Category Archives: TGS Nopec

Short cuts: Greenlight Re, Hornbach & TGS Nopec

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Greenlight Re:

One reader Emailed me that I had made a mistake in my initial post with regard to the book value and P/B ratio. This is what I wrote in December:

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2007 2008 2009 2010 2011 2012 2013 2014 2015
P/B Ratio 1,24 0,96 1,23 1,23 1,08 1,03 1,19 1,05 0,78
P/B Ratio adj. B Shares 1,48 1,15 1,46 1,47 1,29 1,23 1,42 1,25 0,93

For some reason, the official Bloomberg ratios do not include the class B shares held by David Einhorn, so I adjusted them accordingly.

Actually, the B shares are included in the stated Bloomberg Ratios despite showing the wrong number of shares, so the “true” P/B ratio is around ~0,79 which then of course makes the “mean reversion” story even more compelling.

Additionally, Greenlight already released the monthly investment return for December which was -0,1% against -1,6% for the S&P 500. So at least its going into the right direction.

Maybe one quick point on comparisons of Greenlight Re to Berkshire, Markel or Fairfax: Although it is true that the other companies have better track records, I do think that Greenlight has one big advantage: The company is transparent and relatively easy to value as the whole investment portfolio is marked-to-market. And as I pointed out, Greenlight for me is not a long-term compounding story but a mid-term special situation betting on a David Einhorn outperformance.

Hornbach

After Hornbach’s profit warning in December, a lot of people asked me: What are you going to do ? Are you selling now ? Why do you own Hornbach at all ?

First thing: I wil do nothing and watch. For me , the profit warning was very surprising as I thought that they are on a good track and have the right strategy, although the business they are in is very tough.

For me, Hornbach is a pretty low risk position. My expectation was that I can make around 10-12% p.a. with very little risk. Until Q3 2015, that was on track but now of course it looks like a clear underperformer.

One of the reasons for this is clearly the fact that in contrast to almost any other stock in Germany, Hornbach did not enjoy any multiple expansion over the last 5 years. For a capital intensive, real estate dominated business like Hornbach, book value is one of the relevant measures. If we look at this we can clearly see that Hornbach now is valued at the low end of the historical range of P/B which ranged from ~0,8 – 1,8 in the past 15 years:

P/B BV/Share
30.12.1999 1,86 8,335
29.12.2000 1,46 8,679
28.12.2001 1,07 11,654
30.12.2002 0,99 11,642
30.12.2003 1,09 12,103
30.12.2004 1,10 13,201
30.12.2005 1,17 13,661
29.12.2006 1,33 15,182
28.12.2007 1,31 16,441
30.12.2008 0,81 18,784
30.12.2009 0,89 20,584
30.12.2010 1,09 22,947
30.12.2011 0,93 24,900
28.12.2012 0,99 25,881
30.12.2013 1,03 27,101
30.12.2014 1,04 29,023
Jan 16 0,84 31,230

Obviously, Hornbach does have some issues. Personally I think one needs to watch the E-Commerce issue most closely. So far I thought that DIY does not have big issues with Amazon & CO but this now needs to be tested.

TGS Nopec

Tgs Nopec released preliminary 2015 figures and a first outlook for 2016. Naturally, the outlook is rather subdued. Combined with the drop in oil prices, the stock got hammered. For shareholders, the only positive aspect is that TGS still is doing a lot better than its capital-intensive competitors, for instance PGS or CGG:

For the moment I will not do anything. Clearly the oil price went lower than I ever thought but TGS has net cash and will manage the cycle conservatively. So I don’t think one has to panic now.

Overall I think the best advice in such a situation is: Either you panic early or you don’t panic at all. For the early panic it is already too late for oil related stocks in my opinion, so the only alternative is to sit it out.

Update: TGS Nopec Annual Report 2014 and Q1 2015

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TGS Nopec is one of my larger position which I bought back in November 2013 when oil (WTI) was still trading at ~100 US and the world looked great for oil and oil service companies.

