ATCO - Atlas Corp

[gfp]

Was this expected?

"In April 2020, Charles Ferry resigned as Chief Executive Officer of APR."

[petec]

Was this expected?

"In April 2020, Charles Ferry resigned as Chief Executive Officer of APR."

 

I don't know whether it was expected, but it was known.

 

Frankly it's not *un*expected. Change of ownership often brings a change of people.

[brycepeterson]

I own the preferred shares, series H and I.  Read today's report and presentation.  It's comforting to get confirmation the operating cash flow was as expected in 1Q20 and sounds stable in 2020.  For those not watching Atlas' preferred shares, it was a crazy ride during the height of the panic.  They fell from about $25 to high single digits.  At $25 pay about 8%; $10 about 20%.  Despite researching the company well prior to the preferred purchases, when prices drop like that it does mess with your mind, "does someone know something I don't," etc.  Preferred shares of series H and I back to about $20 1/2, pay about 10%.  Not a bad buy here.

[petec]

I own the preferred shares, series H and I.  Read today's report and presentation.  It's comforting to get confirmation the operating cash flow was as expected in 1Q20 and sounds stable in 2020.  For those not watching Atlas' preferred shares, it was a crazy ride during the height of the panic.  They fell from about $25 to high single digits.  At $25 pay about 8%; $10 about 20%.  Despite researching the company well prior to the preferred purchases, when prices drop like that it does mess with your mind, "does someone know something I don't," etc.  Preferred shares of series H and I back to about $20 1/2, pay about 10%.  Not a bad buy here.

 

Wow! Wish I’d noticed them in the single digits.

[gary17]

wow. 20%  sounds like set for retirement. 

i missed the boat

 

what’s the symbol in case the boat comes back for me... thanks !

[brycepeterson]

Preferred shares have different symbols depending on where you're trading.  Common symbols for these are ATCO-H and ATCO-I, or ATCO.PH and ATCO.PI.  You'll find them wherever you're trading, might just have to do a symbol lookup. 

 

It was pretty scary.  Like petec states, Atlas' operating cash flow is contracted and highly expected to by $500-$600 million in 2020, which means the preferred share dividends are easily payable ($67-$70 million per year total preferred payout).  Also, expectation is they're done buying new ships, thus extremely low capex 2Q20-4Q20 and beyond (reinforces big free cash flow).  But when the shares plummeted, I was wondering if counter parties were going bankrupt, or if global trade was slowing so much that Atlas would have to make exceptions to keep clients solvent, etc.  A lot of bad stuff goes through your mind when you see something you thought was a secure payment at $25 go to single digits.  Recovered to $15, but would still have huge -10% to +10% days with no news.  Just hitting $20 now...

[petec]

Next time they're at 15 or 10, would you mind letting me know?

[brycepeterson]

:) ha, I hope to notice, too!  The drop below $10 was BRIEF.  I think like a day or two?  Off memory :) 

 

$15's price area was a little more pronounced - during those really dramatic days in mid to late March.  I just looked at the chart of the H's, and I didn't realize it hit $20 about two weeks ago.  Still not a bad buy here at $20?  Around a 10% annual income.

 

I just read the 1Q20 call transcript.  CEO states Seaspan is in constant communication with major customers and doesn't expect any revisions to deals.  They think shipping volumes already put in the bottom...expect volumes to gradually increase from here.  Said their customers today are dramatically different than in 2008-09 (in better fiscal shape).  Pretty good transcript considering how things feel/felt at the lows.

[Thrifty3000]

Is 23% of Seaspan’s revenue at risk?

 

Seaspan’s 2nd largest client, Yang Ming, accounts for 23% of revenue and looks to me like it could declare bankruptcy any time now. (Look at 2018 losses and 2019 losses relative to debt and remaining equity. I’m assuming 2020 won’t be a banner year.)

 

Yang Ming partly blames high cost charters for its underperformance, and seems to have made reducing charters a key element of its turnaround strategy.

 

Page 16 of Atco’s annual report states: Under some circumstances, we could lose a time charter if a customer declares bankruptcy.

 

Atco management had a canned answer to questions about client risk in the recent conference call (Which is why I decided to do some digging).

 

Does anyone have insight into Yang Ming-related risk/mitigation?

 

(Disclosure: I own some Fairfax, but not Atco.)

 

 

[petec]

I can’t see the 2019 financials - could you post a link? Also to your source for the comments about lease cost and strategy please.

 

My assumption is that deferrals (by lenders and lessors) are more likely than bankruptcy, but I could be WAY wrong.

