Fairfax Financial Shareholder s Dinner. Bob Robotti President & CEO April 8, 2014

Transcription

1 Fairfax Financial Shareholder s Dinner Bob Robotti President & CEO April 8, 2014

2 Disclaimer The Firm is not providing investment advice through this material. This presentation is provided for informational purpose only as an illustration of the firm s investment philosophy and shall not be considered investment advice or a recommendation or solicitation to buy or sell any securities discussed herein. As of the date of this presentation the firm continues to own the securities discussed herein. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Robotti & Company Advisors, LLC or its affiliates may engage in securities transactions that are inconsistent with this communication and may have long or short positions in such securities. The information and any opinions contained herein are as of the date of this material, and the firm does not undertake any obligation to update them. Information contained in this presentation has been obtained from sources which we believe to be reliable, but we do not make any representation as to its accuracy or its completeness and it should not be relied on as such. This material does not take into account individual client circumstances, objectives, or needs and is not intended as a recommendation to any person who is not a client of the firm. Securities, financial instruments, products or strategies mentioned in this material may not be suitable for all investors. Robotti & Company Advisors, LLC does not provide tax advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor. In reaching a determination as to the appropriateness of any proposed transaction or strategy, clients should undertake a thorough independent review of the legal, regulatory, credit, accounting and economic consequences of such transaction in relation to their particular circumstances and make their own independent decisions. 2

3 About Robotti & Company Advisors Manage over $700 million in separate accounts and partnerships on behalf of institutional and individual clients Focus on small-to-mid capitalization equities of misunderstood, neglected, or out-of-favor companies Established in 1983 by Robert Robotti, our primary focus was on North American investments until 2004 Expanded in 2005, when Isaac Schwartz launched Robotti & Company s international investing initiative to apply Robotti & Company Advisors investment philosophy to the global equity markets 3

4 Two Edges Too Many Behavioral Edge We take a longer-term view and have the ability to tolerate losing money before we make it. Leads Us To Analytical Edge Within the context of a longer-term perspective and 30+ years of experience, we have the ability to develop a different conclusion than that of the market. Informational Edge Our network of industry relationships, focus on deep primary research, and experience serving on company boards, provides us with more pieces for building our information mosaic. Our behavioral edge comes from our ability to tolerate losing money before we make it. As a result, our investment process concentrates on understanding the long-term normalized earning power of a business well before the herd, in this case the market, gains interest. 4

5 Value Investing: A Big Tent Expensive Valuation Warren Buffett Graham and Dodd Ideal Cheap Low Quality High In theory there is no difference between theory and practice. In practice there is. - Yogi Berra 5

6 What Is A Good Business A high quality or good business is one that can earn above average returns on capital over a sustained period of time. 6

7 Economics 101 In a competitive economy, firms that earn above-average returns will quickly attract competition. Competitors emerge and attempt to compete even more efficiently and/or effectively. This places downward pressure on returns. As new competitors continue to enter, demand becomes spread among more participants. Average costs will rise as fixed costs are spread over fewer units sold. Prices fall until returns on capital are driven to a level at or below the cost of capital and economic profits disappear (setting the stage for industry restructuring). 7

8 Porter s Five Forces: Four Too Many? Porter Greenwald Rivalry of Competitors Rivalry of Competitors Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products Threat of New Entrants Bargaining Power of Suppliers Threat of Substitute Products Bargaining Power of Customers Bargaining Power of Customers Source: How Competitive Forces Shape Strategy, Harvard Business Review, Michael Porter Source: Competition Demystified, Bruce Greenwald 8

9 Companies with Barriers to Entry? According to Bruce Greenwald: Without the protection of barriers to entry, the only option a company has is to run itself as efficiently and effectively as possible. For companies with barriers to entry, it is most important to execute a strategy that will sustain those barriers. Expensive Valuation Warren Buffett Graham and Dodd Ideal Cheap Low Quality High 9

