PBF Energy’s Assets Trading Well Below Fair Value; Multiple Catalysts Ahead

Executive Summary
PBF Energy (PBF) is a bargain at current market prices. PBF’s adept management team, in conjunction with private equity partners, acquired its core refining assets at fire sale prices in 2010 and 2011. Among these assets are the Paulsboro and Delaware City refineries which, following initial turnarounds, are now the crown-jewels of the East Coast (PADD 1) refining system. East Coast refineries have historically lacked the structural advantages of their Mid-Continent and Gulf-Coast counterparts. However, management’s aggressive investment program in a “crude-by-rail” logistical infrastructure promises to close the gap by adding much lacking optionality through access to cost advantaged crudes. Although the ownership structure has legacy problems and the company will undoubtedly continue to face cyclical margin and secular regulatory issues, the stock is much too cheap. A discounted cash flow analysis and an economic book value analysis convergingly indicate that the stock is fairly valued at around $50 per share (about 60% higher than current prices of about $31/share). Continue reading

Dropping It Like It’s (Not That) Hot: VLO’s MLP strategy in focus

Summary

  • Valero Energy Corporation’s (VLO) conservative valuation reflects a history of and expectations for cyclical margin pressures, secular regulatory pressures, and a management regime which does not create excess long-term shareholder value.
  • Management has singled out asset drop-downs to company sponsored MLP, Valero Energy Partners (VLP), as the most promising avenue for unlocking shareholder value.
  • Although the value gap between VLO and VLP is real, unless management radically accelerates VLP’s financing trajectory, the drop-down strategy will not significantly drive excess returns for VLO shareholders.
  • Disproportionate focus on arbitraging market value dislocations could detract from more enduring drivers of long-term value such as distressed asset acquisitions and continuous rationalization of core refining and logistics assets.
  • VLO’s core refining assets are among the best positioned and most complex in the world. If competently utilized, these assets are worth significantly more than the company’s market capitalization.

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The Ten Pillars of Quality Investing or: How I Learned to Stop Dumpster Diving for Undervalued Stocks

After recently having completed testing on a general method of discounted cash flow (DCF) analysis for estimating a broad basket of stocks’ intrinsic values, I became more concerned with “quality”. While DCFs remain the foundation of any sound business valuation, I discovered they are highly sensitive to the assumptions and data used. Slightly changing a minute detail can drastically influence the result causing an attractive investment to all of sudden seem not so attractive and vice versa. While relative valuation methods were a natural alternative (Wall Street’s preferred choice, in fact) to circumvent the sensitivity issues, I was inclined to believe that an ability to define robust ‘quality factors’ would complement the ideological purity of the discounted cash flow approach much better. The purpose of this discussion is to demonstrate that a good company can indeed also be a good investment.
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Grading the Gurus

FORWARD REMARKS
I used to think of myself as contrarian, but after completing my most recent research project, “Grading the Gurus” (which I presented at the last MBIIM) , I now realize that I only appear to be a contrarian. I’ll spare you the discourse on how I came to that for now, but I’ll make sure to include it in my closing remarks.

For those who were unable to join us last Sunday, I thought I would summarize the presentation and the following discussion. Without further ado…

INTRODUCTION TO ‘THE PROBLEM’
Like my previous post says, “I have often wondered if it makes any sense to pay attention to investing gurus.” And there certainly are a lot of them. Most of which seem to promise you that they’ve found the “secret” to easy money, whether that be a method of valuing companies or assessing the market’s future direction. However, evidence suggests otherwise as it has been proven that 85% of mutual funds have underperformed “dumb” index funds over the last 40 years. This means that all those fancy folks that went to fancy schools and wear fancy neckties are not as smart as “passive” investors. Therein lies the problem…

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The Usual Suspects: A Preview of Sunday’s Investing Presentation

I am going to give a brief talk this Sunday as part of the brand new Meetup Group, Monterey Intelligent Investors. The details are as follow:

Sunday, August 4, 2013
10:00 AM to Cafe Lumiere
365 Calle Principal, Monterey, CA

Grading the Gurus
I have often wondered if it makes any sense to pay attention to investing gurus. I’m talking about the greats; the legends; the Warren Buffets; The Benjamin Grahams; those with real followings, real track records, and, most importantly, real philosophies. In brief, I want to ask questions and query data in such a way that will help people place the “usual suspects” into one of three groups:

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Tomorrow’s IPO of Jones Energy (ticker: JONE)

My coworker told me about an email his broker sent about tomorrow’s IPO on Jones Energy (ticker: JONE). Interested, I did some preliminary research, and here is my email to him almost verbatim:

A word of caution on this deal. The main reason you hold off for now is that you probably are not prepared to sift through the 250 page IPO filing over the next 24 hours. Also, I have no idea what each share is worth because they haven’t even disclosed how many shares are going into the float (i.e., outstanding shares available on the market). Also, they have the disclosed the following below their income statement:

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