In this note, we will continue to highlight recent developments in the portfolio. Our research process demands that we perform a detail-oriented analysis of each company prior to adding a position to the portfolio. However, the work doesn’t stop there. Our team continuously monitors each company and measures real-time changes against the investment thesis that is developed. With each change, we assess whether the company’s actions are in line with management’s previous commitments, in line with our investment thesis, and ask ourselves whether the change necessitates an adjustment to our thesis and target price. Below we highlight recent developments and, where possible, provide context for the development in comparison with our expectations.
Our updates will continue with PBF Holding Co. LLC (PBF) and PBF Logistics LP (PBFX). PBF is a US-based refiner of crude oil and PBF Logistics provides logistics services for refined hydrocarbon products. On November 30, 2022, PBF Holdings announced that it completed the acquisition of PBF Logistics (including taking on PBF Logistics’ outstanding debt) and on January 3, 2023, announced that it would retire the $525 million of outstanding PBF Logistics’ 6.875% notes due 2023 (notes that our clients held in their portfolios). The acquisition of PBF Logistics was in line with senior management’s prior comments with regard to capital allocation, and we view the acquisition as prudent, especially in light of PBF Holdings’ cash generation in recent quarters. The PBF Logistics notes were retired on February 3, 2023, by the company at par ($1,000/bond). We redeployed in client accounts as appropriate, realizing a 7.99% CAGR for the position.
Next, we turn our attention to Service Properties Trust, Inc. (SVC). Last quarter, SVC reported improved revenue primarily attributed to business travel returning to pre-COVID volumes. In addition to a return to normalized occupancy levels at SVC’s hospitality (hotel) properties, SVC continues to sell hotel assets that are bottom quintile performers within its portfolio. This is expected to provide cash to reduce SVC debt load as well as improve the average margin for the remaining portfolio of properties. SVC’s real estate sales in 2022 were well timed with the peak of real estate prices but we do not expect every asset sale going forward to achieve similar pricing. However, regardless of the present real estate market, we view SVC’s asset sales as reasonable and use of those proceeds to retire outstanding debt as a positive for its balance sheet. In the last twelve months, SVC has paid off $1.425 billion of outstanding debt resulting in a debt-to-capital ratio of 79.9% and a trailing-twelve-months EBITDA-to-interest ratio of 1.5x.
Finally, Subsea 7 S.A. (SUBCY), a provider of engineering and construction services to the offshore drilling industry, has announced a handful of new contracts over the last few months in both its traditional and renewable business segments. These contracts are indicative of increased demand for offshore drilling services as elevated price of crude oil has incentivized investment in production accretive projects, particularly in the North Sea, Trinidad and Tobago, and the western coast of Africa. Company management recently stated that its contracted backlog contains projects with higher margins than current projects, but that margins at the peak of the current cycle will not reach the heights that were seen in the peaks of previous cycles. Increased investment in offshore energy assets is a theme that is fundamental to our investment theses for Gulf Island Fabrication, Inc. (GIFI), Borr Drilling, Ltd. (BORR), and Subsea 7. Subsea 7’s management continues to communicate a positive outlook for both margin and volume and believes that Subsea will benefit from the current upcycle later than other participants. We agree and estimate that Subsea 7’s company-wide EBITDA margin will be 14% in a normalized environment. We continue to be constructive on Subsea 7 and are closely monitoring the position as it approaches our price target.
Portfolio companies are monitored continuously, and these brief updates can only provide a snippet of the news and our research team’s knowledge of each company. That said, we hope these updates have been useful and welcome the opportunity to further discuss any particular company or idea.
Sincerely,
The MIAM Research Team