10 Primary Sources of Competitive Advantages? Type Definition Source Supply Advantages: Cost advantages that allow a company to produce and deliver its products or services more cheaply than its competitors Lower input costs / privileged access to resources Proprietary technology Demand Advantages: Access to customers that rivals cannot match customer captivity Habit Switching Costs Search Costs Economies of Scale: Advantage exists if average cost per unit declines as the firm produces more, leaving smaller competitors unable to compete Size - but it is important to remember that pure size alone is not the same thing as economies of scale. Source: Competition Demystified, Bruce Greenwald 10

11 OB:SUBC NOK / $18.42 USD (as of 4/4/2013) CASE STUDY

12 Subsea 7 SA (OB:SUBC) Investment Summary Subsea 7 is a global leader in subsea engineering & construction - a niche industry with a sustainable competitive advantage. It is the only pure-play among the 3 dominant competitors in an industry with the dynamics to create a runway for significant growth. Subsea 7 maintains a solid balance sheet and leadership interests are aligned with shareholders. The company has a record backlog indicating the potential for strong growth, yet still trades at a modest multiple of earnings. 3 Year Price Chart Market Capitalization (USD mm as of 4/4/14) Price $18.42 Shares Market Cap $6,462 Long-Term Debt 636 Minority Interest 47 Cash 650 Enterprise Value $6,495 Valuation Summary FY 12/ E 2015E Revenue 6,297 6,860 7,159 ev/revenue 1.0x 0.9x 0.9x EBITDA 981 1,404 1,538 ev/ebitda 6.6x 4.6x 4.2x EPS $0.93 $1.89 $2.03 p/e 19.7x 9.7x 9.2x Trading Summary 52 Week High / Low: $22.61 / $16.70 Avg Daily Volume: 1.4 million shares Listing Exchange: Oslo Bourse Adjusted for convertibles see slide 30 Source: Capital IQ 12

13 Business Description Seabed-to-surface engineering, construction and services contractor to the global offshore energy industry Capable of executing projects of all sizes and complexity in all water depths 13

14 Investment Thesis / Variant Perception Global leader in oligopolistic industry dominated by 3 competitors Near-term industry-wide concerns and company-specific issues have caused the market to view the business solely through disappointing past earnings and depressed margins Normalized growth / margins for the industry and the company are being ignored Long-term, there are dynamics in place to allow for a long runway of revenue growth in an industry protected by sustainable barriers to entry Backlog growth is just the tip of the iceberg, indicating the potential for significant revenue growth and increased returns on capital Low margin contracts signed during the period are being replaced with higher margin contracts High insider ownership aligns the interest of management and shareholders capital investment and reinvestment opportunities are focused on returns We believe that shares trade at > 50% discount to the company s intrinsic value 14

15 Industry Map Oil Service Majors Baker Hughes, Halliburton, Schlumberger Reservoir Data CGG Veritas, TGS Nopec, Polarcus Logistical Support Bristow, Era, Tidewater Deepwater & UDW E&C Saipem, Subsea 7, Technip Major IOCs & NOCs Anadarko BP Chevron CNOOC ENI ExxonMobil PEMEX Petrobras Repsol Shell Statoil Total Contract Drilling Atwood, Diamond Offshore, Ocean Rig, Rowan, Seadrill, Transocean Service Equipment Manufacturing Cameron, FMC, Aker Shallow & Deepwater E&C Allseas, EMAS-AMC, Heerema, McDermott Other Equipment & Services Cal Dive Intl, Hornbeck Offshore, Oceaneering 15

16 Industry Overview EIPC: Engineering, Procurement, Installation and Commissioning Sapura Crest merged with Kencana in April 2012 and is now known as SapuraKencana Source: Subsea 7 September 2012 Company Presentation 16

17 Merger Between Acergy and Subsea 7 In July 2011, Acergy and Subsea 7 merged further consolidating the industry from four to three competitors Complementary service offerings, technology offerings and geographic strengths especially important for local content offerings in key markets Kristian Siem whose interests are aligned with shareholder through large ownership of shares is named Chairman of Subsea 7 S.A. Source: Subsea 7 / Acergy Merger Presentation; Robotti & Company Research 17

