Author Topic: PDER - Pardee Resources  (Read 60981 times)

ScottHall

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PDER - Pardee Resources
« on: November 11, 2014, 08:01:03 PM »
Hi folks,

I apologize in advance for the disjointed nature of this post. I had my wisdom teeth taken out yesterday and I'm high as a kite off the pain meds.

I've owned Pardee for a few years, and I know Tim Eriksen owned it at one point as well. It has underperformed the market since I purchased shares, but the underlying business is of a high quality and I have met the management team several times at their annual meetings in Philadelphia.

Pardee's main source of revenue comes from its natural resource assets. It owns hundreds of thousands of acres of land and mineral rights (2013 annual report not on hand at the moment, as I lent it to a coworker recently), primarily in the Central Appalachian region.

Rather than running their natural resource operations for themselves and taking all of the operational risk that goes along with that, however, Pardee just leases its properties out to others and collects royalty checks from the coal mines and oil gas wells on its properties.

This makes the company quite a cash cow, with very high levels of free cash flow that it generally deploys in acquiring additional assets and share repurchases.

One thing to note is that Pardee has spent the last several years ramping up its alternative energy business, which basically means they've been buying/building solar projects with long-term deals with relatively creditworthy institutions such as prisons and state universities.

The company doesn't really disclose much about that side of the business in its annual or quarterly reports, but the management team is quite friendly if you make the trek to Philadelphia for the annual meetings, and will tell you most of what you would be interested in knowing.

For example, I was curious about the sort of returns that the company was getting on its solar projects when compared to its royalty business (high teens over many years), but that information had not been disclosed in the annual reports at the time.

Management told me that they were targeting a 10% unlevered IRR on them generally, which it has bolstered by taking on non-recourse bank loans collateralized by the solar projects.

I have meant to write about these guys for quite some time, as they are a sharp crew, and quite frankly I view them more as an investment outfit than I do a typical natural resources company.

Beyond the core business of what they do, the management possesses several traits that I find very appealing:

1. Focused on costs and tax-efficiency like a hawk. When Pardee sold some of its surface and timber acreage last year, they made use of a 1031 exchange to reinvest the profits in to an acquisition of oil & gas mineral interests to defer taxes on the sale.

2. Willing to bet big when they find a good opportunity. Spent $60.1 million - nearly their entire cash hoard at the time - last year acquiring 400,000 acres of oil & gas mineral interests, essentially tripling their exposure to oil & gas in the Central Appalachian region overnight.

The reason this is so compelling is that, as I found out at the annual meeting, much of these acres were adjacent to acreage the company already owned, so they had a pretty good idea of what it was worth from their own experience.

3. Unlevered balance sheet. Only has $5.7 million of debt, all of which is non-recourse to the company.

4. Willing to buy in large chunks of shares through tender offers, even though the stock is very illiquid. Back in May, Pardee announced a tender offer for up to 22,600 shares of stock at a price of $265.50 per share. As it turns out, 51,300 shares ended up tendering. Pardee bought them all.

That may not sound like much, but given the company's share count (it's in the hundreds of thousands), it actually represents a pretty big chunk of the company.

---

One thing to note is that Pardee essentially operates as a quasi-privately held business, and does not file with the SEC. The only way to get annual and quarterly reports is by being a shareholder or getting them from a shareholder.

Unlike many businesses that operate this way, however (JG Boswell, to name one), the company is actually very shareholder friendly with its capital allocation, cost control, and disclosure.

Pardee's annual reports give you all the basic information you'd need to know about their asset base, and they provide a good level of detail about how business has developed over the past year. They're not particularly wonky, though, so there's not a ton of financial metrics shared beyond the basic financial statements and a mention or two about the returns of a project here and there.

The quarterly reports are much shorter, and used to look like the pamphlets for local "Mystery House" or other local attraction you'd find at a Motel 6. They've added a little bit more substance to them in recent years, though, but they're still not near as detailed as the annual report is.

Neither are as detailed as SEC filings, which is fine with me on account of ~80% of any given SEC filing is filler and legal boilerplate, in my view.

