FFH's 13F is out

[Guest ValueCarl]

Dear Brker_guy,

 

I must ask you then, CHEERY for WHOM????

 

<It's less clear whether Google's next step will be to take this from experiment to full-blown project. That cause could lead the company to spend the $8 billion-$10 billion (after debt assumption) needed to acquire Level 3's (Nasdaq: LVLT) massive fiber optic network.>

 

Of one thing I can tell you that they got right in their description was, "massive fiber optic network."

 

After that, while including debt assumption in their numbers, my oh my, are they DEPRESSED, and are they wrong!  :)

 

 

[brker_guy]

ValueCarl,

 

As you have rightfully pointed out, they hold shares or have positive opinions of AKAM and GOOG.  That's why they want to pump their views on that industry and use controversial companies like LVLT is their whipping boy and bash them.  This same author from FOOLS put out an article 1 day prior questioning people what they saw in LVLT when LVLT reported.  Then, when they read the news about the GOOG dark fiber acquisition, they started to have a different view.  This is what I meant "cheery concensus".

 

I used to work in this telecom industry back in the late 90s and early 2000.  You wouldn't believe the kind hubris that went on back then compare to today.  Today, I think capacity is about to be catching up to demands due to a few factors.  One, you have consolidations.  Two, you have the wireless and in particularly, the smart phones(iPhone, RIM, and Google phones) driving up demands.  Three, you have HD video(video is the biggest hogger of bandwidth), and four, you have the political/net neutrality driving demand.  If you look at what is going in China with GOOG and what the RBOCs are doing by capping usage and by giving priorities to their own traffic over others, I can see why the telecom industry will be in for a major change with GOOG being the biggest impact to supply/demand.

 

In due time, I think the business model that LVLT has will withstand the test of time.  They just have to refinance their debt to extend the lifeline.  As long as they generate free cash flow and can stay healthy, they will make it.  At some points here, I think there will be a Q/LVLT merger.

 

Just my two cents...

[Guest ValueCarl]

Brker_guy, besides your great name, you have great two cents. Thank you for your valuable opinion tied to industry knowledge and experience.

 

During the past few months, I had the great fortune to discuss this topic of infrastructure owners, content providers and ISP's with Dr. Leonard Kleinrock, a founding internet father with MIT and UCLA roots. He is quite an impressive man, as well as a dynamic presenter and speaker. In an uncanny sort of way, while having accumulated a knowledge base of Ben Graham's life, I thought I was meeting his brother, in certain regards.

 

For example, he was sure to point out that, AT&T was right in the short term-their decision to avoid embracing the internet back in 1969 when he and others connected the first node from UCLA to Stanford-but very WRONG in the long term when referencing theirs as well as other infrastructure owners' today. His analysis for what's in store for legacy telecom providers, today, was nothing short of catastrophic tied to "net neutrality" amongst other things while focusing on the short term.

 

I found his statement to be profound, but can easily see how IMPLOSIONS might ensue inside the space when pondering pension, healthcare, and other long in the tail financial responsibilities that these former monopolists have created for themselves. It won't be pretty, but they've brought it upon themselves!   

 

On the other hand, the good Dr. not unlike me, believed some type of sharing arrangement would be very healthy for the long term stability of the internet as a whole. 

 

My research has lead me to conclude (3) has been hard at work developing those types of solutions, i.e., per capita income tied to ad and subscription revenues, especially in their emerging CDN space.   

 

If GOOG is wise, while having SOUGHT the wisest counsel even if it somehow found its way out of the halls of Omaha, for example, they would enter into a new business model with a "network partner they can rely on."

 

Since I am a subscriber of Taleb's "Black Swan" events, and I realize my own limitations for predicting short, medium and long term outcomes in this volatile space, I can only say that, I'm glad I am positioned with those SMART MONEY PLAYERS tied to this thread whose decision to own (3) win, lose or draw remains unknown.

 

Qwest's long haul network is one piece of the puzzle for sure, but there are so many opportunities for (3), if its FINANCIERS give Jim Crowe the green lights! Should someone, entity or consortium attempt to jump (3)'s bones early, there will be a bidding war that hasn't been seen in more than a century, one like the "The Northern Pacific Corner" of 1901.

