Mammoth Energy Services Inc (TUSK)

Asset Class: US Stock (Sector: Energy / Industry: Energy Equipment & Services)

Original Investment Thesis (7/2018):  This is a cyclical company in the oil services industry.  They have been growing organically…without taking on substantial debt. They are in multiple lines of business and multiple geographic locations. The 2016 letter said they survived the past two years of low commodity prices and expect to thrive in more normal conditions.  The CEO says every investment decision is made with 2 goals: 1) grow in areas where customer demand is expected to be highest and generate highest returns, 2) generate a profitable ROI.  They intend to maintain a conservative balance sheet.  That is all music to my ears.  That kind of management in this industry is exactly what is needed to survive in this industry.

Update (10/24/2019): Long term holding (well it is now anyway).  All that about conservative management in a cyclical industry (with low debt).  This stock is why you do all that.  For when unexpected things happen (because they will happen).  What a cluster %*)#($!!!!  Pardon me!  But this stock is just kicking sand in my face at this point.  This company has been hit by bad news after bad news (some outside its control and some within).  One of the major themes of my original investment thesis was completely upended (outside their control).  The FBI showed up (within their control?!?).  Then, like icing on a cake…the entire industry is currently in a tailspin.  I don’t normally add to investments often after my initial investments (especially if they are dropping like a rock).  But this is a cyclical company and it is getting absolutely ‘cyclicalled’ (my term).  I’m down 95+% from my initial investment?!?!  They have had success in the past and I think they will in the future doing what got them there (not the FBI stuff).  I think a decade from now all this bad news will be forgotten.  So, I am pulling my pants up a bit, cinching my belt tight and going in for the ultra-rare Triple Down (and no I didn’t skip the less rare Double Down)!  God bless my capital!  We’ll see how this goes!

TUSK – The triple down! The exclamation point is not an exclamation point of excitement!

9/25/2019

TUSK is currently trading at a very, very low multiple due to (in my opinion):

1. Being in the worst performing sector (of 11) over the past year.  Energy sector is down 15.26% while the S&P 500 is up 3.2% during the same period. 
2. Being in the worst performing industry (of 69) over the past year.  Energy Equipment & Services industry is down 35.02% while the S&P 500 is up 3.2% during the same period.
3. Morningstar’s Energy Analysis sees the entire industry being undervalued (even when lower oil prices are taken into effect) and they call out specifically the oilfield services stocks as not looking this “cheap in more than a decade”.  They believe oil will stabilize at $55.  They give oilfield services a “100% 5 star” which is their highest rating.
4. The energy sector is beat down due the price of oil for sure.  In my opinion, it is also getting destroyed because there are too many companies in it and too many using large levels of debt to fund.  When the business hits a rough time (like now) those levered companies go poof.  That is happening.  When you run an oil services company (like TUSK) and a bunch of the company’s that you provide oil services to go away you will experience a tough row to hoe.  Even if you are a low debt oil services company…it doesn’t matter if all your clients are on the ropes and either going out of business or cancelling projects left and right.  You will suffer as well.  That is happening to TUSK across all their business subsidiaries.  Tough times!
5. When I purchased the stock back in July 2018 Puerto Rico cleanup/restoration work (within the company’s COBRA subsidiary) was supposed to continue and was even expected to grow (and grow quickly).  In late 2018/early 2019 funding for all this was suspended due to the government shutdown (and other things).  So, this was a huge blow to the company as a whole and accounted for a large part of the additional drawdown for the company (in addition to the other industry woes).  The company will likely be half the size (from a revenue standpoint) as it was due to this setback.  That is a huge deal for sure (and definitely unanticipated).
6. Then for salt in the wound the FBI rolled in to investigate if the Puerto Rico work had been gotten via some bribery.  They have since arrested I think two executives within the subsidiary (COBRA) that was responsible for this work, including the president of it.  The president was allegedly having an inappropriate relationship with someone in the government responsible for helping with contract bidding (between FEMA and the Puerto Rico work).  The company is cooperating with the investigation. 

I originally purchased this stock back in July 2018 at the absolute top of the cycle for $35.69.  The subsequent drop in price helped me learn (relearn) that investing in a cyclical at the top of a cycle is not a good thing.  This is why I obsess about low debt in these names (they have to be able to weather downturns…and evidently much more).  Of course, no one knows how cycles work or when they will arrive so you just have to take what comes and be prepared for it.  Regardless, at today’s price I am down about 93%.  Ugh!  Before the FBI arrived (in June), I was down 77% (to $8.28).  I added to the position in June 2019 at $5.83 per share (which seemed like an attractive valuation at the time).  The price has fallen further again and is about half my second purchase price, currently $2.69.  My hands are bloody from trying to catch this falling knife!  I’m contemplating trying again and wanted to run this idea through some additional analysis before doing so.

