Professional Documents
Culture Documents
Bob Robotti
President & CEO April 8, 2014
Disclaimer
The Firm is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of the firms investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein. As of the date of this presentation the firm continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Robotti & Company Advisors, LLC or its affiliates may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and the firm does not undertake any obligation to update them. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Robotti & Company Advisors, LLC does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions.
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Analytical Edge
Within the context of a longer-term perspective and 30+ years of experience, we have the ability to develop a different conclusion than that of the market.
Informational Edge
Our network of industry relationships, focus on deep primary research, and experience serving on company boards, provides us with more pieces for building our information mosaic.
Our behavioral edge comes from our ability to tolerate losing money before we make it. As a result, our investment process concentrates on understanding the long-term normalized earning power of a business well before the herd, in this case the market, gains interest.
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Valuation
Ideal
Quality
High
In theory there is no difference between theory and practice. In - Yogi Berra practice there is.
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A high quality or good business is one that can earn above average returns on capital over a sustained period of time.
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Economics 101
In a competitive economy, firms that earn above-average returns will quickly attract competition.
Competitors emerge and attempt to compete even more efficiently and/or effectively. This places downward pressure on returns.
As new competitors continue to enter, demand becomes spread among more participants. Average costs will rise as fixed costs are spread over fewer units sold.
Prices fall until returns on capital are driven to a level at or below the cost of capital and economic profits disappear (setting the stage for industry restructuring).
Rivalry of Competitors
Rivalry of Competitors
Source: How Competitive Forces Shape Strategy, Harvard Business Review, Michael Porter
Valuation
Warren Buffett
Ideal High
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Quality
Demand Advantages:
Economies of Scale:
Advantage exists if average Size - but it is important to cost per unit declines as the remember that pure size firm produces more, leaving alone is not the same thing smaller competitors unable to as economies of scale. compete
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OB:SUBC
110.40 NOK / $18.42 USD
(as of 4/4/2013)
CASE STUDY
Subsea 7 SA (OB:SUBC)
Investment Summary
Subsea 7 is a global leader in subsea engineering & construction - a niche industry with a sustainable competitive advantage. It is the only pure-play among the 3 dominant competitors in an industry with the dynamics to create a runway for significant growth. Subsea 7 maintains a solid balance sheet and leadership interests are aligned with shareholders. The company has a record backlog indicating the potential for strong growth, yet still trades at a modest multiple of earnings.
Market Capitalization
(USD mm as of 4/4/14)
Price Shares Market Cap Long-Term Debt Minority Interest Cash Enterprise Value
Valuation Summary
FY 12/31
Trading Summary
52 Week High / Low: Avg Daily Volume: Listing Exchange:
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Business Description
Seabed-to-surface engineering, construction and contractor to the global offshore energy industry services
Capable of executing projects of all sizes and complexity in all water depths
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Industry Map
Oil Service Majors Baker Hughes, Halliburton, Schlumberger Reservoir Data CGG Veritas, TGS Nopec, Polarcus
Contract Drilling Atwood, Diamond Offshore, Ocean Rig, Rowan, Seadrill, Transocean
Other Equipment & Services Cal Dive Intl, Hornbeck Offshore, Oceaneering
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Industry Overview
EIPC: Engineering, Procurement, Installation and Commissioning Sapura Crest merged with Kencana in April 2012 and is now known as SapuraKencana Source: Subsea 7 September 2012 Company Presentation
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Deepwater Lifecycle
Investment Period
2 10 years
Exploration & Appraisal
Harvest Period
10 30 years
Subsea 7 Work
Production
1 5 years
Development
1 2 years
Decommission
Seismic Subsea Inspections Drill Wells Collect & Analyze Well Data ROV Support*
Reservoir Modeling Subsea Surveys TLP/Spar/FPSO Subsea Tie Back* Pipelines* Well Design Drill Developments FEED* Engineering* Fabricate Topsides Fabricate Pipelines* Heavy Lift Pipelay*
Production
Shut-In
Outsourced Labor Infrastructure Inspections & Maintenance Workovers Infill Drilling Platform Modification Life-of-Field*
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Inspection, maintenance, repair and integrity management of subsea infrastructure i-Tech (3.6%)
SURF (72.4%)
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Segments by Geography
Brazil
Africa, Gulf of Mexico & Mediterranean Asia Pacific & Middle East North Sea & Canada
Revenue by Geography: 850 people SURF 2,850 people SURF, LOF, Conventional/Hook-Up 270 people SURF and LOF 2,300 people SURF and LOF
APME (8.0%) Brazil (13.0%)
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Capital Allocation In 2012, Subsea 7 exited two non-core businesses: Sold stake in NKT Flexibles Spun-off VERIPOS as a dividend inkind to shareholders. In 2013 Subsea 7 authorized a $200 million share repurchase, of which $109 million was remaining at year end and paid a special dividend of $199 million. In 2012 the company repurchased $200 million of shares and paid $199 million of dividends. Interests are aligned - Siem Industries, which is controlled by Mr. Siem and other family members, owned 69.7 million shares of Subsea 7 or 19.8% of issued shares.