 

For the record, and I realize that some will accuse me of blasphemy on a VALUE BOARD such as this, if NOT being a functionally psychopathic drinker of Jim Crowe Kool-Aid, i.e., rhetoric for some twelve years now; a case can be made for TEN PPS before DEBT or Enterprise Value TODAY! IMO 

 

<The Northern Pacific and the "short squeeze" of 1901

With 1901 and the start of the new century, James Hill now had control of both the Great Northern Railway, and the Northern Pacific (which he had obtained with the help of his friend J. P. Morgan, when that railroad went bankrupt in the depression of the mid-1890s). Hill also wanted control of the Chicago, Burlington and Quincy railroad because of its Midwestern lines and access to Chicago. The Union Pacific Railroad, the biggest competitor of Great Northern and Northern Pacific, also wanted control of Chicago, Burlington, and Quincy. Although Great Northern and Northern Pacific were backed by J. P. Morgan and James J. Hill, the Union Pacific was backed not only by its president, Edward H. Harriman, but by the extremely powerful William Rockefeller.

Quietly, Harriman began buying stock in Northern Pacific with the intention of gaining control of Chicago, Burlington, and Quincy. He was within 40,000 shares of control when Hill learned of Harriman's activities and quickly contacted J. P. Morgan, who was on vacation in Europe at the time. Morgan, acting on behalf of his friend, ordered his men to buy everything they could get their hands on.

 

 

James J. Hill's home, 240 Summit Avenue, St. Paul, Minnesota

The result was chaos on Wall Street. Northern Pacific stock was forced up to $1,000 per share. Many speculators, who had sold Northern Pacific "short" in the anticipation of a drop in the railroad's price, faced ruin. The threat of a real economic panic loomed. Neither side could win a distinct advantage, and the parties soon realized that a truce would have to be called. The winners of that truce were Hill and Morgan, who immediately formed the Northern Securities Company with the aim of tying together their three major rail lines. Unfortunately for the Hill-Morgan alliance, on the same day they formed the Northern Securities Company, President William McKinley was assassinated, placing Theodore Roosevelt—the "trust-buster"—in the office of President.>

 

http://en.wikipedia.org/wiki/James_Jerome_Hill 

 

 

   

[Guest longinvestor]

Qwest's long haul network is one piece of the puzzle for sure, but there are so many opportunities for (3), if its FINANCIERS give Jim Crowe the green lights! Should someone, entity or consortium attempt to jump (3)'s bones early, there will be a bidding war that hasn't been seen in more than a century, one like the "The Northern Pacific Corner" of 1901.

 

I think so too. The "catastrophe" Dr Kleinrock alludes to is truly happening but is written so large in front of our faces that we are not able to read it. Just look at what we pay for our TV, Telephone and now internet bills. Compare that with what we paid ala-carte for these twenty years ago. I read a recent report about disposable incomes in NA, which essentially says that a giant swath of society today has less than $50 for all things discretionary including telecom, tv, telephone etc. And I'm not even talking about enterprise business. The race to the bottom line in this industry is unfolding right under our noses and it hardly is Crowe-koolaide at all. Staying the course to being the lowest cost producer is all that (3) has to do while this comes to fruition. Postpoing debt like you have pointed out is what it's taken so far and  is the winning strategy, strange as it may sound.

 

I dont know about consortiums etc but Prem and SEAM have been buying up (3) quietly and now own about half the company. They have a seat at the table should a bidding war start. Love that thought. ;D

[Guest ValueCarl]

As stated previously, without a clue as to how the ultimate outcome behind this business plan is sorted out, notwithstanding the fact that on the common owner side of the equation, Mr. Buffett "flipped out"-pun unintended-of his position one year later for a fast double(100 percent or 1:1 return on capital), his words about the characters of the men running this business continues to stand out in my mind. The seven year FLOOD after his public investment in (3), is now behind us. 