 

I would also assume ATCO would be moderately happy to give lower rates, or leases indexed to spot rates, in return for longer leases.

 

Interesting that Brookfield say container traffic through their ports is now picking up after troughing in q1 when China shut down.

[petec]

Also I see Yang Ming just raised preferred capital in a private placement.

[Thrifty3000]

Yang Ming 2019 Earnings:

 

https://www.yangming.com/News/press_release/PressContent.aspx?BulletinType=PressRelease&uid=11870&localSiteD=

[arcube]

Am I reading this right?

 

Fairfax Financial Holdings has a position in this equal to roughly 54% of portfolio?

[Parsad]

Am I reading this right?

 

Fairfax Financial Holdings has a position in this equal to roughly 54% of portfolio?

 

The data is skewed. 

 

- Fairfax's portfolio is like $30B, so $800M would be about 2.8%. 

- Of the non-cash/non-bond assets tied up in equities/businesses, it probably makes up like 18% or so...I'm just eyeballing without looking at the financials. 

- Of just trading equities they've invested in (XOM, GOOG, BB, ATCO, etc)...$3-4B...probably like 25-30%. 

 

Cheers!

[arcube]

Am I reading this right?

 

Fairfax Financial Holdings has a position in this equal to roughly 54% of portfolio?

 

The data is skewed. 

 

- Fairfax's portfolio is like $30B, so $800M would be about 2.8%. 

- Of the non-cash/non-bond assets tied up in equities/businesses, it probably makes up like 18% or so...I'm just eyeballing without looking at the financials. 

- Of just trading equities they've invested in (XOM, GOOG, BB, ATCO, etc)...$3-4B...probably like 25-30%. 

 

Cheers!

 

Thank you for the clarification Sanjeev.

[Thrifty3000]

Has anyone worked out whether the lifetime value of a ship is actually positive?

 

It was a concern on this thread a couple years ago that there was a negative lifetime value. (At which point the posters who originally carried this thread threw in the towel on Seaspan. Then David Sokol came along and a different group of posters picked up the conversation.)

 

The concern was a ship looks like a great investment during the long term charter phase, but after that the economics deteriorate fast, culminating in a big loss ultimately taken when the ship has to be scrapped - resulting in a negative lifetime value.

 

The thesis was the only way to overcome negative lifetime value near term is to run a quasi-ponzi scheme. You have to buy lots of new ships on long term charter to make near term gains look strong. The problem is once the market eventually saturates and you have more ships going off charter than you have new boats to offset losses then the business collapses.

 

I’m particularly curious about the amount of free cash generated during the long term charter relative to the original cost of the ship. That would give an idea of the odds of breaking even over the ship’s remaining life.

 

I would normally throw this in the too hard pile. But, I mostly hope someone at Fairfax has done this kind of per-ship analysis. I think there’s a lot of trust at Fairfax that Sokol will work his magic in an entirely different industry than he did at Mid American. (Yet, Sokol has invested in companies in the past that he publicly recognized after the fact didn’t earn the cost of capital - see Middleburg Bank. I’m concerned this is another such case.)

 

 

[Thrifty3000]

Here’s a Very Rough example of the negative lifetime value (if you go back to the pre-Sokol years in this thread you can see where the concerns were raised after boats started getting scrapped for much lower than their carrying value):

 

Acquire boat for $100 million

 

First 10 years:

 

- Long term charter nets $3 million annually for a total of $30 million.

 

Next 10 years:

 

- Boat basically breaks even on short term rates netting a total of $1 million over 10 years.

- Boat is valued at $35 million on the books.

 

End of year 20:

 

- Boat is sold for scrap for $1 million.

- $34 million of boat value is written off.

 

Lifetime value of the boat is negative. But, earnings and free cash looked decent during the first 10 years.

 

[brycepeterson]

Thanks for the thoughts Thrifty - I've been wondering same thing.  I own the Series H and I preferred shares.  Have not touched the common shares.  My sense is bad business to own, but good enough to lend to (bonds or preferred shares).

[Thrifty3000]

For less than the price of a new ship Atco could buy out their second largest publicly traded competitor, Danaos, which would increase TEU by over 30%. Danaos’s market cap has dropped to less than $100 million.

[Thrifty3000]

But, Danaos is a 40 year old company. So they are having to take big, consistent, impairments year after year now. Like last year’s $200 million write down on some 15 year old Panamax ships. And $400 million of write downs a couple years before that. In total Danaos has accumulated $200 million of losses over the last 5 years. My concern is Danaos provides a preview of Seaspan’s fate. Just look at how Danaos’s market value has plummeted over time as the impairments overwhelmed earnings.

