO to NOT be in the public markets. Being private will greatly simplify what management at ATCO needs to do moving forward (make money) and not spend a ton of time jumping through hoops required by publicly traded companies. Do i like the transaction as a Fairfax shareholder? Yes. Although i would like to better understand how much of the $1.165 billion will be coming from Fairfax. This likely means we do not see a big share buyback from Fairfax and if so, that would be disappointing.

CVE, MEG, TVE Most energy stocks are getting crushed again the past 2 days. Free cash flow is still massive at $88 oil and will be directed increasingly to stock buybacks (at low prices). Great set up.