 

Naively or not, I have placed a lot of trust in this management team since his quote of yesteryear. imo     

 

<Warren Buffett, chairman of Berkshire Hathaway, issued the following comment on his company's investment in Level 3: "Liquid resources and strong financial backing are scarce and valuable assets in today's telecommunications world. Level 3 has both. Coupled with the management of Walter Scott and Jim Crowe, in whom I have great confidence, Level 3 is well equipped to seize important opportunities that are likely to develop in the communications industry."> 

 

http://www.level3.com/index.cfm?pageID=491&PR=385

[Guest ValueCarl]

At the same time, if anyone would "flip out" over GOOG or another entity only to the exclusion of Mr. Buffett taking this company "UNDER," it would be this man. imo

 

http://www.youtube.com/watch?v=wvsboPUjrGc&feature=related

[beerbaron]

At the same time, if anyone would "flip out" over GOOG or another entity only to the exclusion of Mr. Buffett taking this company "UNDER," it would be this man. imo

 

http://www.youtube.com/watch?v=wvsboPUjrGc&feature=related

 

???

 

I'm glad I don't own any MSFT shares...

 

BeerBaron

 

 

[brker_guy]

I just want to share this with you folks.  It is painting a decent picture of what will come in the telecom industry for the U.S.

 

http://tfi.com/pubs/w/pdf/telektronikk_telecom.pdf

 

ValueCarl, thanks for the kind words.

 

 

 

[Viking]

It appears Sandridge Energy is one of the few companies FFH is purchasing in a material way at the present time. I took a quick look and decided the company is too small and the field (natural gas & oil) out of my circle. Does anyone care to speculate why FFH finds this company so attractive?

 

Could it be a hedge against the the US$? As the $ devalues the price of nat gas and oil should continue to rise making a company like SD more profitable...??? I wonder if the thesis for International Coal is similar?

[oldye]

Real quick,

VIC has a good write up on it, basically they have lots of exploration upside, production set to nearly double by 2012, and an average total cost of extraction 4.50$.  They just announced they're spending 100 million on new headquarters which brought the shares below the recent issue price. 

 

[Guest longinvestor]

I just want to share this with you folks.  It is painting a decent picture of what will come in the telecom industry for the U.S.

http://tfi.com/pubs/w/pdf/telektronikk_telecom.pdf

ValueCarl, thanks for the kind words.

 

I just read this and was not impressed (pedestrian), because

         

it felt like stating the obvious, like the "silly syllabus" of emerging telecom, borrowing a phrase from PGWodehouse!

it appears to be the worldview of incumbent telecom, especially T and VZ

it paints VOIP as a cost reduction opportunity for the incumbents, in the future. I'll be damned! VOIP is history now and thanks to the other guys, Vonage, MagicJack, Skype et al, it is a price reduction scheme rather than a cost reduction one! T, VZ have their head stuck in the sand over this!

 

This report clearly avoids discussing the catastrophe ahead for the telecom. Things like net neutrality, dramatic price erosion etc. Telecom faces a future analogous with what the big-3 faced when Toyota/Nissan etc showed up in the 70's, or what Southwest air did to the big airlines in the wake of the airline deregulation....players like Level3, Google, Skype et al are scripting the agenda. Sure, legacy telecom has a lot of wind behind their backs which makes this a long tail event. Another 10 years, maybe longer. But it has been happening to them for the better part of this decade!

 

[Smazz]

 

Sold out of BNI and INTC.

How did we do on those?

[Myth465]

Real quick,

VIC has a good write up on it, basically they have lots of exploration upside, production set to nearly double by 2012, and an average total cost of extraction 4.50$.  They just announced they're spending 100 million on new headquarters which brought the shares below the recent issue price. 

 

 

$4.50 for nat gas is a big turn off for me. It seems high. Better then $6 and $7 that others sport.

[Guest ValueCarl]

Level Three Communications(LVLT), thanks to their leadership role in "narrow band" services, dial up and managed modem facilities which prevented them from reorganizing(Chapters 18 or 11 plus 7), whilst the shift had been placed on hold post internet bubble/bust, is just ONE LOCAL PHONE CALL away from more than 90 percent of the US population.

 

Early in their business plan, I had discussed the "Intel Inside" concept from a marketing perspective with a part of their organization, while they were deciding upon "(3) Enabled" to become part of their trusted brand mantra for relaying the fact that it was their network "POWERING" the services which another company might be branding on top of theirs.

