JEF - Jefferies Group

[valueyoda]

My cheapskate nature has always appealed to Buffett's frugality. However, simply because Handler is more willing to spend a portion of his substantial net worth on a more luxurious lifestyle, does not make me worry about his capital allocation abilities. Bill Ackman, Dan Loeb and hundreds of other famous investors like to live a bit better without compromising their attention for their investors.

[jay21]

I personally think that the liquidity and solvency risk of Jefferies within the Leucadia structure is largely overblown given the holding company's financial resources. Furthermore, I think that Jefferies is a necessary - and of the more stable - profit and book value generators within the company right now. Leucadia was always a good investment because they had the balls to take large levered calculated bets on individual investments. This caused highly volatile return numbers, but very strong results over longer periods of times. The reverse is true at the moment. The company is currently drowning in liquidity and has too few meaningful investments that will cause large profits going forward. One of the more interesting long term bets they've made recently, was the Harbinger position. 

 

Given the large period of inaction and flat book value growth, I think that investors might be pleasantly suprised by new investments that will be added. I think that the right course of action should be a gradual accumulation rather than disposition of Leucadia shares at these valuations (maybe even some Leucadia LEAPS). The relative inaction shown by Leucadia is also noticeable at Loews (a company I always had a lot of respect for), as they have been hesitant to deploy their cash balances in new large investments.

 

I largely agree with this.  I do not think JEF has too much risk in it.  There are a few minor things to not like here, but it's at less than BV so I think I am being more than compensated for my few minor quibbles.

 

[scorpioncapital]

Jefferies has the most conservative balance sheet of the larger investment banks. Something like 9-10x leverage.

I am reducing my stake in LUK over the next 6 months by 10%, it's a giant ship and it seems that value gains are to come in the years ahead. One thing we might say is it was quite overvalued a few years ago (in hindsight) and I think that with the changes in management and entering the investment banking business we are going to tread water until some catalyst or investments season. However, as Philip Fisher wrote, sometimes perceptions of valuation change very quickly and suddenly, we just don't know when. What we have to distinguish is if there are some "headwinds of mediocrity and complexity" which are a downward pull on this business. Are they ahead of the curve, are they making good investments and managing existing businesses for growth? Can they earn a decent return? These are fundamental questions.

[Spekulatius]

If you want to own an investment banking business right now, just buy GS. It's cheaper based on P/tangible book than LUK and outearns JEF in terms or ROA.

 

The problem with the current structure is that the rest of LUK will serve as a piggy bank, in case JEF has a need for capital (like in 2008). do, I think they will always have excessive liquidity in the holding company going forward.

[WhoIsWarren]

A Jefferies quarterly letter by "Rich and Brian".  This is exactly the type of tone an investment bank should keep.

 

http://www.jefferies.com/cmsfiles/jefferies.com/files/insights/tickr/jefferiesinsights_july2014.pdf

[Grenville]

A Jefferies quarterly letter by "Rich and Brian".  This is exactly the type of tone an investment bank should keep.

 

http://www.jefferies.com/cmsfiles/jefferies.com/files/insights/tickr/jefferiesinsights_july2014.pdf

 

Thanks for posting. Good read.

[james22]

I think the misunderstandings surrounding LUK can give us a rare opportunity to invest in a quality company with proven history at this attractive price point.

 

http://seekingalpha.com/article/2351905-leucadia-national-corp-where-value-investors-can-still-find-good-opportunity-in-this-inflated-market

[Guest ajc]

 

Oregon LNG wins natural gas export license

 

 

- The Department of Energy approves Oregon LNG, controlled by Leucadia National Corp. (LUK -1.2%), to export up to 1.25B cf/day of liquefied natural gas for 20 years.

 

- The project still must clear a lengthy and expensive review process at the FERC, which can span at least 18 months.

 

- The DOE's review of the Warrenton, Ore., project was initiated before the Obama administration shook up its LNG review process in May; under the revamp, the DOE will no longer issue conditional approvals of LNG projects.

 

 

http://seekingalpha.com/news/1889345-oregon-lng-wins-natural-gas-export-license

 

 

 

[rranjan]

 

Oregon LNG wins natural gas export license

 

 

- The Department of Energy approves Oregon LNG, controlled by Leucadia National Corp. (LUK -1.2%), to export up to 1.25B cf/day of liquefied natural gas for 20 years.

