David is a deep-value guy, and he turns up some real gems. Below, he reveals one of his favorite ideas right now. The company has a big catalyst in place for 2014. Trades at $7 per share, pays 10% and is worth 50% more than the current price. I’m sure you haven’t heard of it, either.
When I talked with David, he was eagerly waiting on a press release. He owned Petrominerales, a Colombian oil producer. The exchange halted trading in the stock, pending news…
David expected to hear news that Pacific Rubiales had bought Petro. And indeed, that is what happened. Pacific paid $11 per share, which led to a 50% increase in the stock price — handing David and his Livermore Partners a nice gain.
Greenblatt was an eccentric character with a volatile temper, but really smart and successful… David was the friendly face.
David founded Livermore Partners about four years ago… And how it came about is a fascinating little tale in itself.
“My first real job was working for the Chicago Stock Exchange on the regulatory side,” David said.
“I got to know the traders on the floor… and these guys seemed to be making a lot of money.”
One guy made a lot of money shorting (or betting against) LTV Steel, which ultimately went bankrupt. In fact, he shorted more shares than existed, a trick that led to a battle with the Chicago Stock Exchange, and one he ultimately won. His name was Leon “Chip” Greenblatt.
As a Chicago Tribune story from 2010 reported:
Leon “Chip” Greenblatt III became a cult hero among traders years ago when he stood up to the Chicago Stock Exchange in a battle over his unorthodox strategy of selling more shares than existed in a bankrupt steel company… Greenblatt’s Scattered Corp. kept selling stock and buying warrants until it had traded at least 170 million shares, millions more than existed.
His firm made $27 million in 22 trading days.
Greenblatt was an eccentric character with a volatile temper, but really smart and successful. David knew their floor broker and asked for an introduction. He got it and met Leon for a drink at a bar called Jesse Livermore’s.
This was when Leon was still fighting with the exchange. David would go on to work for him, staying with him for seven years. He became Leon’s right-hand man. “Leon could be somewhat difficult when people met him,” David said. “He was ruthless.” David was the friendly face.
“I managed the portfolio and implemented a number of public and private deals with him and did very well,” David says. The focus was deep value, arbitrage and special situations. At the time, banks were depressed. “We took 9.9% positions in banks and pushed them to sell,” David recalled. After a good run and strong returns, David left Greenblatt’s firm in 2001 when he was 31 years old.
David has nothing but respect for Greenblatt, but he wanted to try out his own theories about markets. So he became a trader and member of the Chicago Mercantile Exchange. He traded oil and wheat and became one of the more respected traders in these commodities. That lasted until 2009.
Then he started Livermore Partners. He named it after the bar where he met Leon Greenblatt, a meeting that had a great impact on all that was to follow. But he also named it after the famous trader Jesse Livermore, depicted in Edwin Lefevre’s classic Reminiscences of a Stock Operator.
“It was one of the first investment books I read,” David said. “It was unbelievable. I read it several times. Leon gave me the book, and I really did follow it. I’ve given the book to some younger guys now, including clients. It’s 90 years old, but you have to embrace it because though times change the markets remain the same.”
Livermore met a bad end, as David knows. “There was not a good ending for Jesse Livermore. He was depressed and killed himself even though his net worth was over $50 million in today’s dollars. I wouldn’t necessarily call that an uplifting success story. But he was a phenomenal trader. I think he is one of the greatest traders that ever lived.”
At Livermore Partners, David focused on stocks. What he did at that point, because he didn’t have lots of money to invest, was source opportunities for clients — usually high-net worth individuals, private equity firms and hedge funds.
“I had lots of ideas, but not much capital,” David explained. “So this was a way to bridge that gap between finding opportunities and putting large pools of capital to work.”
Eventually, he decided to raise money within Livermore and invest in deep value and special situations. This year is the first full year of Livermore as only an asset manager. The firm now has about $100 million in assets under management, a bantamweight in the investment world, but it hits well above its weight. Livermore has tangled with heavyweight Occidental Petroleum… and won.
“With oil giant OXY,” David said, “we helped remove an egregious chairman so the current CEO could look to unlock the company’s undiscovered value.”
Livermore has been active in energy. It pushed another company, TriOil (TOL.V), into a sales process. That was a success as well, as TriOil announced a sale to a Polish oil company for $185 million. Livermore owned nearly 2% of TriOil. And then there is Petrominerales, which I mentioned up top.
These gains came from David’s deep-value, event-driven investing style, where Livermore Partners often takes on the role of an activist. Meaning it will take a “hands on” approach with the management teams it invests with. “This is not to say we look for fights and agitate change in every instance,” David said, “but sometimes it is a necessary tool.” Livermore will pursue both public and private opportunities.
David shared a couple of high-conviction ideas – here’s an oily one…
Zargon Oil & Gas (ZAR.TO, ZARFF) is a small Canadian energy company. “The name sounds like a Star Trek character more than anything else,” David quips. Zargon focuses on oil production from existing oil pools using alkaline-surfactant-polymer (“ASP”) tertiary recovery technology, waterfloods and other methods.
“It’s a company not many people know about,” David explained. “I met CEO Craig Hansen a year ago. Zargon seemed like it had a lot of value, but the Street didn’t believe it. In fact, the Street hated it.”
Zargon has a project called Little Bow, which is an ASP project. Zargon decided to start this project at a bad time. It would cost $100 million, and Zargon would not see its first oil until 2014. This was during a time when cash flow was waning. Then Zargon did the unpardonable for an income play — it cut its dividend.
So the price of the units dropped to C$7.80 or so, and Livermore started to buy. It then traded below C$7 and Livermore bought even more.
“It’s now trading below NAV,” David explained. “Meaning if it had to sell, you’d get at least C$7 per unit.” At the same time, the company has poured $60 million into Little Bow — which has $2 per share in hidden value.
“Our average cost is now C$6.75, which doesn’t include the distributions received,” David said. “We’ve owned it for nine months. The monthly dividend is 6 cents. It’s sustainable at this point… Zargon could easily trade back to the C$10–12 range.”
Why?
“Little Bow is almost fully paid for,” David continued. “The first oil comes next year, which will only be a couple hundred barrels per day. But the difference with ASP versus other projects is that this is essentially no-decline oil. It has a very long life. Just this one project — at several thousand barrels per day [when it reaches full production] and with no decline — is a revenue and income stream that would be second to none and very attractive to an acquirer who needs that type of profile.”
As David sees it, there are a couple of options: Sell Zargon to another oil company and get the 50% bump to NAV. Or start a second ASP project — if it is working well and the market is open to it.
David points out that there are eight or nine ASP projects in Canada. Husky has one and would be a natural buyer. “Zargon is a deep-value play that is close to actually seeing that value realized. And meanwhile, we get a 10% yield. It has very low downside.”
He notes that the shares are tightly held. Livermore owns a few percent. Craig, the CEO, owns about 5% personally and has been a buyer along with other Board members of Zargon.
So there you go.
This company is fully “under the radar,” David said. “I don’t see any way to get hurt. These are the kinds of situations I love: very low-risk and high-reward.”
This article was originally featured on Daily Reckoning on 11/13/2013