[Parsad]

But, Danaos is a 40 year old company. So they are having to take big, consistent, impairments year after year now. Like last year’s $200 million write down on some 15 year old Panamax ships. And $400 million of write downs a couple years before that. In total Danaos has accumulated $200 million of losses over the last 5 years. My concern is Danaos provides a preview of Seaspan’s fate. Just look at how Danaos’s market value has plummeted over time as the impairments overwhelmed earnings.

 

Sokol may be the preeminent operator in large capex type businesses...Kiewit Energy, Cal-Energy, Mid-American, Netjets, BYD Company, Atlas Corp.  If anyone understands large capital requiring, depreciating asset businesses, it's David Sokol.  Not only is he a spectacular manager, but he's as good an investor.  I would not be out of place to say that he is one of the few people as talented, if not more talented, than Warren Buffett or Prem Watsa.  If he had not left Berkshire as he did, David Sokol's name would be in the same stratosphere as Jack Welch, Jamie Dimon, Jeff Bezos, etc.  He is an extraordinary operator...so I doubt you will see anything happen even remotely close to Danaos.  Cheers!

[Parsad]

Here’s a Very Rough example of the negative lifetime value (if you go back to the pre-Sokol years in this thread you can see where the concerns were raised after boats started getting scrapped for much lower than their carrying value):

 

Acquire boat for $100 million

 

First 10 years:

 

- Long term charter nets $3 million annually for a total of $30 million.

 

Next 10 years:

 

- Boat basically breaks even on short term rates netting a total of $1 million over 10 years.

- Boat is valued at $35 million on the books.

 

End of year 20:

 

- Boat is sold for scrap for $1 million.

- $34 million of boat value is written off.

 

Lifetime value of the boat is negative. But, earnings and free cash looked decent during the first 10 years.

 

You have to include the debt that is written off on the liability side as well.  You don't suddenly lose $34M of value. 

 

Free cash would actually have increased dramatically as capex for that boat is now very low, but it is still operational and generating the same revenue.  Cheers!

[Thrifty3000]

But, Danaos is a 40 year old company. So they are having to take big, consistent, impairments year after year now. Like last year’s $200 million write down on some 15 year old Panamax ships. And $400 million of write downs a couple years before that. In total Danaos has accumulated $200 million of losses over the last 5 years. My concern is Danaos provides a preview of Seaspan’s fate. Just look at how Danaos’s market value has plummeted over time as the impairments overwhelmed earnings.

 

Sokol may be the preeminent operator in large capex type businesses...Kiewit Energy, Cal-Energy, Mid-American, Netjets, BYD Company, Atlas Corp.  If anyone understands large capital requiring, depreciating asset businesses, it's David Sokol.  Not only is he a spectacular manager, but he's as good an investor.  I would not be out of place to say that he is one of the few people as talented, if not more talented, than Warren Buffett or Prem Watsa.  If he had not left Berkshire as he did, David Sokol's name would be in the same stratosphere as Jack Welch, Jamie Dimon, Jeff Bezos, etc.  He is an extraordinary operator...so I doubt you will see anything happen even remotely close to Danaos.  Cheers!

 

I Totally agree with you on Sokol. He’s an operations management machine. It kills me Sokol isn’t overseeing Berkshire’s operations. I think his management approach and intensity would unlock So Much more value. And, his track record is the reason why I think Fairfax pretty much had no choice but to invest alongside him. I’m all for investing in David Sokol. Who better to competently manage billions of dollars.

 

I don’t so much mind the bond deal, and I’m glad Atco is diversifying, because I want to see Sokol work his magic. I just can’t find evidence that container ships have a positive lifetime value.

 

Container ships are a bit like owning a rental house that nets $10k a year for 3 years, so you feel pretty good about life, but in years 4 through 6 you have to replace the HVAC system, the water line, and the roof, so from a cash flow standpoint you feel like you’re treading water, and then in year 7 you bulldoze the house and sell the scraps.

 

I just hope that if Seaspan’s is indeed a low-return business model, that Sokol is able to maintain his managerial reputation by pivoting before it’s too late. If anyone can do it he can.

[Parsad]

But, Danaos is a 40 year old company. So they are having to take big, consistent, impairments year after year now. Like last year’s $200 million write down on some 15 year old Panamax ships. And $400 million of write downs a couple years before that. In total Danaos has accumulated $200 million of losses over the last 5 years. My concern is Danaos provides a preview of Seaspan’s fate. Just look at how Danaos’s market value has plummeted over time as the impairments overwhelmed earnings.

