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January 2010: Best Ideas for 2010 February 2010: The Superinvestor Issue March 2010: The Brand Value Issue
BUSINESS OVERVIEW SELECTED OPERATING DATA 1
YTD
Selected Brand Value Rankings
BreitBurn owns oil and natural gas reserves in the U.S.
FYE December 31 2006 2007 2008 9/30/09
BreitBurn was formed as a master limited partnership (MLP) � revenue 2 n/m -44% 970% -54% Exclusive Interview with Aaron Edelheit Top 100 by Interbrand explanation of brand valuation methodology: http://bit.ly/99Jm6c
and went public in 2006. The majority of current reserves � production n/m 84% 126% -5%
Interbrand Brand Finance Brand Ticker Country Sector Interbrand Brand Finance
were acquired from Quicksilver Resources (KWK) in 2007. � realized price 3 n/m 1% 7% -13%
n/m 351% -25% n/a Current Year Current Year of Origin Brand Value Brand Value
� proved developed reserves
� proved reserves n/m 363% -27% n/a We recently had the pleasure of interviewing Aaron Rank Ago Rank Ago ($bn) y-y � ($bn) y-y �
INVESTMENT HIGHLIGHTS
Proved developed reserves (period-end): Edelheit of Sabre Value Asset Management, a value- 1 1 3 2 Coca-Cola KO United States Beverages 69 3% 35 6%
� Onshore U.S.-based oil and natural gas producer Natural gas (Bcf) 4 457 434 n/a 2 2 4 3 IBM IBM United States Computer Services 60 2% 34 7%
with a total of 102 million boe * of proved reserves Oil/liquids (Mbbls) 27,786 52,103 23,346 n/a oriented investment firm founded in 1998. The firm
3 3 5 4 Microsoft MSFT United States Computer Software 57 -4% 34 9%
at year-end 2008. ** Natural gas represents 75% of Total (Mboe)` 28,484 128,344 95,643 n/a manages the Sabre Value Fund and two distressed real
After-tax NPV @ 10% ($mn) 4 312 1,912 592 n/a 4 4 6 6 GE GE United States Diversified 48 -10% 32 20%
proved reserves, which are mainly located in estate funds. Edelheit graduated with a B.B.A. in
Selected average production data: 5 5 21 13 Nokia NOK Finland Consumer Electronics 35 -3% 20 -2%
Michigan’s Antrim Shale (70% of proved reserves). Natural gas (MMcf) 273 4,134 22,384 15,826 finance from the University of Georgia in 1996. He is a 6 8 18 12 McDonald's MCD United States Restaurants 32 4% 20 1%
� 15+ years of reserve life based on proved reserves Oil/liquids (Mboe) 1,595 2,330 3,078 2,247 philanthropist and serves on the board of directors of 7 10 2 5 Google GOOG United States Internet Services 32 25% 36 24%
at yearend 2008 and 2008 production level. 92% of Total (Mboe) 1,640 3,019 6,809 4,885
Realized average sales prices ($ per ...): 3 the Moishe House Foundation. Edelheit maintains an 8 6 10 10 Toyota TM Japan Automotive 31 -8% 27 24%
reserves are developed, meaning reserves can be 9 7 28 25 Intel INTC United States Computer Hardware 31 -2% 17 19%
Natural gas (…Mcf) 4.90 7.36 8.24 7.45 online blog at aaronedelheit.com, which we have found Aaron Edelheit
recovered from existing wells with minor capex. Oil/liquids (…boe) 55.98 58.93 71.51 65.08 Sabre Value 10 9 19 18 Disney DIS United States Media 28 -3% 20 20%
� Hedges provide cash flow visibility through 2013. Total (...boe) 55.24 55.69 59.49 53.96 educational and thought-provoking. Since June 1998,
11 12 9 9 HP HPQ United States Computer Hardware 24 2% 27 15%
89% and 85% of expected oil and gas production in Selected expenses ($ per boe): Edelheit has reported a compounded annual net return in excess of 12%.
