Charles Fabrikant's 1Q15 Letter To Seacor Holdings Stockholders – ValueWalk Premium
SEACOR Holdings

Charles Fabrikant's 1Q15 Letter To Seacor Holdings Stockholders

Charles Fabrikant letter to Seacor Holdings stockholders for the first quarter ended March 31st, 2015.

H/T Value Investing World

Dear Fellow Stockholder,

The Year In Review: Financial Highlights

SEACOR Holdings Inc. (“SEACOR”) produced $100.1 million of profit, a 7.1% return on stockholders’ equity of $1,400.9 million, and $4.71 diluted earnings per share. This compares with last year’s profit of $47.2 million, a 3.6% return on stockholders’ equity of $1,295.4 million (adjusted for the spin-off of Era), and $2.32 diluted earnings per share.

In 2014, SEACOR “pocketed” (earned) $248.6 million from its share of income before depreciation, amortization (including net deferred gains from sales of equipment), and deferred taxes. This $248.6 million accounts for cash interest payments and taxes currently owed.2 We subscribe to the old-fashioned precept that “cash is king” (even in a world in which it earns almost nothing in the bank).

A highlight of the year was teaming up with Avista Capital Partners (“Avista”), a private equity fund, to create SEA-Vista. Avista invested approximately $150 million of cash for a 49% non-controlling interest in our seven U.S.-flag Jones Act tankers (four owned and three leased), and newbuild contracts for three U.S.-flag product tankers. We also committed to building a chemical-petroleum articulated tug-barge (“ATB”), adding an additional $94.3 million to capital expenditures for the shipping group. At year-end our forward capital expenditures totaled $505.8 million for all our business units.

SEACOR Holdings

SEACOR Holdings – 25-Year Perspective

SEACOR marked its 25th year in business this past December. The SEACOR of today is an evolution of an opportunistic “leveraged buyout” of a local Gulf of Mexico business that operated supply vessels in the United States, and a few small tenders in Nigeria. Conditions in the oil patch were difficult, and the outlook then, not unlike that of today, was uncertain and sentiment negative. The industry had plunged into an abyss in 1982-1983, and there was no “APP” for calculating how long it would take to climb out. The offshore vessel sector was struggling with significant excess capacity. Eager investors, subsidized by tax incentives and captivated by a good “story,” and ambitious operators, desirous of expanding their fleets, had binged on work boats anticipating a surge in activity following the commercialization of North Sea oil, and the deregulation of natural gas prices in the United States, and a multifold increase in the oil price in the wake of the regime change in Iran. Even interest rates ranging from 12-20% failed to deter investment!

SEACOR Holdings

From 1989-1996, SEACOR’s best opportunities were to buy secondhand offshore vessels via discrete equipment purchases, or, in bulk, via corporate acquisitions. The latter added value by producing operational efficiencies. SEACOR was an “early mover” in the consolidation of the industry. Five transactions were key in consolidating the standby safety sector in the North Sea, and the offshore vessel markets in West Africa and the Gulf of Mexico. They also transformed SEACOR into a global business with a diverse fleet.

SEACOR Holdings

In the late 1990s, daylight arrived, and the sun warmed up the oil patch. By 1998 opportunities for consolidating combinations and purchases of secondhand assets at compelling prices had become scarce. Offshore vessels were starting to earn money. Investors took notice. “Bulking up” became “trendy,” and prices for secondhand assets improved. SEACOR reversed its strategy, shed secondhand assets, and focused its efforts on designing and building next generation equipment to meet the push into deeper waters and more distant frontiers.

We also used some of the proceeds of our sales and our profits to embark on a path of diversification. Redirecting capital into asset classes other than conventional offshore vessels struck us as more productive than marking time until values for boats fell to attractive levels.

Our first excursion involved building jack-up drilling rigs. Investments in dry-cargo barges and helicopters, both depressed asset classes, soon followed. During the last 16 years, in addition to helicopters, barges, and rigs, SEACOR has invested in international dry cargo ships, aviation services, an alcohol production facility, oil storage terminal, grain elevators, a technology concept that was a first mover in providing email service to ships and offshore vessels (not a winner!), a specialized emergency response service, and public equities and debt as surrogates for assets. We have also run a specialized leasing business that has financed disparate assets such as coal washing plants, oxygen tanks for hospitals, and reconnaissance aircraft used on missions above my clearance. I wish I could say all of these investments were successful. Of course, I cannot. Some have produced, at best, mediocre returns and some resulted in losses. Fortunately, some have also produced outstanding returns. For several the jury is still out. The verdict will be rendered when the assets are sold or scrapped.

SEACOR today has four main business segments: Offshore Marine Services, Inland River Services, Shipping Services, and Illinois Corn Processing, an alcohol production facility. Their activities are described in our 2014 10-K and were also narrated in last year’s letter to stockholders.

SEACOR Holdings

See full letter below.


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