《Pitch the PM》：Doug Garber谈$TUSK的巨额现金储备

I'm your host, Andrew Walker. With me today, I'm happy to have on for the first time the founder of Pitch the PM, Doug Garber. Doug, how's it going?

Good. Thanks for having me on, Andrew.

I don't know how many times I've had a, quote-unquote, rival podcast host on, but small-cap, small-value hosts have to stick together. Let me do this before we get started: The company we're going to talk about today is Mammoth Energy. The ticker is TUSK. I'll just remind everyone that this is a very small-cap company, with about a $125 million market cap, so that carries extra risk.

Anyway, Doug, the company we're talking about today is Mammoth Energy. The ticker is TUSK. What is it, and why is it so interesting?

Well, I think it's a stock where there's very limited downside. Before we get into the stock, I should also say, as a disclosure, that I do own the stock. I want to be transparent about that. I don't view it as a competing podcast. I think we're both Tulane guys, so we're all in this together. I'm in my home office, and I actually have a Tulane banner right there.

It's the same theme of stocks under rocks. I didn't want to just do it on my own podcast and present it to myself. I thought it's such a powerful dynamic when you're having a back-and-forth conversation with another really intelligent investor who can poke holes in your story. I think that's the value that I see, and that's why I wanted to do it with you, Andrew. Thanks for taking the time.

I've covered this stock since it did its IPO. The stock is owned 45% by Wexford. Originally, it was a Northeast fracking company for Gulfport, and they also had their own sand assets. Those assets are of very little value; they've kind of ridden those up and ridden them down. Then, last year was probably the worst year ever for natural gas. I think $2.21 was the average, and utilization was essentially nonexistent for some months. They were also reinvesting in their fleet.

They've been pretty entrepreneurial, too. They've started some other industrial businesses from scratch. There have been other oil-service and energy companies that have also had industrial assets that have been completely ignored. Now, not only is this company off the radar on the energy side, it's off the radar on the industrial side. It's small and really off the radar almost everywhere. Wexford owns it, and I saw Adage and some index funds.

The reason it's interesting to me is that two things have happened recently. First, they got about $180 million from a settlement with PREPA, or Puerto Rico's electric utility, for the work they had done to restore the grid after a hurricane. The company was burning money before it received that money. They were paying interest in kind, they had leased things out, and they were in a tough financial position. Then they finally settled and got the money.

I thought what they were going to do was pivot. They have a transmission-and-distribution business, a segment of Industrials that's been really hot with the AI theme, like Quanta or MasTec. I thought they were going to grow that business and just leave the other businesses alone. Instead, they announced the sale of the transmission-and-distribution business, which was essentially their biggest business, for just under $110 million.

They had started that business 5 or 6 years ago for maybe $10 million and grown it. They got a 9x multiple on it because people like these types of T&D assets, the recurring nature of utility spending, and the growth associated with AI. After that sale, the company had about $155 million of cash. About $20 million of that is restricted until October. It's in a letter of credit tied up with PREPA and the municipalities, and that should roll off in October, depending on what happens. I feel pretty good that they're going to get that $20 million.

If you think about why the stock is priced the way it is, you would say, “All right, I'm not going to give them credit for any of the money related to Puerto Rico until it's in their bank account.” That's what we've been trained to do with this last lawsuit that they finally settled. Then you would say, “All right, the company has $135 million of cash, while the market cap is $118 million.” That's about 87% of cash value. It's a good value, but it's not too unusual in small-cap land, especially if you have a business that's cash-flow negative.

Historically, last year they were cash-flow negative. Their main business was natural gas energy, and I think last quarter they had positive $1 million of EBITDA but still had negative cash flow because of the capex. That makes somewhat of a sense if you don't give them any credit for what is likely to happen in the future or for their actual business lines.