 

- The project still must clear a lengthy and expensive review process at the FERC, which can span at least 18 months.

 

- The DOE's review of the Warrenton, Ore., project was initiated before the Obama administration shook up its LNG review process in May; under the revamp, the DOE will no longer issue conditional approvals of LNG projects.

 

 

How much flowing to the bottom line we are talking here? Any reasonable estimates?

[Guest ajc]

 

 

Oregon LNG wins natural gas export license

 

 

- The Department of Energy approves Oregon LNG, controlled by Leucadia National Corp. (LUK -1.2%), to export up to 1.25B cf/day of liquefied natural gas for 20 years.

 

- The project still must clear a lengthy and expensive review process at the FERC, which can span at least 18 months.

 

- The DOE's review of the Warrenton, Ore., project was initiated before the Obama administration shook up its LNG review process in May; under the revamp, the DOE will no longer issue conditional approvals of LNG projects.

 

 

How much flowing to the bottom line we are talking here? Any reasonable estimates?

 

 

From the article that james22 posted above, the author writes that "the potential revenue for this project could be billions, but there are still many obstacles to overcome."

Obviously though, that's vague.

Arnold Van Den Berg (go to about 2 minutes in -

) talks about current US capacity allowing for production at $4.00 to $4.50 per 1000 cubic feet with shipping costs being roughly the same price.

He goes on to say that Japan pays as high as $16.00 per 1000 cf.

 

Say production and shipping cost $9.50 and Japan and others pay $13.50 (I'm not sure if that's conservative enough), then the entire drilling to delivery process yields $4.00 profit per 1000 cf.

How much does Oregon LNG get from that $4.00? I don't know.

At a guess, they're a key component in the delivery process so they get more. Producers, pipelines (less so) and ships are somewhat abundant, LNG export terminals are complex and there aren't many of them.

Say they get 30% or 35% of that $4.00, so $1.25 or so.

 

If the terminal operates at full capacity (1.25B cf/day), 6 days per week then Oregon LNG gets $488 million a year for the service they provide. If that $9.50 can turn into $8.50 for production and sellers get $14.50 from Asia then that number goes up to $788 million per year for Oregon LNG.

Minus the annual cost of running a LNG terminal and you have your answer. What that cost is though, I really have no idea.

Maybe there are some operational Middle Eastern LNG terminals that would make useful comparisons.

 

There are some economic studies (http://www.oregonlng.com/learn-about-lng/economic-studies/) on their website, by the way.

A few of the market analyses look like they'll also shed more light on the issue of production costs and what prices Asia might pay over the next few decades.

 

PS. I might be double-counting, but I'm assuming that export terminals weren't included in Van Den Berg calculations.

 

PPS. Some other things I don't know the answer to:

 

- Could that 1.25B cf per day number be increased after Oregon LNG operates smoothly for a number of years?

 

- And, would it be legal for Leucadia to buy from producers themselves, hire shippers and then use some of Oregon's capacity to capture a greater share of that $4.00 per 1000 cf?

 

 

[scorpioncapital]

They do plan to buy the natGas from Canada. Perhaps there is a speculation on foreign exchange implicit here as well.

[Guest ajc]

 

They do plan to buy the natGas from Canada. Perhaps there is a speculation on foreign exchange implicit here as well.

 

Maybe that's a possibility.

 

Having thought about it now though, I think the key will be expanding the 1.25B cf per day limit.

My view is that this is just a starting point and that after X years of safe operation, they will get permission to increase Oregon's capacity. From the website, there looks like plenty of open space available for that.

Perhaps sooner rather than later too, because the Canadian supply is huge and the demand in Asia is big and growing rapidly.

I think there is a risk of these terminals becoming major bottlenecks if capacities aren't regularly being increased.

 

For example, Qatar exported around 3800 billion (est.) cubic feet of LNG in 2011 and that number was doubling every 2 years (http://persiangulffund.com/qatar-the-biggest-exporter-of-liquid-gas-in-the-world/).

In order for the west coast of North America to match Qatar's 2011 output, they would need 10 terminals like Oregon sending out 1.25 billion cubic feet per day for 6 days a week, all year round.

Given those numbers, I think it makes a lot of sense to expand existing capacity instead of building whole new terminals each year.

