David Neuhauser is the Founder and Managing Director of Livermore Partners. Illinois Livermore is a private alternative investment manager servicing Institutions, high-net worth clientele and highly-regarded private equity sponsors.

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David Neuhauser is the Founder and Managing Director of Livermore Partners. Based in the Chicago suburb of Northbrook, Illinois Livermore is a private alternative investment manager servicing Institutions, high-net worth clientele and highly-regarded private equity sponsors. David has over 20 years of experience in the investment industry with experience in the field of capital markets, strategy, business development, acquisition and divestitures, and corporate mergers. He was a longtime member of the CME Group (NYSE:CME) as well as the National Futures Association and founded Loren Holdings in 1998, while he was still responsible for portfolio and investment strategies for financier Leon A. Greenblatt III. Prior to founding Livermore, David was President of Loren Holdings Incorporated, focusing on strategic investments across a broad group of industries including Energy(Oil & Gas), Industrial manufacturing, and Financial services. He received his B.A. with concentrations in Economics from Northeastern Illinois University and has conducted Graduate studies in Economics and Sociology from Roosevelt University of Chicago. At September 30th, Livermore Strategic Opportunities LP ended the Q with a gain of 18% adding to a gain of 68% for the first half of 2016.

VW: To start off, can you tell us a bit about Livermore Partners and the team working at the partnership?

DN: Livermore Partners is an alternative investment manager servicing high-net worth individuals and institutional investors. We manage under $100 million AUM and are located in the north suburbs of Chicago. We invest using a deep-value opportunistic approach and work diligently to help extract value in portfolio companies through our event-driven hedge fund. We employ strategies such as shareholder activism and arbitrage. The former truly involves articulating change. Which can affect both short and long term shareholder value.

DN: Livermore Partners is an alternative investment manager servicing high-net worth individuals and institutional investors. We manage under $100 million AUM and are located in the north suburbs of Chicago. We invest using a deep-value opportunistic approach and work diligently to help extract value in portfolio companies through our event-driven hedge fund. We employ strategies such as shareholder activism and arbitrage. The former truly involves articulating change. Which can affect both short and long term shareholder value.

The team is essentially me and a small support staff, which helps model and define our investments. As we grow, I envision Livermore increasing the team, but not in a big way. The key to success is to limit layers and be seamless in our approach. Too many “cooks in the kitchen” hold back good decision-making and progress. We are methodical in approach, though when it’s time to act, one needs to be swift and certain. Especially in this ever-changed market.

VW: What do you think makes Livermore stand out from the crowd?                                                                                

DN: Our contrarian and alternative approach. Given we don’t employ a cookie-cutter investment portfolio. Our goals and mandate stress value, not price. So, we are in no way momentum or technically driven though you always need to respect the markets. In free markets, not ones manipulated or distorted by central bank policy, there is plenty of volatility and opportunities to locate unique situations to invest in. Or even short. Sometimes investors are just too bearish and metric-driven to accurately determine not just the potential equity value of a company, but the path forward. This stood out in late 2015 as Livermore acquired a stake in commodity trader Glencore PLC, and publicly stated the shares are undervalued. You rarely see that today with hedge fund managers. Most shy away of making public calls on positions or the markets. So, this was one specific example that Livermore pressed forward. Today, Glencore has increased more than three times since our initial first investment of 70p to now 250p. But at this time, we continue to shave down the position and lock in profits. Future upside may exist, but the easy money is gone. As a hedge fund, our job is to make money not squeeze out every last dollar out. So we have moved profits elsewhere.

VW: Livermore’s year-to-date performance is nothing short of outstanding with a return of 80% for partners. If you had to pick one trait or part of your investment process that you believe is the main contributor to the stellar returns, what would you highlight

DN: Being contrarian and focusing on what the market could be missing. Or where we can step in and alter the current path. A large portion of our gains have been in commodities. Especially our Mitra Energy (MTE.V) where Livermore and other larger hedge funds (Tyrus Capital and West Face Capital), helped adjust the Board, the management, and even the balance sheet. The equity has now nearly doubled, and it’s one we feel has much more upside. It may even be a better investment today given our $68 million capital raise and recent acquisition of the Stag oilfield. Which presents strong cash flows and no debt for Mitra. Not many oil companies can state that. Livermore even increased our investment in the company on this raise and we continue to support the new management. The shares remain very attractive and undervalued. VW: Could you walk us through your investment process, how do you find investments for Livermore’s portfolio? DN: We screen many names and have unique ways to locate opportunities. I don’t divulge proprietary research methods. Though we have a strong network of advisors. Including solid private equity relationships. So we see many interesting situations and opportunities within our focus.

