3rd Quarter 2020 Letter

Here is the link for the 3rd Quarter 2020 Letter from GB Investments!

Largest Refiner in US available for very attractive price! - Marathon Petroleum

Marathon Petroleum Corporation (NYSE: MPC)

 

Highlights:

•  MPC owns a stable midstream pipelines business which generates excellent cash flows, with more than 16% dividend yield.
• Recent sale transaction of Speedway brings in $16.5B cash in net of taxes.
• Remainder of the holding company, MPC’s refineries and storage and pipelines, are selling in the market for less than $2B, which generated more than $2B in operating earnings.

Business Introduction:

Marathon Petroleum is one of the largest refiners of petroleum products in US. It owns and controls one of the largest pipelines companies (MPLX) and it used to own the retail chain ‘Speedway’, which just got sold to 7-Eleven.

Refinery Operation:

MPC currently owns and operates 16 refineries in the Gulf Coast, Mid-Continent and West Coast regions of the United States with an aggregate crude oil refining capacity of 3 million barrels per day. This division produced more than $2.3B in annual operating earnings in 2018 and 2019.

Mid-Stream Pipelines:

Along with their own storage and pipelines, the Midstream segment also consists of MPLX LP (“MPLX”). MPLX is a diversified, large-cap master limited partnership (“MLP”) formed in 2012 that owns and operates midstream energy infrastructure and logistics assets, and provides fuels distribution services. MPLX owns more than 17,000 miles of pipelines and more than 33M barrels of storage capacity. This division produced $3.6B in operating earnings for 2019. MPC owns approximately 63% of the outstanding MPLX common units. MPC received $1.82B in dividends from MPLX in 2019.

Speedway Retail:

This is the marketing/retail end of the operation which got sold to 7-Eleven for $21.5B and expect to receive $16.5B in After tax proceeds.

Conservative balance sheet:

Cash: ~$1B, Total debt (Q2 2020): $10.6B

Cash proceeds from Speedway Sale: $16.5B, Net Cash: ~$7B

Operating Earnings of refinery and Midstream: ~$4.6B

Interest: $400M; Interest Coverage: 11 times

Net Income: $2.6B

 

Here is a snapshot of historical consolidated financial data from the 2019 Annual report:

                                                                                    

 The company generated more than $13B in cumulative after-tax profits in the last five years as stated above.

Valuation:

Stock Price: $31/share; Market Cap: $20.3B (9/11/20); Debt: $10.6B; Cash: $17.6B; Enterprise Value: $13.3B

P/E: 7.7; EV/EBITDA: 2.25

MPLX market value of 63% @ 18/share: $11.4B

Refinery operation: Valued at $2B based on the above.

When adjusted for net cash and MPLX ownership position, we are paying 1 times operating earnings for one of the largest refiners in the America.

Catalysts:

·         Cash inflows from the sale of Speedway, debt payback and cash distribution to shareholders.

·         Some form of normalcy in the derived petroleum products and hence the crack spread and usage of pipelines flow.

·         Activist fund Elliott management has been pushing management to increase the value of the company, who was also behind the sale/separation of Speedway.

·         Attractive valuation relative to their assets and cash flows.

Risks:

·         General economic downturn may hinder the growth of the business as the refinery business is cyclical, especially given the Covid-19 crisis now.

·         If it takes longer to return to some normalcy, then large losses at refineries may erode the safety of net cash position.

Summary:

·         Stable business through the ownership of pipelines combined with cyclical refinery operation.

·         Net Cash business during the downturn to survive and thrive.

·         Priced very attractive relative to the current and future potential profits.

 

Disclosure: I own a significant position in shares of MPC.

European Fixed and Mobile Convergence Champion - Liberty Global

Liberty Global Presentation by Gopinath Bala on Scribd

Hotel Franchisor business for almost free??

Red Lion Hotels Corporation (NYSE: RLH)

RLH is a hotel owner/operator and a franchisor of several brands (Hotel RL, Red Lion Hotels, Red Lion Inn & Suites, GuestHouse, Settle Inn, America’s Best Value Inn, Canada’s Best Value Inn, Signature and Signature Inn, Knights Inn, and Country Hearth Inns & Suites) in the economy/midscale categories in US and Canada. Franchised operations consist of 1,056 hotels with an approximate room count of 67,000 and 4 hotels owned/leased/operated are in various stages of sales. Over the last few years, the company has transitioned from owning/managing hotel operations to primarily hotel franchising.

Owned Hotels:

Hotel RL Baltimore Inner Harbor:

Located in Baltimore, Maryland; has 130 rooms. No debt associated. Operated by a third party management company and listed for sale.

Hotel RL Olympia:

55% owned via RL venture. Located in Olympia, Washington; has 193 rooms. Operated by a third party management company. $5.6M debt associated with this property. It is in the process of marketing to sell.

Red Lion Hotel Kalispell:

Located in Kalispell, Montana; has 170 rooms. No debt associated. Land leased and operated by Red Lion.