 

Just to pluck a number out of the sky, if after a few years that number got increased to 5 or 10 billion cubic feet per day for Oregon LNG then you can see for yourself that things would start to look quite different from Leucadia's point of view.

 

 

 

[Guest ajc]

 

@scorpioncapital

 

Just some thoughts to follow-on from what you wrote.

 

Most of the US export plants looking to be built are on the Eastern seaboard.

Oregon LNG is the only one out west. Canada has 3 proposed western projects which together total 2.0B cf per day (http://www.sourcewatch.org/index.php?title=LNG_Terminals).

I'm having a hard time thinking that anywhere will be cheaper to ship to Asia from, but maybe I'm missing something obvious there.

 

As well as that, there's the US/Canada arbitrage opportunities.

In currency as you noted and also I think related to where there's been over-production and a consequential over-supply. Sometimes that will happen in the US and sometimes it'll be Canada.

Either way, Oregon users get the best access to the lowest prices.

So, from that perspective it seems to make sense for the smart money to take their business to Oregon because you'd think it'd be the most profitable terminal for them to do work through.

 

Does that then also mean that Oregon expands capacity more quickly than other places? I don't know, but I don't think that's a totally crazy notion.

The more companies that want to do business through your terminal, the more pressure there will likely be to increase capacity there. I mean, that'd be the sensible direction for things to take.

For the sake of some comparison, Ras Laffan Industrial City (the world's largest LNG export terminal, if I'm not mistaken) was exporting 31 million tons of LNG per year back in 2007 (http://www.cedaconferences.org/documents/dredgingconference/downloads/2/qatar2008_2008-18-05_42_saad.pdf).

Oregon will be designed to export 9 million metric tons per year, so there is still a fair amount of room for growth there.

 

Finally, I was wondering... since Jefferies is a full-service investment bank and Leucadia would own Oregon LNG, would Oregon LNG become a kind of full-service export terminal?

Could they offer currency hedging to all of their various clients?

The relationships would already be there, they'd trust each other and Jefferies could do that kind of thing.

How about if a producer wanted to IPO after some time. If business with Oregon LNG had been going well, would they be inclined to use Jefferies for that rather than someone else?

After all, the trust and previous business history would already be there.

Again, what if a shipping company needed to raise some capital?

The list might go on and on.

 

What I'm wondering is how active Oregon LNG could eventually become in financial activities that relate to the LNG business?

Or whether they could at least offer these services and then put in a call to Jefferies so that everyone involved trusts the other person they're doing business with.

I don't want to put a number on that stuff (even if I don't think it'll be zero), but right now I think most people are looking at this as if Leucadia invests and then that thing produces cash flows over time.

Clearly that's not wrong, but another side-effect might be that all of these other added business opportunities are then created for another Leucadia subsidiary and if it's handled well there could potentially be a substantial amount of business to be done there for Jefferies too.

 

Anyway, that's as far as I've got for now.

I guess we'll just have to wait and see how things turn out if FERC does end up giving Oregon LNG the approval they need to build this thing.

 

 

 

[BG2008]

Has anyone here dealt with Leucadia in a professional capacity?  Given that they are savvy investors, does that make them tough negotiators.  Any reputation on whether they are pleasant people to work with?  I find it interesting that the CEO of the Bank of Ireland said that he never wanted to go through another DD process with Fairfax again.  I get the sense that these firms are shareholder friendly, but not necessarily friendly with counterparties.  Thoughts?

[Grenville]

Has anyone here dealt with Leucadia in a professional capacity?  Given that they are savvy investors, does that make them tough negotiators.  Any reputation on whether they are pleasant people to work with?  I find it interesting that the CEO of the Bank of Ireland said that he never wanted to go through another DD process with Fairfax again.  I get the sense that these firms are shareholder friendly, but not necessarily friendly with counterparties.  Thoughts?

 

Thanks for the post. Do you have a link to those comments by the CEO of BOI? I'd be curious to hear more.

[rogermunibond]

I've never dealt with them (meaning Cummings and Steinberg) but they have generally been good at distressed investing (look at the total return from the Fortescue loan).  What's hurt them is offloading some of their investing portfolio to Ackman, Wintergreen, and some other hedgies.  They had a terrible return from the Ackman side car for transforming Target.  One would assume they did DD on Ackman but sheesh.

