Sixth Street Specialty Lending's Historical Value Creation May Offer Insights Into Its Future Returns

Sixth Street Specialty Lending, Inc. (TSLX) is a business development company, or BDC. The company primarily invests in companies with earnings before interest, taxes, depreciation, and amortization, or EBITDA, between $10 million and $250 million, according to the company’s most recent earnings presentation. Almost all of Sixth Street’s investments are in the companies’ first-lien secured, floating-rate debt.

I recently wrote about another BDC, Prospect Capital (PSEC), that looks cheap because it trades at a steep discount to book value.

Sixth Street Specialty Lending does not look cheap. The company trades at a price to book ratio of around 106.5%, compared to the average P/B ratio for BDCs, which is around 83%. This means each dollar of stock buys only 93.9 cents in equity in Sixth Street, compared to around $1.20 in equity in the average BDC.

That said, as in life, in investing you often get what you pay for. In several recent articles, I’ve described two common types of investment opportunities:

1. High quality companies trading at a modest discount to intrinsic value.
2. More average companies trading at a much larger discount to intrinsic value.

In the long run, high quality companies compound an investor’s capital far more than average ones. To see if Sixth Street Specialty Lending, Inc. is a high quality company, we can use the methodology I used in my article about Prospect. We can look at how much value the company has historically created for shareholders. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Dynex Capital's Historical Value Creation May Offer Insights Into Its Future Returns

Dynex Capital, Inc. (DX) is a mortgage real estate investment trust, or mREIT. The company invests in mortgage-backed securities, or MBS, securities whose income is based on the performance of pools of mortgages.

I’ve written two recent articles about mREITs Ladder Capital (LADR) and Anworth Mortgage (ANH). Both those articles were written because those mREITs look cheap. Dynex Capital does not look cheap. The company trades at a price to book ratio of 94%. In contrast, Anworth and Ladder have, respectively, P/B ratios a little over 60%. The market certainly seems to think it is a higher quality company than other mortgage REITs, given how much higher its valuation is.

To see if Dynex Capital is a high quality company, we can use the methodology I used in my previous mREIT articles. We can look at how much value the company has historically created for shareholders. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Anworth Mortgage's Value Creation Since Its IPO May Offer Insights Into Its Future Returns

Anworth Mortgage Asset Corporation (ANH) is a mortgage real estate investment trust, or mREIT. The company invests in residential mortgages as well as mortgage-backed securities, or MBS, securities whose income is based on the performance of pools of residential mortgages. Those securities include both agency-backed MBS whose performance is guaranteed by Fannie Mae (OTC:FDDXD) and Freddie Mac (OTC:FMCC), as well as non-agency MBS whose performance is not guaranteed. According to the company’s most recent quarterly report, over 70% of Anworth’s investments were in agency MBS.

By several metrics, Anworth’s stock looks cheap. The company’s price to book ratio on August 13th was 63%. This means each share of the company’s stock trading at $1.81 a share corresponded to around $2.85 of the company’s equity. Anworth also has a dividend yield of around 11%.

In that context, Anworth’s cheapness raises a question. Is it a high quality company I can “buy and hold” forever while it compounds my investment?

To see if Anworth Mortgage Asset Corporation is a high quality company, we can use the same methodology I used in my recent article about Prospect Capital. We can look at how much value the company has created for shareholders since its 1998 IPO. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

Prospect Capital's Value Creation Since Its IPO May Offer Insights Into Its Future Returns

Prospect Capital Corporation (PSEC) is a business development company, or BDC. The company invests in middle market companies with an “enterprise value between $5 million and $1000 million,” according to the company's profile. Prospect invests in both the companies’ secured and unsecured debt as well as their equity.

By several metrics, Prospect’s stock looks cheap. The company’s price to book value ratio on July 31st was 63%. This means each share of the company’s stock trading at $5.01 a share corresponded to $7.98 of the company’s equity. Prospect also pays a monthly dividend of $0.06 per share, giving the company an annual dividend yield of over 14%.

Prospect Capital’s cheapness raises a question. Is it a high quality company I can “buy and hold” forever while it compounds my investment?

To see if Prospect Capital is a high quality company, we can use the same methodology I used in my May 2020 article about Ladder Capital. We can look at how much value the company has created for shareholders since its 2004 IPO. This will help us predict the company’s future value creation, and thus the company’s possibilities for future share price growth and dividends. (Read More)

SandRidge Mississippian Trust II Is Dissolving, Leaving Investors With Large Losses And Important Lessons

SandRidge Mississippian Trust II (SDR) (SDRMU) announced in late January 2020 it would dissolve by the end of 2020.