Lease operating 5 17.66 19.60 20.55 20.16 12 11 39 52 Mercedes-Benz DAI Germany Automotive 24 -7% 14 41%
2010 is hedged at average prices of $81/bbl and 13 14 117 94 Gillette PG United States Personal Care 23 4% 7 4%
DD&A 5.19 9.75 26.42 16.66
$8/Mcf, respectively. Similar prices are hedged on Revenue ($mn) 2 133 75 802 167 14 17 60 42 Cisco CSCO United States Computer Services 22 3% 11 6%
volumes representing roughly 75%, 65% and 50% Selected items as % of revenue: The Manual of Ideas: Value investors come in many different stripes. How 15 13 29 26 BMW Frankfurt: BMW Germany Automotive 22 -7% 17 22%
of production in 2011, 2012 and 2013, respectively. EBIT 38% -74% 54% -29%
does your approach differ from some other value-oriented strategies?
Net income 1% -80% 47% -41% 16 16 270 210 Louis Vuitton LVMUY France Luxury 21 -2% 3 5%
� ~ 20% FCF yield on equity based on $168 million 17 18 149 128 Marlboro PM United States Tobacco 19 -11% 6 7%
DD&A 10% 39% 22% 49%
of net cash from operations (annualized from 3Q09) Capex 29% 31% 16% 11% Aaron Edelheit: I focus on small to medium sized companies that most 18 20 46 35 Honda HMC Japan Automotive 18 -7% 13 14%
and $32 million of maintenance capex. Given Net cash from operations ($mn) 46 60 227 184 “I’m looking for spin-offs, investors have never heard of. My goal is to find companies that are very 19 21 23 28 Samsung London: SMSN Republic of Korea Consumer Electronics 18 -1% 19 40%
existing hedges, relative stability of cash generation Tangible equity / assets (avg) 77% 73% 66% 59% companies restructuring, attractive, but aren’t being followed closely due to their size, lack of analyst 20 24 20 27 Apple AAPL United States Computer Hardware 15 12% 20 45%
appears reasonable assumption for next four years. ���hares out (avg) n/m 48% 82% -16%
1
Where stated, 2006 data refers to owned assets at BreitBurn’s formation. turnarounds and special coverage or neglect. I look for change inside of those companies that investors 21 22 94 146 H&M Stockholm: H&M B Sweden Apparel 15 11% 8 81%
Management has started hedging into 2014 as well.
situations, such as a company 22
2
Includes realized and unrealized gains/losses on derivative instruments. are not seeing and that will make the company much more valuable. 15 50 50 American Express AXP United States Financial Services 15 -32% 13 28%
� Reinstatement of MLP distributions likely with 3
Includes realized gains/losses on derivative instruments.
23 26 31 21 Pepsi PEP United States Beverages 14 3% 16 6%
continued FCF generation and reducing debt level.
4
Based on SEC guidelines (from production of proved reserves with period-end with two divisions, in which Specifically, I’m looking for spin-offs, companies restructuring, turnarounds and
prices held constant), and not accounting for hedges. 5 Excludes SG&A. 24 23 49 39 Oracle ORCL United States Computer Software 14 -1% 13 15%
BreitBurn has reduced net debt by $160+ million the poor division is masking special situations, such as a company with two divisions, in which the poor
25 28 198 63 Nescafé NSRGY Switzerland Beverages 13 2% 4 -52%
since yearend 2008 to $574 million at 10/31/09, or the other division that is very division is masking the other division that is very attractive. And I take very
� Borrowing base at discretion of lenders, based on 26 29 33 22 Nike NKE United States Sporting Goods 13 4% 16 8%
3.1x the midpoint of 2009 adj. EBITDA guidance. their valuation of reserves and internal criteria. A attractive.” concentrated positions, am patient and do not use leverage. 27 31 104 102 SAP SAP Germany Computer Software 12 -1% 8 24%
� Borrowing base confirmed at $732 million in decline in oil prices may reduce borrowing capacity. 28 35 - - IKEA Privately held Sweden Home Furnishings 12 10% - -
October 2009, with next evaluation in April. 29 25 52 34 Sony SNE Japan Consumer Electronics 12 -12% 13 9%
BreitBurn’s credit facility, which expires in MAJOR HOLDERS MOI: You have at times put in writing your thesis on your favorite ideas, both 30 33 16 19 Budweiser BUD United States Alcohol 12 3% 21 27%
November 2011, is provided by 18 banks. Insiders 1% | Quicksilver Resources 40% | Baupost 16% 31 30 44 32 UPS UPS United States Transportation 12 -8% 13 11%
long and short. Let’s take a look at some of what you’ve written and extract