VW: What kind of metrics do you use to try and establish if a particular investment is attractively priced? What sort of discount are you looking for?                                                                                                                                                  

DN: We look for a discount of 30% of a company’s intrinsic value. And use P/B, P/E, FCF yield, and other metrics to determine value. There are many ways to look at value so you must understand the current opportunity and what you expect to occur. Metrics alone are not enough. Just look at companies such as Amazon (AMZN) or Deutsche Bank (DB). One could have argued AMZN was always overpriced. With DB, many have viewed it as deep value. Given its discount to book. In both cases, the market has been wrong.

VW: Would you mind sharing some of your current holdings or perhaps your highest conviction idea?

DN: Livermore owns a number of positions. Appx 15. Our publicly disclosed positions have been an activist stake in London listed Entertainment One (ETO.L) and a short position in Corrections Corp of America (CXW). Which we profited in Q3 and since covered with a 20 percent gain. One needs to be nimble with shorts. Pigs get slaughtered. We do still own ETO and that has helped propel our year given its now 50% higher since our initial investment back in January.

Our best short idea in 2015 was Valeant (VRX). Which we again publicly called out as a broken business model and shorted all the way down. We covered in the mid $20’s after first shorting at $100. In fact, our interview on Canada’s business channel BNN back in November 2015 disclosed our Long Glencore/Short Valeant trade. I wish all our ideas worked out this way. It has been amazing and I’m just grateful they both worked out so well and we profited.

VW: You mention your idea Icahn-ism in your writings to investors a fair bit. What is Icahn-ism and how does it feature in your investing?

DN: Icahn-ism): noun. Pronounced, I-Khan-ism (Definition: Survival of a warrior species that looks to create value left by misguided management that lack vision and strong Board oversight) It was simply a play on Darwinism. I came up with the term. Given activism was receiving much negative attention. In reality, it’s required in many situations to help increase shareholder value. I see the small cap space deserving of activism. Carl Icahn, to me, is the greatest investor of our time and one I look up to. He represents all that is right with seeking change and creating value. Where others don’t see it or lack the courage to take on management or an entrenched board. I want Livermore to take the baton and focus our efforts on ways to gain a strong return via activism. For many years to come.

VW: Do you think activist investing will benefit or lose out from the rise of passive investing?

DN: It has lost out on the hot investor money, but it’s not a short game anyway. Activism takes time especially operational activism when you alter the management or change the strategy, which we did at Mitra and it is working very well. Passive investing is good for some but not the way to really make strong returns. You are just riding the economy and wave of others. With activist investing, and where you have a specific focus, there is a path to profit in many ways and in many different type of markets. Activism is not dead. It is just not a commodity. You must have the skill-set and aptitude to make changes that others don’t see and go up against management teams that now have the resources in place to fight off a threat. My view is that it’s very healthy to have activist investors and Livermore is gaining much respect in the market. I am hopeful we can continue to be a real force for change. And build shareholder value for all investors.

VW: Do you tend to run a concentrated or diversified portfolio?

DN: We run a mostly concentrated portfolio. Given how many companies can one really follow at one time. If you have great ideas, why would you invest in other companies that don’t offer the same dynamic or opportunity or where you are not as focused and engaged? We want to put our money where we are working very diligently for partners and have a clear path.

VW: You have several decades of experience investing, what has been the most valuable lesson you’ve learned over the years? DN:

DN: Always focus on the downside. That’s a true lesson. Even though a company may look cheap there are reasons for it. Know your downside and have a plan. Additionally, cut losses quickly. I am still learning this and easier said than done especially when you are deeply involved it’s hard to turn and sell it. Though we continue to focus on what needs to happen within a specific time-frame. Five months to five years is fine for hold time, but there must be a risk tolerance and plan to exit if things are just not working.

VW: What’s been your greatest mistake and what did you take away from the experience?

DN: I’ve made many mistakes. It’s the most humbling part of this business. They will always occur. But as you grow older, you can determine mistakes faster. My greatest mistake was acquiring a stake in a small energy company back in the early 2000’s. It had big value and tremendous opportunity, but weak management — the founder was the CEO. I held a large personal investment and lost most of it. Due to mismanagement and lack of a plan. It still bothers me today but I am a better investor because of it. So, value is not the only factor when sizing up an opportunity. You must be proactive. Know the exit and give yourself a timeline. I am hopeful to not make the same mistake again.

 

IV Livermore’s Stock Highlight

VW: One small cap you like is Jadestone Energy Inc. What do you like about this business in particular?

DN: When we first took a position in Jadestone, we saw an opportunity to transform the company by replacing the management and board and using the business to acquire depressed operating assets others must sell to de-lever their balance sheets and focus on core basins. Producing assets (not exploration) with real cash flows and deep value. We feel that we’ve made excellent progress on this. New management has been brought in, and the company has been transformed. New Jadestone is built on an “acquire and exploit” strategy not unfamiliar to some domestic E&P companies, whereby bringing operating capability and new capital to under-invested assets (or assets in the hands of super-majors for whom materiality in future activity is a concern to them), can add significant incremental value. The difference with New Jadestone, compared to North American plays is that the company is focused on Asia Pacific opportunity where the returns are on average two or three times better than North America (IHS Herold annual performance reports), where the competition is very limited and therefore purchase price is very modest (often assets are sold on bilateral deals – no competition), and finally where opportunity options are on the increase.