I would share last year's annual numbers with you if I had it on me. Fortunately I do have the most recent quarterly on hand, which is actually what reminded me to write this in the first place.

Income Statement, Q3 2014 (Dollars in Thousands)

Divisional Revenue:

Coal & Minerals: $5,826
Oil & Gas: $3,348
Timber and Surface: $1,615
Alt. Energy: $1,441

Total Revenue: $12,230

Divisonal Expenses:

Coal & Mineral: $614
Oil & Gas: $2,014
Timber & Surface: $733
Alt. Energy: $529

Total Expenses: $3,890

"Net Operating Income": $8,340

Interest and Other Income: $11
General & Administrative: ($1,623)
Interest Expense: ($8)

Income Before Taxes: $6,648

Taxes: $2,381

Net Income: $4,267

Earnings Per Share, Quarter Ended 9-30-14: $6.11

Earnings Per Share, Quarter Ended 9-30-13: $4.54

Earnings Per Share, Nine Months ended 9-30-14: $15.91

Earnings Per Share, Nine Months ended 9-30-13: $22.70


The reason for the year-over-year decline in earnings for the first nine months, despite the strength in the third quarter results, was mostly because of the sale of the timber and surface rights last year, that I already mentioned, combined with the fact that Pardee was still receiving royalties from a mine in Colorado at the time, which has since been exhausted.

The third quarter improvement was related to strength at the portfolio properties along with new investments that Pardee had not yet made as of the third quarter last year, including the newly acquired 400k acre property.

Here is a summary of the most recent balance sheet, as well, again in thousands except for share count:

Assets

Current Assets:

Cash & Equivalents: $13,290
Accounts Receivable: $6,200
Deferred Income Tax: $447
Other: $797

Total Current Assets: $20,734

Fixed assets, net of depletion and depreciation:

Land & Right of Ways: $23,581
Mineral Rights - Coal: $29,945
Timber: $5,605
Solar Equipment: $28,545
Building & Structures: $234
Timber Operations: $46
Office Equipment: $398
Automobiles: $92
Other Fixed Assets: $327

Total Fixed Assets: $88,773

Investments:

Oil & Gas Investments (Net of Depl. & Depreciation): $62,211
Other: $146

Total Assets: $171,864

Liabilities

Accounts Payable: $2,218
Taxes Payable: $913
Other Liability: $1,142
Non-Recourse Bank Debt: $5,677
Supplemental Pension Plan: $139
Deferred Revenue: $5,051
Deferred Taxes: $17,708

Total Liabilities: $32,848

Book Value: $139,016

Weighted Average Shares Outstanding, MRQ: 698,324

BV Per Share: ~$199.07


One thing to note is that BV per share is materially understated because, as the company put it at this year's annual meeting, most of its timberland was acquired in the late 1800s, and so is recorded well below market prices on the balance sheet.

Beyond that, the company contracted Forecon to provide a valuation of Pardee's core 136,200 acres of hardwood timber that was completed at the time, which ended up coming out at $136 million. You can take it or leave it, but it's far above what it is being carried on the books for in any case.

http://www.pardee.com/pardee-resources-company-completes-timberland-appraisal/

Other than that, the only real thing of interest I have on me at the moment is a chart from the annual meeting in 2013, of the company's pre-tax IRR of its projects going from 1995 to 2013, which by the CEO's calculations came out to 19.3% over that timeframe. There are other charts showing the increase in operating cash flow, EPS, etc. from 2002 but it's getting late and I don't have a scanner anyway.

I know some guy uploaded a bunch of old Pardee reports somewhere online, so you can probably find them if you care. I personally view the company as a long-term holding that I don't have to keep an eye on every day. It's not a cigar butt, and I think the management team has proven to be very astute. I suspect it will compound at a satisfactory rate going forward.

Perhaps my favorite attribute is that Pardee is a "land trap" that isn't a land trap. Which is to say, it is actually pretty aggressive about extracting the value of its assets and finding new places to reinvest its capital. I like getting exposure to natural resource assets/land in a way that isn't a total sink of opportunity cost.