SDR owns oil and natural gas royalty interests in the Mississippian formation of southern Kansas and northern Oklahoma. These interests entitle SDR to royalty payments out of the income from 273 oil and gas wells drilled by SandRidge Energy (SD), the trust’s sponsor. Most of this royalty income is then distributed to the owners of the trust’s units (shares).

Once the trust is dissolved, SandRidge Mississippian Trust II’s unitholders will not get any more distributions. This will leave many of them, including investors who bought units in the trust’s IPO, with a large loss on their investment. This loss offers important lessons for future investors, especially investors in IPOs, the oil and gas industry, and in high yield stocks. (Read More)

2016 CLO Issuance Was Much Higher Than Expected

I recently read a May 2016 Wall Street Journal article about the recovery of CLO issuance after the early 2016 market decline.

CLOs, or collateralized loan obligations, are bundles of “loans from junk-rated companies” that are “[repackaged]…into securities that pay varying levels of interest based on which get paid off first if the underlying loans go bad.”

Because CLOs are a way to invest in financially stressed companies, their performance is highly dependent on the economy. When the economy is doing well, CLOs can offer high rates of return. When the economy does badly, the companies that take out the loans that go into CLOs are often the first to run into trouble, inflicting potentially high losses on CLO investors. Because of that, CLOs are popular when people think the economy is doing well and very unpopular when people think the economy is doing poorly.

A 2012 report from the National Association of Insurance Commissioners shows this. CLO issuance peaked before the Great Recession and almost disappeared during the Recession:

Source: U.S. Insurance Industry CDO/CLO Update

What intrigued me about the WSJ article was the prediction near its end:

Few analysts expect CLO issuance to reach much higher than $50 billion this year…

Whenever I read a prediction like this in a past news article, I wonder if it came true. Thus, I looked up the total CLO issuance in 2016.

As it turned out, it was $72.3 billion. This was, of course, much higher than the $50 billion number “[few] analysts [expected] CLO issuance to reach” in 2016 according to the WSJ article.

I think the fact this prediction didn’t come true illustrates a valuable point. Economic and financial predictions are often wrong. This is true even when the predictions are about something only 7 months away. This doesn’t mean such predictions should be totally ignored. However, it is something to keep in mind when making investing decisions.

As a postscript, the prediction in 2019 was for “US CLO issuance…to fall in 2020.”

Given the current economic situation caused by COVID-19, this prediction seems likely to come true, if for reasons no one expected back in November. That said, it will be interesting to see exactly how things turn out.

Disclaimer: The content here is not meant as investment advice. Do not rely on it in making an investment decision. Do your own research. The content here reflects only the author's opinions. Those opinions might be wrong. This content is meant solely for the entertainment of the reader and its author.

Comparing Whiting Petroleum's Post-Bankruptcy Enterprise Value To Its Reserves

On April 1^st, Whiting Petroleum Corporation (WLL) announced it was going bankrupt. In late April, it announced how the company will be split between current lenders and shareholders after bankruptcy.

Based on the company’s bond prices, we can estimate the post-bankruptcy Whiting Petroleum’s enterprise value. We can then compare that enterprise value to the value of the company’s oil and gas reserves.

In doing so, we can see how the market is valuing those reserves. Using that valuation, we can guess what other distressed oil and gas companies’ reserves might be worth in bankruptcy. (Read More)

Alternative Financial Services Are A Major Source Of Earnings For Republic Bancorp

At first glance, Republic Bancorp, Inc. (RBCAA) looks like an ordinary regional bank. With $5,601 million in assets, Republic was Kentucky’s biggest bank at the end of 2019. Republic was also America’s 172^nd largest bank.

Unlike most regional banks, though, Republic Bancorp earns around 30% of its net income from alternative financial services. The term “alternative financial services” covers products such as high interest loans and tax refund advances. Customers often use these services when they can’t access traditional bank services. Such customers are often poorer and pay higher costs.

Republic Bancorp’s Republic Processing Group (RPG) business is a big provider of these services. RPG has two segments. Tax Refund Solutions (TRS) offers tax refund advances. TRS also offers “refund transfers” that let tax filers pay for tax preparation using their refunds. Republic Credit Solutions (RCS) offers loans, mainly high interest lines of credit.

These two segments earned $28.246 million of the company’s $91.699 million in 2019 net income. It is very unusual for much of a bank’s earnings to come from alternative financial services. Since these segments are so important, we will analyze them to better understand their impact on the company. (Read More)

How Much Value Has Ladder Capital Created For Shareholders Since Its IPO?

One of my favorite investment bloggers, Clark Street Value, recently wrote about mortgage real estate investment trust (mREIT) Ladder Capital (LADR). Ladder mainly invests in commercial mortgage backed securities (CMBS), or pools of mortgage loans to businesses.