 

Sokol may be the preeminent operator in large capex type businesses...Kiewit Energy, Cal-Energy, Mid-American, Netjets, BYD Company, Atlas Corp.  If anyone understands large capital requiring, depreciating asset businesses, it's David Sokol.  Not only is he a spectacular manager, but he's as good an investor.  I would not be out of place to say that he is one of the few people as talented, if not more talented, than Warren Buffett or Prem Watsa.  If he had not left Berkshire as he did, David Sokol's name would be in the same stratosphere as Jack Welch, Jamie Dimon, Jeff Bezos, etc.  He is an extraordinary operator...so I doubt you will see anything happen even remotely close to Danaos.  Cheers!

 

I Totally agree with you on Sokol. He’s an operations management machine. It kills me Sokol isn’t overseeing Berkshire’s operations. I think his management approach and intensity would unlock So Much more value. And, his track record is the reason why I think Fairfax pretty much had no choice but to invest alongside him. I’m all for investing in David Sokol. Who better to competently manage billions of dollars.

 

I don’t so much mind the bond deal, and I’m glad Atco is diversifying, because I want to see Sokol work his magic. I just can’t find evidence that container ships have a positive lifetime value.

 

Container ships are a bit like owning a rental house that nets $10k a year for 3 years, so you feel pretty good about life, but in years 4 through 6 you have to replace the HVAC system, the water line, and the roof, so from a cash flow standpoint you feel like you’re treading water, and then in year 7 you bulldoze the house and sell the scraps.

 

I just hope that if Seaspan’s is indeed a low-return business model, that Sokol is able to maintain his managerial reputation by pivoting before it’s too late. If anyone can do it he can.

 

No they don't, but most large capex businesses have depreciating assets...doesn't mean they aren't good businesses.  In fact, Berkshire has become one of the leaders in investing in such businesses, because they consume so much free cash and tend to have valuable operating moats.  Cheers!

[Thrifty3000]

But, Danaos is a 40 year old company. So they are having to take big, consistent, impairments year after year now. Like last year’s $200 million write down on some 15 year old Panamax ships. And $400 million of write downs a couple years before that. In total Danaos has accumulated $200 million of losses over the last 5 years. My concern is Danaos provides a preview of Seaspan’s fate. Just look at how Danaos’s market value has plummeted over time as the impairments overwhelmed earnings.

 

Sokol may be the preeminent operator in large capex type businesses...Kiewit Energy, Cal-Energy, Mid-American, Netjets, BYD Company, Atlas Corp.  If anyone understands large capital requiring, depreciating asset businesses, it's David Sokol.  Not only is he a spectacular manager, but he's as good an investor.  I would not be out of place to say that he is one of the few people as talented, if not more talented, than Warren Buffett or Prem Watsa.  If he had not left Berkshire as he did, David Sokol's name would be in the same stratosphere as Jack Welch, Jamie Dimon, Jeff Bezos, etc.  He is an extraordinary operator...so I doubt you will see anything happen even remotely close to Danaos.  Cheers!

 

I Totally agree with you on Sokol. He’s an operations management machine. It kills me Sokol isn’t overseeing Berkshire’s operations. I think his management approach and intensity would unlock So Much more value. And, his track record is the reason why I think Fairfax pretty much had no choice but to invest alongside him. I’m all for investing in David Sokol. Who better to competently manage billions of dollars.

 

I don’t so much mind the bond deal, and I’m glad Atco is diversifying, because I want to see Sokol work his magic. I just can’t find evidence that container ships have a positive lifetime value.

 

Container ships are a bit like owning a rental house that nets $10k a year for 3 years, so you feel pretty good about life, but in years 4 through 6 you have to replace the HVAC system, the water line, and the roof, so from a cash flow standpoint you feel like you’re treading water, and then in year 7 you bulldoze the house and sell the scraps.

 

I just hope that if Seaspan’s is indeed a low-return business model, that Sokol is able to maintain his managerial reputation by pivoting before it’s too late. If anyone can do it he can.

 

No they don't, but most large capex businesses have depreciating assets...doesn't mean they aren't good businesses.  In fact, Berkshire has become one of the leaders in investing in such businesses, because they consume so much free cash and tend to have valuable operating moats.  Cheers!

 

I say we give it a positive spin and just look at the high levels of free cash from leased boats as “float” that David Sokol gets to invest. If the boat sucks wind after it goes off lease, big deal, Sokol will have already made up for it and then some.