� $13 EV to boe of proved reserves. This compares 32 27 8 7 HSBC HBC United Kingdom Financial Services 11 -20% 28 12%
to an average realized sales price of $54 per boe and lessons that may help us become better investors. In April 2009, when Sprott
RATINGS Resource (Toronto: SCP), an investment firm controlled by respected
33 36 126 110 Canon CAJ Japan Computer Hardware 10 -4% 6 8%
estimated all-in cash costs of $26 per boe in 3Q09. VALUE Intrinsic value materially higher than market value? ����� 34 39 98 71 Kellogg's K United States Food 10 7% 8 2%
Canadian investor Eric Sprott, traded at C$2.65 per share, you wrote, “What if I 35 32 75 67 Dell DELL United States Computer Hardware 10 -12% 10 19%
MANAGEMENT Capable and properly incentivized? ���
INVESTMENT RISKS & CONCERNS FINANCIAL STRENGTH Solid balance sheet? ��� told you there was a company out there that was predominantly sitting in cash, 36 19 36 54 Citi C United States Financial Services 10 -49% 14 46%
� Lawsuit by 40% shareholder Quicksilver claims MOAT Able to sustain high returns on invested capital? ���� gold and silver bullion with no debt, whose tangible book value is 37 37 57 69 JP Morgan JPM United States Financial Services 10 -11% 12 45%
BreitBurn “made false and misleading statements to EARNINGS MOMENTUM Fundamentals improving? ���� approximately C$3.50 per share, with little expenses, that was selling for C$2.65 38 38 38 89 Goldman Sachs GS United States Financial Services 9 -10% 14 106%
induce Quicksilver to acquire units” in their 2007 MACRO Poised to benefit from economic and secular trends? ��� per share? Better yet, what if I told you that it is run by one of the best resource 39 40 120 55 Nintendo NTDOY Japan Consumer Electronics 9 5% 7 -32%
deal. Quicksilver recently dropped claims against EXPLOSIVENESS 5%+ probability of 5x upside in one year? ��� 40 44 315 277 Thomson Reuters TRI Canada Media 8 1% 3 16%
individual BreitBurn directors but not the MLP. investors around, who has a proven record for making investors money and has
**
Reserve total reflects sale of Permian assets. Reserves may be about 140 41 45 - - Gucci GUCG Italy Luxury 8 -1% - -
*
Barrels per oil equivalent (six thousand cubic feet to one barrel of oil). million boe at yearend 2009 based on new SEC average price rules.� increased book value from $1.50 to over $3.50 in two years?” Many investors
42 43 93 117 Philips PHG Netherlands Diversified 8 -2% 8 49%
reading your argument might have said, “Yes, I see that SCP is undervalued on a 43 58 42 79 Amazon.com AMZN United States Internet Services 8 22% 13 79%
THE BOTTOM LINE
sum-of-the-parts basis, but what is the catalyst to unlocking value? Can’t the
July 2010: The Downside Protection Issue August 2010: The Superinvestor Issue September 2010: The European Value Issue
What differentiates BreitBurn from other oil and gas producers is better visibility into future cash generation as a result of the 44 51 32 37 L'Oréal Paris: OR France Personal Care 8 3% 16 41%
company’s commodity price hedging program. As the hedges are struck at attractive prices, BreitBurn should be able to discount persist indefinitely?” Eight months later, SCP traded at more than C$4 45 47 154 135 Accenture ACN United States Computer Services 8 -3% 6 11%
generate about $135 million of annual FCF through 2013/14. That amounts to close to 100% of market value over five years. per share, with additional upside looking likely due to value creation in the 46 46 166 171 eBay EBAY United States Internet Services 7 -8% 5 28%
At a minimum, the capacity to quickly de-lever significantly removes downside risk, while increasing the likelihood of a interim. When dealing with investment vehicles such as SCP, how do you 47 48 35 66 Siemens SI Germany Diversified 7 -8% 15 79%
reinstatement of distributions, which traditionally represent one of the core benefits of the tax-efficient MLP structure. It decide what discount to net asset value is sufficiently compelling, and how do 48 56 - - Heinz HNZ United States Food 7 9% - -
appears unlikely that litigation will lead to any materialitvalue transfer fromour Top 5 investment to 40% shareholder several
We found difficult to select smaller shareholders ideas this month, as you avoid the entitiesTop investorsat wide discounts to NAV for a long time?