The post described how Ladder is well positioned to survive the current downturn due to its high quality assets and use of unsecured debt to fund those assets. It provided much information about both topics; I encourage interested readers to read it.

As an investor, though, I am not just interested in how well a company might survive the current downturn. I am also interested in the long term value the company can generate for me if I invest.

This is especially important since downturns offer two common types of opportunities for investors:

1.  High quality companies trading at a modest discount from normal prices.
2.  More average companies trading at a much larger discount to their intrinsic value.

In the long run, high quality companies compound an investor’s capital far more than average ones. This is true even if those average companies are purchased at much cheaper valuations.

In that context, after reading Clark Street Value’s post, I was curious which type of company Ladder Capital is. Is it a high quality company I can “buy and hold” forever while it compounds my investment? (Read More)

Equinor, One Of The Greenest Oil Majors, Could Be Undervalued

Norwegian company Equinor (EQNR) (STOHF), once named Statoil, is one of the greenest big oil companies. Morningstar’s January 2020 report “Understanding the Emissions Challenge” evaluated each of the oil majors based on several metrics for carbon emissions reduction. Equinor was the only company to score in the top third in each metric.

In that context, I wanted to look at the company’s investment value. Equinor has three sources of value. The first is its Exploration and Production (E&P) operations, which explore for and produce oil and natural gas. The second is its Marketing, Midstream, and Processing (MMP) segment, which transports, processes, and sells oil, gas, and electricity. Finally, the company’s Other segment develops renewable energy projects and new oil and gas technologies, and also handles other corporate functions.

By adding up the value of these three parts, we can calculate the Equinor’s valuation. That valuation turns out to be around the same as the company’s enterprise value, which means Equinor could be undervalued. (Read More)

Southwestern Energy Might Have Difficulty With One Of Its Debt Covenants At The End Of The Year

In my two most recent articles, I described how anyone considering an oil and gas investment right now must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

In an earlier article, I answered the first question for Southwestern Energy (SWN). I described how the company looks cheap when you compare its enterprise value to the value of its underground oil and natural gas reserves.

In my last article, I began answering the second question for Southwestern. I looked at how the company’s hedging contracts might affect its estimated 2020 revenues. By estimating the company’s revenues for this year, we can see if the company will earn enough to service its debts.

There are two areas of concern here:

1. Will the company have enough earnings to cover its interest expenses?
2. Will the company have enough earnings to meet its debt covenants?

If Southwestern can answer “yes” to both questions, it is likely to survive the current downturn, at least through the end of 2020. If the answer to either question is “no,” the company’s survival will be in the hands of its creditors. (Read More)

A Look At Southwestern Energy's 2020 Hedges

In my last article, I described how anyone considering an oil and gas investment right now must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

In that article, I answered the first question for Southwestern Energy (SWN). I described how the company looks cheap when you compare its enterprise value to the value of its underground oil and gas reserves.

To answer the second question for Southwestern, we need to know if the company will earn enough this year to service its debts. There are two areas of concern here:

1. Will the company have enough earnings to cover its interest expenses?
2. Will the company have enough earnings to meet its debt covenants?

If Southwestern can answer “yes” to both questions, it is likely to survive the current downturn, at least through the end of 2020. If the answer to either question is “no,” the company’s survival will be in the hands of its creditors.

To calculate Southwestern’s 2020 earnings, we need to look at the company’s price hedges. Those hedges are meant to protect the company from oil and gas price declines, and may be key to giving the company enough earnings to service its debts. Only if we know the impact of those hedges on the company’s revenues will we be able to calculate the company’s earnings. (Read More)

A Look At Southwestern Energy's Reserves

With the recent fall in oil and gas prices, many investors are looking for bargains in the industry. One company that has drawn interest is Southwestern Energy (SWN).

For an oil and gas company such as Southwestern to be a good investment right now, I think it must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

Answering the first question tells an investor if they might earn above average returns by investing in the company. Answering the second tells an investor how likely it is they will earn those returns, rather than losing most or all of their money.

To answer the first question for Southwestern, we will compare the company’s enterprise value to the value of its underground oil and gas reserves. (Read More)

Occidental Petroleum Is Even More Expensive Relative To Its Reserves Than I First Thought

For my 30th Seeking Alpha article, I revisit Occidental Petroleum by taking another look at the company's valuation relative to its reserves:

In my recent article “Occidental Petroleum is Surprisingly Expensive Relative to Its Reserves,” I compared the company’s enterprise value to the value of its underground oil and natural gas reserves. I then made the same comparison for several other large oil companies. Even though Occidental Petroleum (OXY) is much riskier than those companies due to its high debt levels, its enterprise value to reserve value ratio was not much cheaper.