In the meantime, as we all now, the oil price fell substantially since 2014 and especially oil service companies were hit hard. In contrast to other oil service companies however, TGS share price has decoupled from oil to a large extent as we can see in the chart:

This is especially interesting as 2008/2009 for instance, TGS lost almost -70% when oil crashed back then. Almost always when I discussed TGS with other investors, the argument was like this: TGS is a great company but the price has to fall at least -50% or more as it did in the past. Well, for now they are holding up pretty well.

2014 annual report

Anyway, the 2014 annual report can be found here

I would recommend anyone to read the annual report, at least the one page letter of the CEO, which in very clear words describes how TGS operates.

The highlights from my side:

– EPS dropped significantly from 2,59 USD to 2,09 USD per share
– however there were several negative one time effects included (around 65 mn USD or 60-65 cents per share).
– interestingly they make no effort to adjust those one time effects. You won’t find adjusted numbers anywhere in the report. I like this VERY MUCH.
– Operating cashflow actually increased by 10%
– Operationally, the Americas were doing very well in 2014. Asia was growing strongly but deeply negative
– payroll costs increased by ~10% in 2014
– they are still committed to invest counter-cyclical into new data by taking advantage of low charter rates for ships

Overall, they way TGS operates, 2015 will not look good from a P&L perspective, as they expense a lot of their investments and sales might take a little bit longer than usual. However if the past is any guidance for the future, in 2-3 years time the investments will then turn into nice profits down the road.

Q1 2015 update

A few days ago, even before the official Q1 report, TGS issued a Q1 update press release. They reduced significantly the expected net revenues for 2015 as E&P companeis are delaying their projects. Additionally, they announced a significant cost cutting program:

The Cost Reduction Program will position the company for the more challenging seismic market caused by the significant drop in oil price. A key element of this program is a reduction of more than 10% of TGS’ global workforce effective from April. Restructuring charges of approximately USD 4 million will be booked in Q2 as a result of this Program. The company expects annual cost savings of approximately USD 10 million as a result of the Cost Reduction Program.

Interestingly, this 10% reduction seems to off set the salary increase in 2014. At first, the market seemed to be shocked and the stock lost around -20% intraday but since then things have recovered. Maybe the recommendation change from Goldman has lifted the stock. This is what Goldman wrote last week (via Bloomberg):

(Bloomberg) — Offshore seismic market set for structural changes as oil producers rationalize costs, optimize upstream portfolios and concentrate on efficiency, Goldman says in note dated yday.
Goldman: multi-client segment has strongest outlook; data acquisition will continue to face challenges with at least six vessels needed to leave market to achieve balance
TGS raised to buy vs sell, is best-positioned in new oil order; co.’s library has highest N. America exposure which should remain most attractive onshore area
Strong financial position can sustain div.; selloff post 1Q creates buying opportunity

So it seems that this time, TGS does get better credit for their countercyclical business model than in 2008/2009. Maybe investors have learned actually a little bit since then ?.

In any case, from my side, TGS is a clear long-term core investment. Although the industry is very difficult, TGS is very good company with strong competitive advantages. Oil companies must replace their reserves,the demand for seismic data is not going away. Maybe it gets postponed a little bit ut they don’t have a choice. Without replacing reserves, atraditional E&P will not valued as going concern but as a run-off which much lower multiples.

Even with the reduced forecasts, TGS is still very profitable and who know what opportunities show up if some of the competitors get deeper into problems.

TGS Nopec ( ISIN NO0003078800) – an “Outsider” Company Buffet would buy if he could ?

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Disclaimer: This is not an investment advice. The author will most likely own the stock already and sell it without telling anyone as well….

As the post is rather long, a short Elevator pitch:

– TGS Nopec is a potential “outsider” style oil services company with a distinctive and capital efficient business model
– currently cheap because of cyclical issues, negative sentiment for the oil and natural resources and top line decline yoy
– underlying business much less sensitive to oils price than the market believes and yoy top line decline is due to “outsider” behaviour

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