that do trade included in this section:
Top 5 European Investment Ideas
49 49 51 53 Ford F United States Automotive 7 -11% 13 29%
other companies in this report offer very interesting risk-reward tradeoffs. We have
Quicksilver. In fact, all shareholders may benefit from closer scrutiny of management to ensure intrinsic value is realized. 50+ Portfolios With Signal Value™ 50 62
Lavendon (London: LVD) 212 - Zara Madrid: ITX Spain Apparel 7 14% 4 -
slotted those companies into our “Next 5 ideas with strong downside protection.” Revealing the Top Ideas of Top Investors � Bill Ackman, Pershing Square
Rental Equipment Leicestershire, UK, 44-1455558874 www.lavendongroup.com
They are EchoStar (SATS; $19.50; MV $1.7 billion), Gravity (GRVY; $1.55; MV � Lee Ainsle, Maverick © 2009-2010 by BeyondProxy LLC. All rights reserved. www.manualofideas.com March 25, 2010 – Page 84 of 116
© 2009-2010 by BeyondProxy LLC. All rights reserved. www.manualofideas.com January 21, 2010 – Page 9 of 124 © 2009-2010 by BeyondProxy LLC. All rights reserved. www.manualofideas.com
$43 million), Harvest Natural Resources (HNR; $8.45; MV $280 million), Penn � Chuck Akre, Akre Capital February 18, 2010 – Page 28 of 144 Trading Data Consensus EPS Estimates Valuation
“Signal value” as opposed to “noise.” We present the � Zeke Ashton, Centaur Capital Price: £0.52 (as of 9/24/10) Month # of P/E FYE 12/31/09 n/a
Millers (PMIC; $12.10; MV $57 million), and Seahawk Drilling (HAWK; $10; MV
$118 million). Set-top box and satellite company EchoStar trades at a material holdings of some of the world’s top investors. We look for � Brian Bares, Bares Capital 52-week range: £0.43 - £1.86 Latest Ago Ests P/E FYE 12/31/10 n/a
� Bruce Berkowitz, Fairholme Market value: £86.7 million This quarter n/a n/a n/a P/E FYE 12/31/11 n/a
discount to tangible book value, with well over one-half of market value in net cash investors who have amassed impressive track records over Enterprise value: £254.4 billion Next quarter n/a n/a n/a P/E FYE 12/31/12 n/a
and investments; it has improving business performance and is run by one of the � Richard Breeden, Breeden Capital
long periods of time. We choose these investors carefully Shares out: 164.4 million FYE 12/31/10 n/a n/a n/a EV/ LTM revenue 1.2x
most accomplished entrepreneurs in the industry, Charlie Ergen, who owns one-half � Tom Brown, Second Curve
Ownership Data FYE 12/31/11 n/a n/a n/a EV/ LTM EBIT 21x
of the equity. Korean Internet gaming company Gravity trades for less than net cash, to avoid the noise inherent in most 13F-HR filings. � Warren Buffett, Berkshire Hathaway
Insider ownership: <1% FYE 12/30/12 n/a n/a n/a P / tangible book 1.0x
is profitable and cash generative and should release a long-awaited new game within � Francis Chou, Chou Associates
Insider buys (last six months): >1 LT growth n/a n/a n/a Greenblatt Criteria
the next six to twelve months. Oil and gas firm Harvest trades at a lowly price based MOI Signal Rank answers the question, “What are � Chase Coleman, Tiger Global
Insider sales (last six months): 0 EPS Surprise Actual Estimate LTM EBIT yield 5%
on proved reserves in Venezuela, a � James Crichton, Scout
this investor’s top ten ideas right now?” Rather than Institutional ownership: n/a n/a n/a n/a LTM pre-tax ROC 4%
country that strikes fear into investors � Ian Cumming and Joe Steinberg, Leucadia
simply presenting each investor’s largest holdings as of the � Boykin Curry, Eagle Operating Performance and Financial Position
but appears unlikely to stand in the
� David Einhorn, Greenlight (£ millions, except Fiscal Years Ended LTME 6ME 6ME
way of value creation for Harvest recently filed quarter end, the MOI’s proprietary per share data) 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 6/30/10 6/30/09 6/30/10
� Phil Falcone, Harbinger
shareholders. Penn Millers is a leader methodology ranks the companies in each investor’s Revenue 108 100 125 186 260 227 219 114 106
� Alan Fournier, Pennant
in the attractive agribusiness insurance Gross profit 36 41 55 87 110 87 80 43 36
portfolio based on the investor’s current level of conviction � Glenn Fuhrman and John Phelan, MSD Capital