In calculating Occidental’s enterprise value in that article, I left out Occidental’s roughly 10 billion dollars in preferred stock. Warren Buffett (BRK.A) (BRK.B) bought this stock to help finance Occidental’s August 2019 acquisition of Anadarko Petroleum, and I only noticed my omission while writing my follow-up article “A Valuation of Occidental Petroleum Based On Its Three Sources of Value.”

Fortunately, including that preferred stock in the calculation doesn’t weaken my original thesis. It actually makes it stronger. My original thesis was that the company's enterprise value to reserve value ratio was surprisingly high, and now it's even higher. This article will look at that revised EV/Reserves ratio and compare it to the EV/Reserves ratios of some other integrated oil companies, taking into account the various companies’ share price changes in the past three weeks. In doing so, we will see how expensive Occidental Petroleum is now compared to those other companies. (Read More)

A Valuation Of Occidental Petroleum Based On Its Three Sources Of Value

Of the companies impacted by the recent oil price collapse, Occidental Petroleum’s (OXY) story might be the most dramatic. The company bought Anadarko Petroleum in August 2019 to become America’s fourth largest oil and gas company. Since then, its shares have fallen by over 60%, in part due to concerns over the debt the company took on for that deal. Even the company's bonds have collapsed. Occidental’s bonds due in 2049 have dropped by over 50% in the past year. Such low prices imply many bondholders think the company will go bankrupt.

Of course, not everyone feels so negatively about the company. Six “Bullish” or “Very Bullish” articles were written about Occidental on Seeking Alpha in March alone, and three more in April. After all, much of the fall in the company’s shares has been caused by the recent oil price collapse. If oil prices go back up again, it is plausible that investors who buy now could triple their money. It's also worth noting that both Carl Icahn (IEP) and Warren Buffett (BRK.A) (BRK.B) are invested in the company, which gives even more impetus to whose who think that the company will do well as an investment.  

With so many diverging opinions about Occidental’s future, I think it is important to remember the company’s fundamentals. Occidental has three sources of value...(Read More)

Occidental Petroleum Is Surprisingly Expensive Relative To Its Reserves

In my recent article “Drilling for Oil in the Stock Market,” I compared the enterprise values of the oil “supermajors” to the value of their reserves—the oil and natural gas they own underground.

A company’s enterprise value is the value of all the money invested in the company by both shareholders and lenders. It equals the company’s market capitalization, which is what all its stock is worth, plus the face value of its debt minus the company’s cash (also known as its “net debt”).

Enterprise value is a good metric to compare to an oil company’s reserves because ultimately, both lenders and shareholders have a claim on the company’s assets, including those reserves. This is particularly important if the company is at risk of bankruptcy. In comparing the supermajors’ enterprise values to their reserve values, I wasn’t implying they might go bankrupt. Rather, I wanted to see how an acquirer might appraise them. However, there is a major oil company which is in financial difficulty—Occidental Petroleum (OXY). (Read More)

A Valuation Of BP Based On Its 4 Sources Of Value

In my last article, “Drilling for Oil in the Stock Market,” I wrote that some of the world’s largest oil companies are trading for little more than the value of their oil and gas reserves. My analysis looked at each company’s enterprise value—the value of all of the money invested in the company by both shareholders and lenders, minus the company’s cash. When an oil company’s enterprise value is the same as the value of its reserves, you essentially get the rest of the company’s assets for free when you buy the company’s stock.

Of the five oil supermajors—Royal Dutch Shell (RDS.A) (RDS.B), Exxon Mobil (XOM), BP (BP), Total (TOT), and Chevron (CVX)—analyzed in that article, BP was the cheapest on an enterprise value to reserve basis. BP is divided into four segments—its Upstream segment, its Downstream segment, its Other Businesses and Corporate segment, and its Rosneft holdings. By looking at each of these segments, we can get a better idea of what the company might be worth. (Read More)

Drilling For Oil In The Stock Market

Oil analyst Daniel Yergin’s book The Prize has been described as “the canonical history of the oil industry.” As a value investor, the part I found most interesting was the section on the 1980s oil price slump, when many oil companies traded for less than the value of the untapped oil and gas they owned underground.

In Yergin’s words, both oil companies and outside investors eventually realized it was ‘cheaper to “explore for oil on the floor of the New York Stock Exchange”—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico.’ Once investors realized this, they bought up oil company shares, causing them to rise to a price that better reflected the value of the companies’ underlying assets. Since value investing is all about buying a company’s stock for less than its underlying value, this story was unsurprisingly appealing to me.

Despite their recent decline, oil companies’ shares have not fallen by as much as they did in the 1980s. However, they have fallen by enough that it’s worth comparing companies’ share prices to the value of their reserves...(Read More)