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.
Eriksen had some interesting thoughts about small cap investing in the pre-conference workshop, and has a very solid record with his small fund… the last two ideas he has profiled at the Congress over the last 18 months or so, Internet Bancorp (INBK) and Awilco Drilling, have not done all that well recently, but did look better for a while (I don’t know if he still owns those) … so… what is he going to talk about today?
He is a small cap guy — looking for stuff that larger institutions can’t get interested in, microcaps and unlisted stocks and the like. He focuses on free cash flow, not on earnings or other more easily manipulated stuff.
The “ick” reference is a quote from Michael Burry — “taking a special analytical interest in stocks that inspire a first reaction of ‘ick.'”
His “ick” — small stock, in oil, trades in Canada, 5X book, cut dividend, has to partner with local operators, in a third world country, has to shut down production a third of the time, and a quarter of their production is stolen.
The stock is Mart Resources (MMT.TO, MAUXF on the pink sheets), market cap $400 million, after the dividend cut the yield is 6%.
Past the “ick”?
The dividend cut was to invest in opportunities. They have high quality assets (that’s why they trade at a high price/book), their oil production curve is incredibly flat — long lived, low cost production ($43/boe operating cost, including depletion).
Cost includes theft, royalties, etc. — where are they? Nigeria, in the delta, where physical risk is lower but headline risk is certainly high.
Royalties are high, which discouraged small projects, so Nigeria created a system for “marginal fields” that gives better rates for folks partnered with local companies.
Their initial well came online six years ago at 2,400 bopd, it’s still producting at 2,000 bopd now — unheard of for folks used to shale production declines.
Catalysts:
New pipeline in September, should cut theft from 25% to 10%… which effectively means production increases by 20% at no extra cost (they’re already paying for producing the stolen oil). Pretax income should rise by more than 20% — he estimates ...