I want to do a little exercise:

TUSK TODAY

• Book Value Today = $16.96
• Tangible Book Value Per Share Today = $14.55
• At today’s price it is trading at .17x BV.  The median for the industry is 1.04 (which would imply $17.64).  The median for TUSK is 1.71 (which would imply $29.00).
• Current Share Price Today = $2.69
• 45,000,000 shares outstanding
• Receivables on balance sheet as of 6/30 = $423,000,000

For this exercise I’m going to be using book value because it is the balance sheet number that will be impacted if the receivables get written off as uncollectible.  Every ratio for this company is pinging along all-time lows however.  This receivables number includes the unpaid Puerto Rico work (which is highly suspect).  They’ve booked that as revenue and all the expenses are likely already paid (they have $73,000,000 in payables).

Let’s assume none of the receivables will be collected…zero.  This is unlikely (because not all of those receivables are Puerto Rico related) but let’s go there.  They will write off the entire balance $9.40 per share in book value if that happens.  Another way to look at it is they collect it but then get a huge fine levied against them.  I can’t imagine the fine being more than $400 million dollars however.  Either way, this is an exercise to see a very dark case.

TUSK IF THAT HAPPENS

This would make the new balance sheet look like.

• Book Value Today = $7.56
• Tangible Book Value Per Share Today = $5.15
• At today’s current .17x BV ratio (this would translate to $1.28 which is about half what it is currently trading for today).  The median for the industry is 1.04 (which would imply $7.86).  The median for TUSK is 1.71 (which would imply $12.93).
• Current Share Price Today = $2.69

No one knows what will happen when an investigation like what the FBI is currently investigating happens.  My suspicion is TUSK will be paid for the receivables (maybe not in a timely fashion however…although that has not been an issue to date).  I suspect that the negative impact of the whole Puerto Rico / COBRA fiasco will likely be a fine of some sort paid by the company (in addition to jail time for the executive(s) already arrested).  Since they were acting within the scope of their employment and the company benefited, I’d expect there to be a heavy fine and potentially the loss of their ability to do business in the future (ie COBRA subsidiary would need to close down or at least never receive FEMA work again).  No one knows, hence the uncertainty in the stock’s valuation (and rightly so).  For the 3 months ended 3/2019 the COBRA subsidiary only accounted for $263,000 of the $56,000,000 in revenue so it already figures in very low.  It is effectively already closed down.

So, the big question is can TUSK survive this horrible time in the industry AND survive whatever is going on with the criminal probe. 

They have $82,000,000 in long term debt and with $763,000,000 in stockholder’s equity a very low 11% debt to equity ratio.  If the hypothetical write-off of all the receivables does happen, they would have $340,000,000 in stockholder’s equity and a higher, but still manageable, 24% debt to equity ratio.  They have already suspended their dividend.  They will definitely lose money in the upcoming quarters/year(s) as they work through this downturn.  But they have managed quite effectively in the past through industry downturns and come out the other side doing well.  They have done this with a cautious, while at the same time aggressive, long-term approach.

The criminal dealings of an executive (or two) within a certain subsidiary are discouraging.  Nothing so far has been proven that it is anything more than that and there is currently no allegation that the entire company in all of its subsidiaries are a bunch of crooks.  To the contrary, this company is also owned jointly by other institutions (and there is no evidence at hand alleging this is some rampant criminal organization).  So, while this issue may have huge ramifications for the company overall as things play out, I suspect they will be dealt with and the company will move along.

Based on all this I am left deciding if I want to risk further additional capital towards this company.  The question of the day is 1) do they survive and industry downturn and criminal investigation and 2) do I believe that they will return to anything near their former levels (from a valuation perspective)? 

I think the answer is yes.  I’ve invested in cyclicals before and their prices can swing wildly even when the FBI isn’t knocking on the front door.  If, as an investor, you don’t freak out and sell when your investment gets clobbered, they will generally (if they survive and are well run) come back over time.  If you can confirm your thesis in the company and invest during the downswing and they return to normal during normal/better times then you have bought some really cheap shares.  Based on my analysis, that is what I think will happen here. 

I don’t normally add additional investments to an investment I make.  I’ve done that once already with this one and am catching (or trying to) the falling knife.  This is why I don’t like to add to them.  If I was wrong once be wrong and move on.  If I was wrong again, I’ll likely be wrong again, and again, and again.  That said this stock is absurdly cheap even if things go very, very poorly and what I lay out here as a really bad case scenario happens for them it is still very cheap.  There is enough about everything presented here for me to give the company the benefit of the doubt.  Once again, if I am right, I will have picked up some extremely cheap shares and if I am wrong, I’ll lose a bit more capital on this one.  It is a risk I am willing to take right now.