18 Deepwater Lifecycle Investment Period Harvest Period 2 10 years 1 5 years years 1 2 years Exploration & Appraisal Development Subsea 7 Production Decommission Work Prospect Identification & Evaluation Seismic Subsea Inspections Drill Wells Collect & Analyze Well Data ROV Support* Planning, Drilling & Completion, Installation Reservoir Modeling Subsea Surveys TLP/Spar/FPSO Subsea Tie Back* Pipelines* Well Design Drill Developments FEED* Engineering* Fabricate Topsides Fabricate Pipelines* Heavy Lift Pipelay* Subsea is wellpositioned at the fulcrum between investment and cashflow Production Outsourced Labor Infrastructure Inspections & Maintenance Workovers Infill Drilling Platform Modification Life-of-Field* Shut-In Heavy Lift Subsea Pipelines, Platform/Topsides, Pipelines FPSO Demobilization * Subsea 7 Service Capability 18

19 Segments by Service Capability ROV Support Remote intervention and drilling support technologies with global fleet of ROVs from observation-class to purpose-built drill support vehicles SURF Conventional / Hook-Up Heavy Lifting Engineering, procurement, installation and commissioning of subsea umbilicals, risers, flowlines and structures Fabrication / installation of fixed platforms & pipelines Addition of modules on new platforms and the refurbishment of topsides of existing fixed and floating platforms Heavy lifting in both the development and decommissioning stages. Life-of-Field Revenue by Service Capability: Inspection, maintenance, repair and integrity management of subsea infrastructure i-tech (3.6%) Life-Of- Field (12.3%) Conv / Hook-up (11.7%) SURF (72.4%) Source: Subsea 7 Annual Report 19

20 Segments by Geography Brazil Africa, Gulf of Mexico & Mediterranean Asia Pacific & Middle East North Sea & Canada 850 people SURF 2,850 people SURF, LOF, Conventional/Hook-Up 270 people SURF and LOF 2,300 people SURF and LOF Revenue by Geography: APME (8.0%) Brazil (13.0%) AFGOM (39.0%) NSC (40.0%) Source: Subsea 7 Annual Report 20

21 Leadership / Capital Allocation Key Leaders Kristian Siem Chairman Jean Cahuzac CEO Chairman of Subsea 7 since January 2002 Assumed Chairman role upon the merger of Subsea 7 with Acergy Active in the oil & gas industry since 1972 Currently Chairman of Siem Industries and Siem Industrikaptial Past director of Aker Kvaener and Transocean CEO of Subsea 7 since April 2008 Active in the offshore oil & gas industry Prior experience as COO and then President of Transocean Spent 21 years in various positions at Schlumberger Capital Allocation In 2012, Subsea 7 exited two non-core businesses: Sold stake in NKT Flexibles Spun-off VERIPOS as a dividend inkind to shareholders. In 2013 Subsea 7 authorized a $200 million share repurchase, of which $109 million was remaining at year end and paid a special dividend of $199 million. In 2012 the company repurchased $200 million of shares and paid $199 million of dividends. Interests are aligned - Siem Industries, which is controlled by Mr. Siem and other family members, owned 69.7 million shares of Subsea 7 or 19.8% of issued shares. Source: Subsea Annual Report 21

22 Mr. Market Reacts to Brazil On June 27, 2013 Subsea 7 surprised the market by announcing the Guara-Lula project in Brazil would lose $250 - $300 million more than expected. Issues cited were: (1) continued supply chain issues, (2) pipeline fabrication delayed on customs clearance issues, and (3) adverse weather issues. In 2010, just 3 months after the merger between Subsea 7 and Acergy, Petrobras awarded the company a $1 billion contract for work in the Guara-Lula pre-salt region. In late 2011 it became apparent that Subsea 7 would not be able to gain the necessary permits to use the yard it had originally planned upon. This led to the announcement of a $50 million cost overrun. An additional $52 million write-down on the project occurred in Q At the end of FY 2013 Subsea 7 announced an additional $49 million write-down, bringing the total full-life provision to $355 million. While these issues are not insignificant, our discussions with management and primary research leads us to believe this is a contract specific event and not indicative of how other contracts that represent current and future revenue will progress. Source: Subsea 7 conference call, Robotti & Company research 22