These characteristics make the thesis almost unique (compared with North America for example where the competitive bidding is intense. What’s more, product pricing is favorable in Asia. Oil is usually sold at premiums to Brent and domestic gas is contracted in the range $7.50 – $8.50/mcf)

VW: The company just completed a refinancing to acquire assets from Stag Oilfield, what’s your view on this acquisition and the financing deal?

DN: Jadestone secured $68 million of new financing, by way of a (nonbrokered) placing for C$53 million (c$40 million) at C$0.40/sh and a $28 million convertible debt facility from Tyrus Capital to contribute towards further acquisition opportunities. The convertible facility has a tenor of three years and carries a 7.5% coupon. The conversion price is C$0.50/sh. This additional financing will allow Jadestone to conclude the (previously announced) Stag asset acquisition, provide a LoC in respect of the Stag FSO and provide the capital to drill additional appraisal wells. The Stag asset adds production of 3,750bopd and will generate cash that could be deployed elsewhere for the development of the portfolio. There are some additional acquisitions also in the pipeline. As described above, New Jadestone is built around an acquire and exploit strategy. There is a growing number of M&A opportunities emerging with limited competition. Opportunities are increasingly being sold at distressed prices. The fundamental value proposition, however, is the reinvestment that follows M&A. We look for almost an order of magnitude of reinvestment potential compared to acquisition price which drives 3-6 times MOIC. As the portfolio builds the ratio of organic capital increases giving optionality, diversity, and control. After the completion of Stag, Jadestone is now aiming to complete the purchase of two appraised gas fields in Blocks 05-1b and 05-1c offshore Vietnam in the Nam Con Son basin in the next two months and bring them on stream in 2019, as well as further development of its existing assets in Vietnam’s Malay Basin with the Nam Du and U Minh gas fields.

VW: If everything goes to plan how much do you think the company could be worth? Do you have a bear and bull valuation?

DN: We feel Jadestone can be worth $2.00+ a share. Perhaps much more over time as the company continues to roll-up assets. Timing is tough to determine, but today even with our capital raise, the shares are very cheap. Trading at only $15,000 a flowing barrel and a discounted 0.30 net asset value per share with no debt, $20 million of cash on the balance sheet and plenty of development opportunities in the pipeline this is a very compelling opportunity where we believe the downside is limited. Catalysts to further upside will be closing the two current acquisitions, adding two or three new acquisitions currently being targeted, delivering production and cash flow stability for the company for the first time since inception. Also, recognition in the market that the strategy of new management is working and the value is being delivered, re-listing the stock on a more appropriate exchange, further delivered growth longer term.

VW: What do you think of the new management?

They’re very skilled and experienced. Each of the team has 15 to 30 years experience operating in the industry within the Asia Pacific region. The new team also has a longstanding relationship with the principal stakeholders and deep insight to many M&A opportunities. They’re credited with already creating one of the most successful independent E&P business in Asia Pacific, Talisman Energy, and we hope they can replicate this success at Jadestone.

VW: Are there any issues that could derail this thesis? Is the company highly sensitive to oil prices or is this a play on rising oil prices?

As Jadestone’s shares are already trading at a deep discount to the value of the company’s assets, we believe there’s a wide margin of safety here. The stock is not a direct play on oil but a play on management’s ability to buy distressed assets at attractive prices. Of course, as with all investments, there are risks; execution of the new management team, available opportunities, and of course financing risks but today the company has plenty of opportunities available to it and is fully funded. So, we see much more upside as long as the current environment holds. On the topic of energy prices, I should point out that as part of the Asia Pacific upstream strategy, approx. 50% to 70% of the reserves and production will be domestic gas the majority of which the majority is sold at long-term fixed prices with escalation clauses. This makes the business a natural hedge in a volatile price environment and takes away significant upstream investment risk.

As well as Jadestone, David likes BNK Petroleum Inc. another international oil and gas exploration and production company focused on finding and exploiting large, predominately unconventional oil and gas resource plays. The company owns and operates shale oil and gas properties and concessions in the United States, utilizing its technical and operational expertise to identify and acquire additional unconventional projects.

At the beginning of November, David was appointed to BNK’s board of directors with the sole goal of instigating change at the small-cap producer. Soon after Mr. Neuhauser’s appointment, BNK announced that its lenders had reaffirmed their commitment amount under the company’s credit facility at US$24.4 million pursuant to the semiannual review and redetermination of the borrowing base. The company only has $20.5 million outstanding of the $100 million facility giving David and his team plenty of firepower to grow the business.