The only indicator that I’d like to see looking different than it does right now is on the technical front.  I look at the weekly technical charts (long term) and look for MFI triggering oversold (along with RSI and MACD indicators looking good).  I’m not in love with what I’m seeing right now at this very moment which might indicate there could be further weakness in this stock left to go.  Regardless, the fundamentals are so beat up I’m going to invest.  If “any” and I do mean any positive news breaks on this stock the price to fundamentals won’t stay this low long.  The FBI has been hanging around for 4 months and they’ve put I believe two COBRA employees in jail.  The company also has earnings releasing next month.  They could definitely be worse than anticipated but I’m not sure how they could be worse!  As Clark Griswold said…”Worse?  Worse?!?  Take a look around you Ellen, we’re at the threshold of hell”

So, I’m going in for a triple down!  Again, not excited about it!  In a few years I’ll know if it was the right choice to make today.  No pressure…it is just my life’s savings?!?!

TUSK (Mammoth Energy Services Inc) – Annual Reassessment

February 2019

I’ve owned this stock for about half a year and just completed my annual reassessment on it (using tools I’ve updated significantly since I purchased this stock).  I’ve attached a PDF that has my analysis in case anyone else might find it useful:

I purchased this stock back in July 2018 at $35.68. These are my thoughts after reviewing this when I completed my initial purchase in 2018:

• PRO #1 – Growing organically…without taking on substantial debt. In multiple lines of business and multiple geographic locations. The 2016 letter said they survived the past two years of low commodity prices and expect to thrive in more normal conditions.
• PRO #2 – CEO says every investment decision is made with 2 goals: 1) grow in areas where customer demand is expected to be highest and generate highest returns, 2) generate a profitable ROI.
• PRO #3 – They intend to maintain a conservative balance sheet.
• PRO #4 – Puerto Rico results have been hampered. Pro and Con potentially. Cobra (business unit)…is where they are investing cap-ex. Credit Suisse has not put Puerto Rico work in their estimates at all and still has 2019 at $2.51 (versus low analyst $3.93 which is still them with the newer PR work included). They wouldn’t be investing in Cobra heavily if the Puerto Rico work wasn’t coming or they expected it to help them win additional business. They are starting to get their initial ongoing contracts there.
• PRO #5 – Management has proven effective so far in investing in high return projects and is looking at deals (35 M&A at this time). They are not in the business of supplanting bigger competitors but to run profitable projects. With no/low debt they will likely get bought by a larger company at some point (I’d imagine).
• CON #1 – Puerto Rico results have been hampered. Pro and Con potentially. Cobra…where they are investing cap-ex.
• CON #2 – New company, IPO in OCT 2016.
• CON #3 – Secondary sale announced one month ago (4mm shares)…no proceeds going to the company.

So this stock has been hammered in the last half of 2018 and at one point was down to $17.50 range. It is trading back up a bit now but I’m basically down 50% at one point. Not my shining day! I’ve learned a lot about cyclical investing over the past few months (both in reading/research and the hard way by owning stocks like this). I’m not against owning cyclical stocks but when you own them you have to be ready for a huge drawdown like this when the cycle turns. Of course, it would be better to not have money tied up in a stock like this during that time…duh!?!  I’ve learned that a lot of value-oriented screens will kick out cyclical companies at a peak at low PEs. I invest in the conservative ones so that I’m sure they will be able to survive a downturn. I also am pretty diligent about using super-duper conservative estimates when running my estimates.

Now that is where I’m at sitting down about 40% (from being down 50+%). I’m not freaking out too much about that…is what it is. I think the price movement is drastic. I’m running all the stocks I’ve bought over the past year+ through my upgraded toolset to ensure I really want to own them. Part of the reason I’ve upgraded my tools to analyze my stock investments is to analyze much more to increase my certainty and to keep me out of stocks where things are as erratic as they are with this company. If I had run this through this enhanced tool I probably would not have purchased it originally. Live and learn! I’ve had good success with many investments using the tools I had. I have made some bad investments in companies as well. Over the past year+ I’ve learned a lot and have incorporated those learnings into the toolset. It is good to see the tool alerting me to things that I should have been paying attention to. So my 40% loss in TUSK will be chalked up to a learning experience (yet another one).

So, am I buying more, holding, selling? At this point, I am going to hold onto this stock. That said I don’t expect much at all from it right now. I think at the current price it is overvalued and thus I don’t expect to earn superior returns from it going forward. I have tried to use very conservative estimates so perhaps I am wrong and it turns upward more quickly than expected. I think it is a good company to own in this space and it checks a lot of boxes for me in that regard. I will hold it and if something else better comes along I will not hesitate to sell this and move into that. At this point I want to get through the remainder of the stocks I hold in my current portfolio ‘reanalyzed’ using my new tools before I make any more moves with my money. I’m sharing my analysis here. If you have thoughts on it I’d love to hear them hit me up on Twitter @joeydean72