[scorpioncapital]

They're at it again - offloading investments to other managers. Even in the latest press release handler says they have given the money to funds and managers they have great confidence in their investing abilities.

[racemize]

They're at it again - offloading investments to other managers. Even in the latest press release handler says they have given the money to funds and managers they have great confidence in their investing abilities.

 

Aren't they buying in at the manager level, rather than as clients though?

[scorpioncapital]

they said they invested 461m in liquid securities managed by focused investment managers so it sounds more like their previous activity but not entirely sure what they are buying.

[jay21]

they said they invested 461m in liquid securities managed by focused investment managers so it sounds more like their previous activity but not entirely sure what they are buying.

 

Can you post the link?  I missed this.  Thanks

[thepupil]

We invested a further $332.5 million in our Leucadia Asset Management platform, including a follow-on investment in Topwater Capital, a new investment with Mazama Capital Management and an initial investment in the Global Equity Events Opportunity Fund, which historically was part of Jefferies. At June 30, 2014, total capital invested in our asset management affiliates and associates was $461.5 million. Almost all of this represents seed capital invested in liquid securities managed by focused investment teams in which we have significant confidence. We expect a reasonable return on our invested capital and to earn an incremental return from our participation in the results of the related management companies.

 

http://seekingalpha.com/pr/10706945-leucadia-national-corporation-announces-second-quarter-2014-results

 

[BG2008]

This was during the fairfax shareholder meeting.  There's likely no link to it.  You just have to be there.  Richie is a riot and hilarious.  He insinuates that Fairfax in essence gave him a rectal probe with the DD they did.

 

Has anyone here dealt with Leucadia in a professional capacity?  Given that they are savvy investors, does that make them tough negotiators.  Any reputation on whether they are pleasant people to work with?  I find it interesting that the CEO of the Bank of Ireland said that he never wanted to go through another DD process with Fairfax again.  I get the sense that these firms are shareholder friendly, but not necessarily friendly with counterparties.  Thoughts?

 

Thanks for the post. Do you have a link to those comments by the CEO of BOI? I'd be curious to hear more.

[txlaw]

We invested a further $332.5 million in our Leucadia Asset Management platform, including a follow-on investment in Topwater Capital, a new investment with Mazama Capital Management and an initial investment in the Global Equity Events Opportunity Fund, which historically was part of Jefferies. At June 30, 2014, total capital invested in our asset management affiliates and associates was $461.5 million. Almost all of this represents seed capital invested in liquid securities managed by focused investment teams in which we have significant confidence. We expect a reasonable return on our invested capital and to earn an incremental return from our participation in the results of the related management companies.

 

http://seekingalpha.com/pr/10706945-leucadia-national-corporation-announces-second-quarter-2014-results

 

I've been thinking about this a bit, and I have to say I'm getting more and more uncomfortable with all these seed capital deals.  Obviously, distributing capital to different managers didn't work out too well last time, and I'm not so sure investing in the management firms mitigates the potential downside risks.

 

I'm also not too crazy about this "reasonable return" + "incremental return" business.  What exactly are their target returns here?

[Grenville]

This was during the fairfax shareholder meeting.  There's likely no link to it.  You just have to be there.  Richie is a riot and hilarious.  He insinuates that Fairfax in essence gave him a rectal probe with the DD they did.

 

Has anyone here dealt with Leucadia in a professional capacity?  Given that they are savvy investors, does that make them tough negotiators.  Any reputation on whether they are pleasant people to work with?  I find it interesting that the CEO of the Bank of Ireland said that he never wanted to go through another DD process with Fairfax again.  I get the sense that these firms are shareholder friendly, but not necessarily friendly with counterparties.  Thoughts?

 

Thanks for the post. Do you have a link to those comments by the CEO of BOI? I'd be curious to hear more.

 

Thanks for the color!

[stevevri]

 

I've been thinking about this a bit, and I have to say I'm getting more and more uncomfortable with all these seed capital deals.  Obviously, distributing capital to different managers didn't work out too well last time, and I'm not so sure investing in the management firms mitigates the potential downside risks.

 

I'm also not too crazy about this "reasonable return" + "incremental return" business.  What exactly are their target returns here?

 

If you looked at Leucadia as a concentrated bet on Jefferies and investment banking and then saw this as a continuation of those activities as opposed to with a lens towards the past how would you view this?