Whether you're interested or not is up to you all, but given the relative lack of coverage of this company, I thought it was worth bringing up.

http://www.pardee.com/

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ScottHall

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Re: PDER - Pardee Resources
« Reply #1 on: November 11, 2014, 08:20:40 PM »
Apparently Nate (oddballstocks) also profiled this one recently, so I'm linking for reference.

http://www.oddballstocks.com/2014/10/value-investing-seminar-recording.html
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thepupil

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Re: PDER - Pardee Resources
« Reply #2 on: November 11, 2014, 08:45:34 PM »
own and love, a real gem particularly when you compare to the alternative ways of getting US timber exposure (DEL, RYN, WY, whatever Plum's ticker is that I can't remember). With Pardee you buy a big piece of timber and a bunch of cash flowing assets. It's like a positive carry inflation call option that is well managed.  I intend to hold for a long time.  Nate's profiling and a few SA articles along with a tender offer increased the liquidity and price nicely.

Since it sounds like you've done a lot more DD on this than I, do you know from which exact mines they get their coal royalties? When first researching, I tried to figure out the names of the mines and to which operators they were leasing, but I never did after a few hours of google searching; I can't go to the annuals because of my job commitments. I know one is a Patriot mine since they mentioned a bankruptcy that coincided with theirs. I have a contact on the sell side who would have a good idea of an individual mine's prospects, so I wanted to bounce those off of him.

 I've struggled with how to discount the coal royalty stream and fear that the decline there may resemble a step function downwards as mines are shut down, rather than a slow and gradual beautiful decline (more Blackberry than Altria). That said, so far they've done a great job of buying assets and growing their share of a declining pie.

The price is such that a pretty quick decline in coal won't break the company, and the big o&g acquisition helped diversify, but getting a better handle on the coal would certainly help gauge the risk reward more accurately.

Also, did you happen to do any checks on the veracity of the timber appraisal. They sold a substantial chunk   very low mark relative to the average per acre value of the appraisal; I trust them when they say their remaining is of higher quality, but just curious if you had any thoughts.

thepupil

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Re: PDER - Pardee Resources
« Reply #3 on: November 11, 2014, 08:48:56 PM »
Also the VIC article has a link to collection of old annuals and meeting remarks

https://www.mediafire.com/?lcuk79ri1m52n

http://www.valueinvestorsclub.com/idea/PARDEE_RESOURCES_CO/97301

Tim Eriksen

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Re: PDER - Pardee Resources
« Reply #4 on: November 11, 2014, 09:18:01 PM »
I have owned it since 2005 in order to get reports (that is how they found there way online).  I periodically buy and sell depending on valuation.  I still own a modest position in the fund.  It is a wonderfully managed steady business.  I briefly profiled it at the Value Investing Congress Workshop in New York in September.  This is a royalty business with 65% operating margins, including depreciation.  If you added back depreciation margins are probably above 80%.  It builds up cash quickly and uses it wisely.  What more could you want?   

The only reason it is not a bigger position is I look for 20% plus annual returns and it "only" averages in the  mid teens.  If I ever managed a closed end fund for micro caps or unlisted stocks it would be a core holding.  If anyone wants to help me start one...

Hielko

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Re: PDER - Pardee Resources
« Reply #5 on: November 12, 2014, 02:06:57 AM »
I own this as well, bought it earlier this year when they ended up purchasing all shares tendered in the tender offer.

For those interested: have compiled 10 years of historical financials in this google drive sheet: https://docs.google.com/spreadsheets/d/1LriZKr0QFv7zdrzNr9FJ4KjQnD4lHyws1SGjrZDZYXw/edit?usp=sharing

CorpRaider

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Re: PDER - Pardee Resources
« Reply #6 on: November 12, 2014, 04:57:50 AM »
own and love, a real gem particularly when you compare to the alternative ways of getting US timber exposure (DEL, RYN, WY, whatever Plum's ticker is that I can't remember). With Pardee you buy a big piece of timber and a bunch of cash flowing assets. It's like a positive carry inflation call option that is well managed.  I intend to hold for a long time.  Nate's profiling and a few SA articles along with a tender offer increased the liquidity and price nicely.