23 Key Investment Factors Subsea 7 is a global leader in oligopolistic industry dominated by 3 competitors. Barriers to entry will allow for above average returns on capital over the long-term. Near-term industry-wide concerns and specific company issues have caused the market to view the business solely through disappointing past earnings, and depressed margins creating a misperception. Long-term, there are dynamics in place to allow for a long runway of revenue growth in an industry protected by sustainable barriers to entry. Backlog growth is just the tip of the iceberg, indicating the potential for significant revenue growth and increased returns on capital. Normalized growth rates and margins for both the industry and the company are being ignored. 23

24 Indicators of Barriers to Entry Historical returns on equity do not indicate the presence of barriers to entry. 50% Subsea 7 Return on Equity Present 40% 30% 20% 10% 0% The ultra-deepwater engineering & construction industry does, however, have a limited number of incumbent competitors with a history of dominating the industry. Source: Company Financials, Capital IQ, Robotti & Company Calculations 24

25 Evidence of a Competitive Advantage Source Type Evidence Proprietary Technology Supply Advantage History of increasingly complex engineering needs in deeper water requires a demonstrated track record of successful and safe execution. Privileged Access to Resources Supply Advantage In this case, the resource is skilled labor. Customer Captivity Demand Advantage The tangible and intangible costs of searching for someone who can complete a major ultradeepwater project at or above the standard of the big three are very high. 25

26 Deepwater Production Declining production of international oil companies drive demand for oil services Deepwater represents the greatest opportunity to replenish major oil & gas reserves Also presents greater technical challenges and increased overall complexity Average Deepwater Well Depth (ft) Source: BSEE, Hornbeck 2013 Investor Presentation Source: FMC Technologies 2013 Investor Presentation 26

27 Revenue Driver: Industry Backlog Industry Backlog The Big 3 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Saipem - Subsea Technip - Offshore Subsea 7 Source: Company Filings 27

28 Revenue Driver: Subsea 7 Backlog Backlog Progression Present $12,000 $10,000 Backlog above $10 bn for the first time $8,000 $6,000 $4,000 $2,000 $0 Q Q Q Q Q Q Q Q Q Q Q Q $5,000 Current Backlog by Region $7,000 Current Backlog by Year of Execution $4,000 $3,000 $6,000 $5,000 $4,000 $2,000 $1,000 $3,000 $2,000 $1,000 $0 AFGOM APME Brazil NSC $ Source: Subsea 7 Financial Statements 28

29 Revenue Driver Backlog Progression Revenue Driver: Variant View of Potential Backlog Well known by the market Reported Backlog over $12 billion (updated for recent announcements) Potential for >420 Tree Awards over the next 15 months 1 Underappreciated by the market because of horizon to realization Over $10 billion of contract awards expected over the next 18 months 2 Worldwide offshore rig count is expected to increase over 50% between FMC Technologies Presentation, Quest Offshore Resources, May Robotti & Company Research 3 IHS-Petrodata, Barclays Research 29

30 Comparable Analysis The Big Three Comparable Fundamental Analysis Ticker Name Price Dil Shrs Mkt Cap EV Gross Margin EBITDA Margin EBIT Margin ROE Debt / EBITDA Debt / Equity OB:SUBC Subsea 7 SA $ ,462 6, BIT:SPM Saipem SpA $ ,682 17, (0.8) (7.4) ENXTPA:TEC Technip SA $ ,198 10, Mean: Comparable Valuation Analysis Ticker Name FY 2013 EBITDA EV/ EBITDA FY 2014E Median: EV/ EBITDA FY 2013 Price / Earnings EPS FY 2014E OB:SUBC Subsea 7 SA , Price / Earnings BIT:SPM Saipem SpA , na ENXTPA:TEC Technip SA 1, , x Mean: Median: Company reports diluted shares assuming conversion of all convertible bonds regardless of current share price. Diluted shares adjusted for 2017 convertible bonds with a conversion price of $29.31 as of 12/31/2013. LT Debt adjusted for convertible bonds with a conversion price of $15.82 as of 12/31/2013. Source: Company Financials, Capital IQ, Robotti & Company Advisor Calculations, All in USD 30