 

When Goog's toll free, 411 service was introduced some time ago now, I was told the greeting once the searched number was identified and ready to be connected, stated, "Powered by Level 3 Communications."

 

To be frank, and not Carl, I never heard this advertisement and attempted often without success when first hearing about it.

 

Of course, this (3), LVLT, is also often confused in name, stock symbol, and company logos, with LLL, a high flying defense company who specializes in communications solutions as well.

 

Whatever the case may be along with the often corresponding mix ups and confusion; however, you can be assured that GOOG's 411 information service is LVLT powered! FWIW, it's good to see (3)'s name missing from this research report.  imo 

 

<A precursor indicating the potential of marrying wireless,

voice, and the Internet is an experimental directory

assistance service by Google where users dial a toll-free number to reach Google, which recognizes

what they say and provides information on the businesses

in the city that fit their criteria. It’s not much

of a leap from there to providing maps, directions,

Web pages, and especially advertising, or completing

the phone call. Eventually, with VoIP on wireless

broadband, such a service could bypass the voice

network entirely.>

 

 

 

     

[Guest ValueCarl]

The long weekend seems to have spawn some Fairfax and Seam criticism by onlookers using words embedded on this board. I have never seen the $158 share price the author is quoting either. imo

 

<While respected value investors, they must be betting on the company's franchise value and moat. LVLT sells at over 4 X Book and has virtually no tangible book value, it's $6 Billion of debt dwarfs it's equity, interest charges gobble up over $1/2 Billion per year, and net earnings have been rare over it's lifespan. It doesn't fare well under almost any value investing metrics. Yet, two guys smarter than me have parked lots of money here. Additionally, both have the bulk of their net worth tied up in their companies, so they aren't some Wall Street hotshot playing with other peoples money while skimming large fees. They must believe.

 

It's obvious that they too have drunk the LVLT Kool-Aid. Will the result be different from the losses sustained by many of the Omaha faithful? Buffett and Leucadia were attracted by the generous terms offered by LVLT, made a well calculated investment and have exited. Hawkins and Watsa have the bulk of their money at risk in common stock. Their 15% yields on the convertibles is attractive, but the majority of their investment pays no interest. Whether they are under or above water on their positions, they are believers. They still own a ton of LVLT shares.>

 

http://www.gurufocus.com/news.php?id=84608

[T-bone1]

With regard to SD, they have a few advantages I see:

 

1) they have a CO2 factory coming online this year in partnership with OXY (who will use the CO2 for tertiary oil extraction at a nearby field they own). SD's best wells/wellsites in the WTO all have very high CO2 content (60%+!) . . . this is why they have never been drilled despite the fact that they can be easily drilled with "old" vertical rigs and none of the fancy new techniques needed in the shales.  As soon as this CO2 factory/extractor comes online they will be drilling much better wells and when natural gas goes back up they will not suffer the cost inflation the rest of the industry will because they don't need the more modern technology.

 

2) the oil feild they just bought is a good inflation hedge.  This are also encompasses an emerging oil play called the three forks which apparently has very high rates of return at current prices (200-300% IRRs)

 

3) they have a lot of land that hasn't been explored which gives them upside potential if you think they know what they are doing (the CEO was co-founder of CHK and helped build that company from nothing for - what its worth - not everyone thinks highly of CHK). 

 

 

[Guest longinvestor]

The long weekend seems to have spawn some Fairfax and Seam criticism by onlookers using words embedded on this board. I have never seen the $158 share price the author is quoting either. imo

 

<While respected value investors, they must be betting on the company's franchise value and moat. LVLT sells at over 4 X Book and has virtually no tangible book value, it's $6 Billion of debt dwarfs it's equity, interest charges gobble up over $1/2 Billion per year, and net earnings have been rare over it's lifespan. It doesn't fare well under almost any value investing metrics. Yet, two guys smarter than me have parked lots of money here. Additionally, both have the bulk of their net worth tied up in their companies, so they aren't some Wall Street hotshot playing with other peoples money while skimming large fees. They must believe.