Since it sounds like you've done a lot more DD on this than I, do you know from which exact mines they get their coal royalties? When first researching, I tried to figure out the names of the mines and to which operators they were leasing, but I never did after a few hours of google searching; I can't go to the annuals because of my job commitments. I know one is a Patriot mine since they mentioned a bankruptcy that coincided with theirs. I have a contact on the sell side who would have a good idea of an individual mine's prospects, so I wanted to bounce those off of him.

 I've struggled with how to discount the coal royalty stream and fear that the decline there may resemble a step function downwards as mines are shut down, rather than a slow and gradual beautiful decline (more Blackberry than Altria). That said, so far they've done a great job of buying assets and growing their share of a declining pie.

The price is such that a pretty quick decline in coal won't break the company, and the big o&g acquisition helped diversify, but getting a better handle on the coal would certainly help gauge the risk reward more accurately.

Also, did you happen to do any checks on the veracity of the timber appraisal. They sold a substantial chunk   very low mark relative to the average per acre value of the appraisal; I trust them when they say their remaining is of higher quality, but just curious if you had any thoughts.

Neat idea guys thanks.  PCL is the ticker for Plum Creek.  I just read their most recent transcripts and noted that Rick Holley ( PCL CEO) was discussing his view that private value timber transactions are going for prices above the implied value per acre of the timber reits, specifically PCL (he was discussing a plan to potentially divest timber and buy back stock).  They have a good/decent track record for guaging the heat in the timber markets, as an analyst on the call pointed out, they basically top ticked the market with some large dispositions prior to financial crisis.  I don't own any because it seems like management gets paid too much.  I've followed it since WEB sold it off as a stock pick for charity way back when.

writser

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Re: PDER - Pardee Resources
« Reply #7 on: November 12, 2014, 05:09:16 AM »
Great research by all of you. I'm fully invested now but have been looking at this as a potential replacement for my portfolio. One thing I couldn't quite get comfortable with (just as thepupil) is that net income still is >60% coal royalties despite their push into other areas. So aren't you effectively making a bet on coal mining not declining? Is this something you are taking into consideration? How relevant do you think this is?
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oddballstocks

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Re: PDER - Pardee Resources
« Reply #8 on: November 12, 2014, 05:48:43 AM »
Yes, very much like this one as you can see from my link above.  Own a good position here, I've occasionally added, on the lookout for more.

I'm content with mid-teens returns.  I know Tim shoots for the stars (and gets there), but I'm ok with lower returns, I have no fee hurdle to overcome.  We're all forever indebted to Tim for getting those results online!

In terms of coal, that's the worry everyone has.  A few notes on the coal.  They discuss at length how they have been able to extract coal profitably when others can't.  There is also a potential to export coal due to their location.  And finally natural gas has quickly been taking the place of the coal.

The largest revenue drop related to coal already happened.  This is as their Colorado property was exhausted. 

In my mind these guys are natural resource value investors.  They purchase resources cheap, lease them or sell them when overvalued.  They have an excellent track record of success, so I'm going to trust their expertise going forward.
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Hielko

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Re: PDER - Pardee Resources
« Reply #9 on: November 12, 2014, 06:11:13 AM »
Great research by all of you. I'm fully invested now but have been looking at this as a potential replacement for my portfolio. One thing I couldn't quite get comfortable with (just as thepupil) is that net income still is >60% coal royalties despite their push into other areas. So aren't you effectively making a bet on coal mining not declining? Is this something you are taking into consideration? How relevant do you think this is?
While coal is a large part of their current earnings it's a smaller piece of the company in terms of intrinsic value, mainly because the land/timber segment isn't creating a whole lot of earnings currently but it does have a lot of value (at least if we trust the 2013 appraisal). And the other segments probably have more value further away in the future. They have 10 years of permitted coal reserves, but the timber and land will have inflation adjusted returns 100 years from now.

I think the coal segment is approx. 30% of the intrinsic value of the whole company, but the price of coal will obviously still have a big impact on the company, despite the diversification.