niche, yet trades at a material discount Operating income (9) 7 13 26 39 (25) 12 (31) 6
� Jeffrey Gates, Gates Capital
to tangible book value, owing to an in each holding, as judged by the MOI. Net income (13) 1 7 15 17 (43) (7) (37) (0)
� Tom Gayner, Markel Gayner Diluted EPS n/m 0.02 0.18 0.42 0.35 n/m n/m n/m n/m
ownership change quirk typical in � Kian Ghazi, Hawkshaw
demutualizations. Gulf of Mexico Our proprietary methodology takes into account a Shares out (avg) 37 37 38 42 46 56 105 47 164
� Ed Gilhuly and Scott Stuart, Sageview Cash from ops 24 25 30 49 54 56 49 20 13
jackup driller Seahawk has seen number of variables, including the size of a position in an � Glenn Greenberg, Brave Warrior Capex 2 8 36 50 59 13 16 5 8
demand for its drilling platforms � John Griffin, Blue Ridge
investor’s portfolio, the size of a position relative to the Free cash flow 22 17 (6) (1) (5) 43 33 15 5
decline along with natural gas prices, � Howard Guberman, Gruss Cash & investments 8 8 10 17 15 76 6 10 6
but the shares have slumped to a level market value of the corresponding company, the most recent � Andreas Halvorsen, Viking Global Total current assets 34 32 44 69 80 135 68 72 68
that might be below the price quarterly change in the number of shares owned, and the � Mason Hawkins, Southeastern Intangible assets 1 1 3 10 15 7 6 9 6
shareholders could realize in a � Lance Helfert and Paul Orfalea, West Coast Total assets 202 177 268 426 571 514 414 466 414
liquidation that would see the rigs sold change in the stock price of a position since the most recent � Chris Hohn, Children’s Investment Fund Short-term debt 16 14 25 41 55 44 46 52 46
for scrap steel. quarterly filing date. � Carl Icahn, Icahn Current liabilities 33 32 67 119 116 98 89 99 89
Long-term debt 81 56 84 161 265 214 127 231 127
� Rehan Jaffer, H Partners
Finally, we are happy to bring For example, an investor might have the most Total liabilities 127 99 174 306 423 340 244 360 244
� Seth Klarman, Baupost
you an exclusive interview with top- Common equity 75 78 94 119 148 174 170 105 170
conviction in a position that is only the tenth-largest � John Kleinheinz, Kleinheinz Capital
performing small cap value fund � Eddie Lampert, ESL Investments Ten-Year Stock Price Performance and Trading Volume Dynamics
manager Scott Barbee of the Aegis position in such investor’s portfolio. This might be the � Dan Loeb, Third Point 800p
Value Fund (AVALX), a mutual fund � Steve Mandel, Lone Pine
case if an investor invests in a small company, resulting in
that has handily outperformed the � Sandy Nairn, Edinburgh Partners 700p
Russell 2000 Value Index since the fund’s inception in 1998. Scott has been through a holding that is simply too small to rank highly based on
� Mohnish Pabrai, Pabrai Funds
two very tough periods for value investors while at the helm of Aegis — the tech size alone. On the other hand, such a holding might � John Paulson, Paulson & Co. 600p
stock “melt-up” in 1998-2000 and the market collapse of late 2008 and early 2009. � Boone Pickens, BP Capital
represent 19.9% of the shares outstanding of the subject 500p
His insights into surviving and thriving as a Graham-and-Dodd-style investor are � Mark Rachesky, MHR
perhaps not so much unique as they are a reminder that investors do better when they company, suggesting a high level of conviction. Our � Lisa Rapuano, Lane Five
400p
refuse to be swayed by the prevailing market psychology and instead follow their estimate of the conviction level would rise further if the � Larry Robbins, Glenview
own path with discipline and conviction. � Bob Rodriguez and Steven Romick, First Pacific 300p
subject company has a 20% poison-pill threshold, thereby � Wilbur Ross, WL Ross
Sincerely,
suggesting that the investor has bought as much of the � Chris Shumway, Shumway Capital 200p
� David Tepper, Appaloosa
subject company as is practically feasible.
� Peter Thiel, Clarium 100p
John Mihaljevic, CFA � Prem Watsa, Fairfax
and The Manual of Ideas research team � Wally Weitz, Weitz Funds 0p
� David Winters, Wintergreen Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09 Sep 10