 

It's obvious that they too have drunk the LVLT Kool-Aid. Will the result be different from the losses sustained by many of the Omaha faithful? Buffett and Leucadia were attracted by the generous terms offered by LVLT, made a well calculated investment and have exited. Hawkins and Watsa have the bulk of their money at risk in common stock. Their 15% ....

 

http://www.gurufocus.com/news.php?id=84608

 

 

There is a fundamental difference between Prem/SEAM and other (3) Koolaide drinkers. Has to do with the proverbial question WEB says people forget to ask when buying a stock...."how much"?.  Best of my knowledge, Prem has paid $1 or less per share for most of his shares, SEAM a little higher but not as low as Prem. And we know they have made a killing on their bond holdings. The rest of us paid more than $1, call it $5, $30 or ...$132. The emotional baggage, koolaide references and such stem from this fact, IMO.

 

Another lesson in value investing!

 

[Guest ValueCarl]

The sadder aspect of value investing, is in the years forward when you'll be hearing those same gentlemen opining about how smart they were, maybe at the ten bagger mark, invoking a certain amount of penis envy in the game of investing.

 

I'm sure they would have earned it though! Human nature doesn't understand that concept when they hear it after the fact, however. Human nature always responds sub consciously as follows:

 

Why didn't I have some of that?  :'(

 

Point: Best for value investors to learn and embrace securities with the characteristics these men are allocating large sums of their investment capital, before rather than after they have made their SCORE!  ;D 

[Guest ValueCarl]

There's one other important thing that human nature fails to recognize in retrospect when they think about what they missed in the future, rather than moving on their instincts to purchase some measurable amount during times of absolute pessimism.

 

Since we're talking almost exclusively about behavioral psychology here, and I have the answer in my feeble mind, who would like to attempt to guess?

 

Hint: This is an independent thinker's game! 

 

 

[Cardboard]

"Best of my knowledge, Prem has paid $1 or less per share for most of his shares, SEAM a little higher but not as low as Prem."

 

I think that Prem paid a lot more than that. The only period where LVLT has traded sub $1 was between Oct 08 and Apr 09. Fairfax carried 116.7 M shares before that and added only about 22.5 M shares in the 4th quarter of 08.

 

It is an interesting situation, but determining the value is not easy. The company has 1.64 billion shares, around $5.6 billion in net debt and generated roughly $550 million in EBITDA - CAPEX in 2009. There is no doubt that replicating their network would cost a lot more than current net debt. The question to me is how much a buyer would be willing to pay above that?

 

At this point, it would seem difficult for a buyer to justify to his investors a purchase of LVLT above $10 billion including debt or around $2.70 a share. Current cash generated by the business does not justify much more. A bidding war could erupt, but I would be surprised if it goes sky high since most CEO's are short term oriented and will need the support from debt holders, shareholders to push it through.

 

What is needed IMO to create real big value is for LVLT to really increase its revenues or to fill its pipeline. Then the shares will go up, takeover or not. Bandwidth demand is really increasing, but so far we have seen little translation into their revenues. The Google experiment and now RIM warning about a bandwidth crisis may be signs that we are about to see some fundamental change in the industry.

 

Still, predicting these future revenues and resulting cash flows is near impossible. So it is value investing because the asset or their network is worth more than enterprise value, but estimating the terminal value is a pure guess.

 

Cardboard

[oldye]

With regard to SD, they have a few advantages I see:

 

1) they have a CO2 factory coming online this year in partnership with OXY (who will use the CO2 for tertiary oil extraction at a nearby field they own). SD's best wells/wellsites in the WTO all have very high CO2 content (60%+!) . . . this is why they have never been drilled despite the fact that they can be easily drilled with "old" vertical rigs and none of the fancy new techniques needed in the shales.  As soon as this CO2 factory/extractor comes online they will be drilling much better wells and when natural gas goes back up they will not suffer the cost inflation the rest of the industry will because they don't need the more modern technology.