Red Lion Hotel Seattle Airport:

Located in Seattle, Washington; has 144 rooms. No debt associated. Land leased by Red Lion and operated by a third party management company.

Recently Sold:

Hotel RL Washington DC:

Recently sold, debt associated with this property is gone.

Red Lion Anaheim:

Red Lion Anaheim, CA was sold for proceeds of $21.65M on March 2, 2020.

http://ir.redlion.com/news-releases/news-release-details/rlh-completes-sale-red-lion-hotel-anaheim-215-million

Franchising Business:

Franchising business economics are wonderful for the franchisors to operate since the franchisees are putting up capital and execution to run the hotels day and night. Red Lion Hotels (Franchisor) collects the royalties (around 5% of gross sales) as it provides the brands to these hotel owners/franchisees. Red Lion Hotels also help them with marketing and technological implementation for a separate fee. This business can grow and produce more cash flows every year without adding any capital from Red Lion. No wonder all these large hotel chains are focusing more and more on franchising segment rather than owning and operating hotels. One can see the economics of franchised hotels segment compared to the company operated hotels below.

Business Segment Financials:

Snapshot of owned properties from the recent annual letter:

Debt Profile:

All the current debt associated with Hotel RL Washington DC is eliminated after the recent sale of the hotel.  Here is an excerpt from the annual letter,

“On February 7, 2020, we sold the Hotel RL Washington DC for $16.4 million. Using proceeds from the sale, together with the release of $2.3 million in a loan reserve held by CP Business Finance I, LP, RLH DC repaid the remaining outstanding principal balance and accrued exit fee under the RLH DC Venture - CPBF loan agreement of $17.7 million, plus a prepayment penalty of $0.6 million.”

Line of credit of $10M will be paid from the proceeds of sales of Red Lion, Anaheim. Here is the excerpt from the sale disclosure:

“Red Lion Hotel Anaheim was wholly owned by the Company and unencumbered by a mortgage.  Proceeds after broker fees and customary closing costs will be used to repay the $10 million credit facility. The remaining funds of $10.8 million will be used to fund franchise growth opportunities and for general business purposes.”

The only debt outstanding for the company is $5.6M associated with the ‘RL Venture - Olympia’ property which is currently being marketed for sale.

Valuation:

Owned Hotel segment:

After the sale of Red Lion Anaheim, they will have 4 hotels/650 rooms in ownership (including pro-rata for 55% ownership RL venture Olympia). Even at the conservative level of $40k - $50k/room (recent sales prices per room have been higher than that) can be worth $30M.

Franchising segment:

This segment produced sales of $59M, EBITDA of $18M and pre-tax cash flow of $16M. This asset light/debt free business and a perpetual royalty type income converts large amount of EBIDTA to Free cash flow. Even on the conservative side, 10 times multiple of EBITDA will command $180M valuation for this segment.

Net cash:

After the sale proceeds of Red Lion Anaheim, the company will have more than $42M in cash balance against $5.6M in total debt, which puts the net cash at $36M.

Simply adding it together will bring about a valuation of $246M against the current $60M market cap or an Enterprise value of $24M (not counting the unsold hotels) against my conservative valuation of more than $212M. If my assumption about the remaining hotel sales is close to the reality, we are getting the franchising business for better than free as the remaining company will have more cash than the market cap.

Risks:

• Due the recent Corona virus epidemic, the hotel room occupancy and total sales can be down for many months to few years to come. It affects the royalty incomes proportionately.
• The business is seasonal within the year; quarterly income may not represent the full year reality as the room rates and occupancy vary substantially among 4 quarters.
• The market may be late to realize the value, although I don’t see how that could be the case given their cash balance relative to their market cap.
• The company may get acquired by someone/entity for a cheap valuation and we don’t get the full value for our ownership. I would definitely reject any such offers in my capacity as a shareholder even if I have to use legal measures.

Large Shareholders:

•         Coliseum Capital Management LLC – 17.25%
•          Dimensional Fund Advisors, Inc. – 8.18%
•          BlackRock Inc – 6.86%
•          Price Michael – 4.98%
•          Royce & Associates, LP – 4.13%

Most of the above shareholders are value oriented, fundamental business owners in their investment vehicles. They have bought the company’s shares at over $8/share against the current $2.4/share.

Summary:

The company is profitable, substantial net cash in the balance sheet (relative to the market cap) and available at very attractive valuation. There are very few businesses in the world such as franchising that have the ability to grow cash flows without putting additional capital at risk. There were 25,208,983 shares of common stock outstanding as of most recent quarter (4^th Q 2019). The common stocks are trading for ~ $2.4/share or $60M in market cap or less than $24M enterprise value. For this, you get a hotel franchisor with 1056 hotels/67,000 rooms and 4 owned hotels/650 rooms. This is a very attractive opportunity for any investor. In other words, the company may be selling for less than 1 times of pre-tax earnings of a hotel franchisor with 1056 hotels and 67,000 rooms. In the next few years, the company’s enterprise value could be worth more than 10 times of its current price.

Disclosure: I own shares of this company.