CEO of Subsea 7 since April 2008 Active in the offshore oil & gas industry Prior experience as COO and then President of Transocean Spent 21 years in various positions at Schlumberger
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In 2010, just 3 months after the merger between Subsea 7 and Acergy, Petrobras awarded the company a $1 billion contract for work in the Guara-Lula pre-salt region. In late 2011 it became apparent that Subsea 7 would not be able to gain the necessary permits to use the yard it had originally planned upon. This led to the announcement of a $50 million cost overrun. An additional $52 million write-down on the project occurred in Q4 2012. At the end of FY 2013 Subsea 7 announced an additional $49 million write-down, bringing the total full-life provision to $355 million.
While these issues are not insignificant, our discussions with management and primary research leads us to believe this is a contract specific event and not indicative of how other contracts that represent current and future revenue will progress.
Source: Subsea 7 conference call, Robotti & Company research 22
The ultra-deepwater engineering & construction industry does, however, have a limited number of incumbent competitors with a history of dominating the industry.
Source: Company Financials, Capital IQ, Robotti & Company Calculations 24
Supply Advantage
Demand Advantage
The tangible and intangible costs of searching for someone who can complete a major ultradeepwater project at or above the standard of the big three are very high.
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Deepwater Production
Declining production of international oil companies drive demand for oil services Deepwater represents the greatest opportunity to replenish major oil & gas reserves Also presents greater technical challenges and increased overall complexity
Average Deepwater Well Depth (ft)
12000 10000 8000 6000 4000 2000 0
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Saipem - Subsea
Source: Company Filings
Technip - Offshore
Subsea 7
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2014
2015
2016
2017 - 2022
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Over $10 billion of contract awards expected over the next 18 months 2 Worldwide offshore rig count is expected to increase over 50% between 2012 - 2015 3
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FMC Technologies Presentation, Quest Offshore Resources, May 2013 Robotti & Company Research 3 IHS-Petrodata, Barclays Research
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EPS
EV/ EBITDA FY 2013 Price / Earnings FY 2014E Price / Earnings
0.99 6.44
Company reports diluted shares assuming conversion of all convertible bonds regardless of current share price. Diluted shares adjusted for 2017 convertible bonds with a conversion price of $29.31 as of 12/31/2013. LT Debt adjusted for convertible bonds with a conversion price of $15.82 as of 12/31/2013.
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Source: Company Financials, Capital IQ, Robotti & Company Advisor Calculations, All in USD
Earnings Summary
(USD mm)
Revenue growth Gross Profit gross margin Adjusted EBITDA ebitda margin Operating Income operating margin Gain on Disposal of Subsidiary Net Income Adjusted EPS Diluted EPS Diluted Shares
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2011 5,476.5
2012 6,296.6 15.0% 1,095.0 17.4% 1,139.0 18.1% 808.2 12.8% (243.6) 847.2 $1.59 $2.23 380.2
2013 6,297.1 (0.0%) 742.2 22.0% 981.0 15.6% 573.4 9.1% 349.9 $0.99 $0.99 350.8 1
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946.4 17.3% 1,003.0 18.3% 640.5 11.7% 450.7 $1.23 $1.23 366.3
Company reports diluted shares assuming conversion of all convertible bonds regardless of current share price. Diluted shares adjusted for 2017 convertible bonds with a conversion price of $29.31 as of 12/31/2013. LT Debt adjusted for convertible bonds with a conversion price of $15.82 as of 12/31/2013. Source: Company Financials / Capital IQ
Revenue (USD) 9,500 10,000 10,500 11,000 1,050 1,125 1,200 1,275 1,190 1,275 1,360 1,445 1,330 1,425 1,520 1,615 1,470 1,575 1,680 1,785 1,610 1,725 1,840 1,955 1,750 1,875 2,000 2,125 Implied Margin of Safety
Revenue (USD) 6,600 13.2% 28.4% 43.6% 58.7% 73.9% 6,800 21.4% 37.6% 53.8% 70.1% 86.3% 7,000 29.5% 46.8% 64.1% 81.5% 7,200 37.6% 56.0% 74.4% 92.8%
15% $17.86 $19.36 $20.86 $22.35 $23.85 $25.35 17% $20.26 $21.95 $23.65 $25.35 $27.04 $28.74 19% $22.65 $24.55 $26.44 $28.34 $30.23 $32.13 21% $25.05 $27.14 $29.24 $31.33 $33.43 $35.52 23% $27.44 $29.74 $32.03 $34.32 $36.62 $38.91 25% $29.84 $32.33 $34.82 $37.32 $39.81 $42.31
98.8% 111.3%
Robert Robotti and/or members of his household has a financial interest in the following securities Robotti & Company or its affiliates beneficially own common equity of the following securities Robotti & Company or its affiliates beneficially own 1% or more of any class of common equity of the following securities Robert Robotti serves as a Director or Officer or Advisory Board Member of the following securities
Yes
Yes
Yes
No
As of the date of this presentation, Robotti & Company Advisors, LLC and/or its affiliates owns shares of Subsea 7 and does not have any current intention to exit this position. Companies have been chosen solely as a case study to illustrate the investment process and approach of Robotti & Company Advisors, LLC. This information should not be interpreted as a performance record or as an indication of future performance results.
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