 

2) the oil feild they just bought is a good inflation hedge.  This are also encompasses an emerging oil play called the three forks which apparently has very high rates of return at current prices (200-300% IRRs)

 

3) they have a lot of land that hasn't been explored which gives them upside potential if you think they know what they are doing (the CEO was co-founder of CHK and helped build that company from nothing for - what its worth - not everyone thinks highly of CHK). 

 

 

 

They diluted heavily to get the new oil field  and now they're using that money to pay for their headquarters. Management obviously has an empire state of mind.  If you think gas prices will be around 6-7$ or you think their cost to extract will drop once the new plant is online then this is going to be a hell of a play for Fairfax.

I can also see this going poorly,  every single company out there has a mandate to drill,  or there just isn't enough political will to keep the patient off the emergency room floor this will end badly. This is why they hedge! 

[T-bone1]

They diluted heavily to get the new oil field  and now they're using that money to pay for their headquarters. Management obviously has an empire state of mind.   If you think gas prices will be around 6-7$ or you think their cost to extract will drop once the new plant is online then this is going to be a hell of a play for Fairfax.

I can also see this going poorly,  every single company out there has a mandate to drill,  or there just isn't enough political will to keep the patient off the emergency room floor this will end badly. This is why they hedge!  

 

I do think gas prices will be $7+ after 2010 and that the costs of extraction per MCF of gas for Sandridge will drop when the plant comes online, so yes I am long shares and think it will work out for FFH. Prem owns shares personally as well.

 

SD also has 80% of their gas production for 2010 hedged at $7.70 per MCF, so the uncertain commodity outlook for this year doesn't concern me.

 

Your point about the new headquarters is a concern. And the same criticisms have always been leveled at CHK . . . these guys are definately visionaries that have built a lot of shareholder value, but they also tend to treat the company like their own piggy bank.

 

Bottom line: I think this is a great way to invest in natural gas (or inflation if you prefer), but not a great bottom-up investment if you don't have a view on the commodity.  The convertible note FFH bought lets them ride out the next few years collecting interest but the mandatory convertability definately suggest that Prem & Co at least believe in the inflation thesis (and since Prem bought shares himself I think they believe in the company too)

[FFHWatcher]

SD has a good investor presentation and a webcast on their website that is more fwd looking.  Their financial statements give you a sense of their past but because it is so short, it is hard to determine their potential.  They are also changing with acquisitions and financings so quickly that 6 month old financials are too old.  It is certainly a growth story.  Projecting to double their output by 2012.  They have hedged about 70-80% of their gas production in 2010 at $9.15 ($8.59 for 2009) and they have sold/locked in over about $1.1B of oil revenue from 2010-2012.  They are doing some things conservatively but many things aggressively. 

 

They have diluted a lot.  They have added a lot of debt.  They will be cash flow negative for 2010 and 2011 with 2012 turning cash flow positive with the Century Plant fully contributing at that point.  Even Tom Ward had to sell $50M of SD at the bottom in the mid $5. range (margin call?). 

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzY3MDI2fENoaWxkSUQ9MzYyMjIyfFR5cGU9MQ==&t=1

[Guest ValueCarl]

In picking up on my yesterday, Behavioral Finance Quiz question, here's an example of the answer which I will articulate under the LINK.

 

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=18190251&src=finance&ch=633473

 

With the exception of a Bozo like Cramer due to his current limelight popularity, those who listen to TALKING HEADS taking money away from them OVERTIME, will never recall their SILLY NAMES when looking back and lamenting over why they didn't buy, sell or HOLD predicated upon their own thinking skills and analysis! For this, they will have only themselves to blame!

 

In the case of Cramer, however, most of the people he burns won't forget him at the same time "market participants" continue to shrink in size as a result of having their money removed from the table, so that they're too broke or too scared to ever come back again!

 

Some have said that, this is where average market participants have been since March, last year. IMO   

 

 

[Guest ValueCarl]

FOOLS remain unenchanted with (3) LOVE.

 

http://www.fool.com/investing/general/2010/02/17/this-is-why-you-love-level-3.aspx

 

But I still ask these FOOLS, why do FOOLS fall in love?

 

 

 

Good skill, and a higher BV to Fairfax owners after the bell tomorrow. One day in the future, it's very feasible that, (3) will play a large portion or percentage of their BV. imo