“Ignore the Noise — Focus on Priorities” — Cliff Remily, Northwest Priority Capital

Notes from the Value Investing Congress

By Travis Johnson, Stock Gumshoe, September 9, 2014

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Remily was one of the folks who built up the equity business at PIMCO, and he now has his own business called Northwest Priority Capital as a long biased global equity fund.

Different kinds of value — deep value (discount to conservative estimates), basic value (out fo favor, cuclical, uncertain), Compounding value (Wide and sustainable moat) and Emerging value (companies in the early stages of building a moat that giving “promise at a discount”).

His idea: Subsea 7 (SUBC in Norway, SUBCY OTC ADR), which is not levered compared to the business but is still cheap relative to broad markets and to the energy sector.

$6 billion market cap.

Subsea business: They are the “plumbers” to the deepwater industry — design, install, maintain and provide subsea infrastructure to bring oil and gas back to the surface.

Technically difficult and specialized, work with the operator and driller. Have to install, maintain, then decommission.

Equipment – $4.6 billion for design and build of systems
Life of field — $800 million for maintenance, survey, repair, upgrades
Conventional/shallow — $730 million. Lower margin, more competition.
I-Tech — unmammed robotics — $220 million, a lot of this is in Brazil. Also moving into North Sea, but a small market.

The industry is cyclical but attractive. Underlying secular growth, high barriers to entry (oligopoly), their peers are rational.

They have good fundamentals, insider ownership and good balance sheet and attractive valuation.

Trend: Subsea capex spending is increasing — North sea spending has slowed but is not gone (people have said the North Sea is mature and you shouldn’t buy there for ten years, they’ve been wrong). People are still drilling offshore despite the shale revolution.

Beaore of the “noise” of the bear argument that E&P capex is under pressure and they’re facing margin pressure. So you should sell all service-related offshore businesses.

“This argument is presented regularly and yet actual spending always seems to surprise (on the upside) while product targets generally disappoint.”

The company has taken a hit on their share price, but has financial strength to get through tough periods. They have backlog of about 2X annual sales, debt is equal to EBTIDA.

Decent business, decent industry, ...

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