31 Earnings Summary (USD mm) Revenue 5, , ,297.1 growth 15.0% (0.0%) Gross Profit , gross margin 17.3% 17.4% 22.0% Adjusted EBITDA 1, , ebitda margin 18.3% 18.1% 15.6% Operating Income operating margin 11.7% 12.8% 9.1% Gain on Disposal of Subsidiary (243.6) Net Income Adjusted EPS $1.23 $1.59 $0.99 Diluted EPS $1.23 $2.23 $0.99 Diluted Shares Company reports diluted shares assuming conversion of all convertible bonds regardless of current share price. Diluted shares adjusted for 2017 convertible bonds with a conversion price of $29.31 as of 12/31/2013. LT Debt adjusted for convertible bonds with a conversion price of $15.82 as of 12/31/2013. Source: Company Financials / Capital IQ 31

32 Valuation / Margin of Safety Implied EBITDA Revenue (USD) 8,500 9,000 9,500 10,000 10,500 11,000 15% ,050 1,125 1,200 1,275 17% 1,020 1,105 1,190 1,275 1,360 1,445 19% 1,140 1,235 1,330 1,425 1,520 1,615 21% 1,260 1,365 1,470 1,575 1,680 1,785 23% 1,380 1,495 1,610 1,725 1,840 1,955 25% 1,500 1,625 1,750 1,875 2,000 2,125 Implied Stock Price (7x EBITDA) Implied Margin of Safety EBITDA Margin Revenue (USD) 6,200 6,400 6,600 6,800 7,000 7,200 15% $17.86 $19.36 $20.86 $22.35 $23.85 $ % $20.26 $21.95 $23.65 $25.35 $27.04 $ % $22.65 $24.55 $26.44 $28.34 $30.23 $ % $25.05 $27.14 $29.24 $31.33 $33.43 $ % $27.44 $29.74 $32.03 $34.32 $36.62 $ % $29.84 $32.33 $34.82 $37.32 $39.81 $42.31 Revenue (USD) 6,200 6,400 6,600 6,800 7,000 7,200 15% (3.0%) 5.1% 13.2% 21.4% 29.5% 37.6% 17% 10.0% 19.2% 28.4% 37.6% 46.8% 56.0% 19% 23.0% 33.3% 43.6% 53.8% 64.1% 74.4% 21% 36.0% 47.3% 58.7% 70.1% 81.5% 92.8% 23% 49.0% 61.4% 73.9% 86.3% 98.8% 111.3% 25% 62.0% 75.5% 89.1% 102.6% 116.1% 129.7% Source: Robotti & Company Research 32

33 Risks to Our Thesis The safe and successful execution of large, complex EPIC projects is a primary risk. Supply chain delays can reverberate throughout a project. While management believes the current provision for the Guara- Lula Project in Brazil is sufficient, additional problems could require additional write-downs. Operations in deepwater are subject to unpredictable events such as severe weather or harsh ocean environments. Increasing competition in shallower water could result in decreased profitability should well depth not continue to increase. Commodity Risk: A good forecaster is not smarter than everyone else, he merely has his ignorance better organized. -Anonymous 33

34 Disclosure: Ownership Information Disclosures Subsea 7 (OB:SUBC) Robert Robotti and/or members of his household has a financial interest in the following securities Robotti & Company or its affiliates beneficially own common equity of the following securities Robotti & Company or its affiliates beneficially own 1% or more of any class of common equity of the following securities Yes Yes Yes Robert Robotti serves as a Director or Officer or Advisory Board Member of the following securities No As of the date of this presentation, Robotti & Company Advisors, LLC and/or its affiliates owns shares of Subsea 7 and does not have any current intention to exit this position. Companies have been chosen solely as a case study to illustrate the investment process and approach of Robotti & Company Advisors, LLC. This information should not be interpreted as a performance record or as an indication of future performance results. 34

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