They have probably another $40 million to $50 million to collect. They have $10 million in escrow from the deal they recently finished. They have another $20 million that we just talked about, which is a letter of credit that they should get in October related to the PREPA settlement. Then there's another $20 million in accounts receivable. We don't really know the timing of when they'll get that, but they've agreed to it in their settlement. It depends on when the bondholders ultimately settle, and I don't know how long that will take. I discount that in my model to about $0.75 or $0.80 on the dollar. There are markets out there to pull that forward because it's actually an administrative claim, which means it's not that risky; it's just a question of timing.

Let me pause you there. I think you've done a nice job going through all that. I think what it comes down to is that the stock, as we talk, is about $2.50 per share. You just laid out a path to, even ignoring the businesses, approaching $3 per share in cash, with another $0.50 to $1 per share of cash-like assets that should be coming through at some point. Am I laying that out about correctly?

Yeah, exactly. There's another—I call it about $0.80 to $0.90 of cash—that should be coming on top of the current $2.80.

Let me ask you the first question. I actually have some pushback. The market is a really competitive place. Now we're getting into the much smaller-cap lane, but the market can do math. What do you think you're seeing that the market is missing when it comes to making this a risk-adjusted alpha opportunity?

I think the market is giving Mammoth and TUSK credit for the current cash on the balance sheet, but it's not giving them credit for the next approximately $50 million—$40 million from Puerto Rico and the $10 million in escrow. Unless they can see it in front of them, they're not giving them credit for that.

So, I think they're saying, “All right, you have $135 million of cash. I'll give you credit for that.” But these businesses—the appraised value might be about $145 million on top of it—had negative cash flow last year. So I'm going to give you a discount to your cash because you're actually burning money. I think that's what the market is saying and looking at today.

On top of that, I think there's a likely chance the market isn't giving them credit for the future events of getting this $40 million to $50 million, which could be another $0.87 a share. That's kind of how I discount it. And I understand why they're not giving them credit for it, because it's Puerto Rico. We had the same issue when they were owed $360 million for years from PREPA, and they finally settled that and got $180 million of it. They essentially got the principal and only a little bit of the interest; they didn't get all the interest. So the market's like, “Hey, I'm not going to give you credit for it until it's here.” That's how I think the market thinks about it.

No, look, I think that's exactly right. I say that because I've got a lot of history with this stock, and I'm not the only one who, for years, heard them saying, “Hey, these are good claims on PREPA. We did good work. We're going to get it,” while they were financing with PIK and everything. But if you go back to last year, when they took the deal, it resulted in, from memory, well over $100 million of write-offs, right? Because they'd been accruing all of that interest on the balance sheet.

So I think the first thing people look at and say is, “Oh, cool. You've got the cash.” It's not lost on me that this company is trading around cash, but getting hit with huge discounts on anything that's not cash. I think they look at the prior claims and say, “Oh, I don't know if I can trust that you're getting anywhere close to face value.”

Yeah, no, I think that's exactly right. If you dissect it, one issue was the time it took to get the money from Puerto Rico. But this money has kind of 3 tranches, right? There's the $10 million that's in escrow from the recent sale. We can say that's pretty safe; there might be normal dings on that after a year—closing adjustments, what have you.

Then there's the LC, which is already out of bankruptcy. That money they should be getting back in October, unless somehow it gets extended and they have to take some efforts to extend that LC with the municipalities. So I actually feel pretty good about that coming in October.

Then there's the next $20 million that's in A/R, where they again had to take all these write-offs. They're owed this money, they've agreed to it, it's already been settled, and it's an administrative claim, which means it's higher up in the pecking order. But again, this is the same sort of thing as that $360 million before: I'm really not going to give you credit because I have no idea if it's going to come in 1, 2, or 7 years, right?

So that last $20 million, you don't really know the timing. And I think even that first $20 million that's in the LC, people just kind of say, “Well, that's too complicated. I'm not going to give them credit for it until it's here,” because it's still related; the Puerto Rican municipalities could fight it. So I think they're not going to get credit for that until it's here. We've been trained not to give them credit until it's here because of what happened. And I think the bet is that it's more likely than not that we're going to see most of that money in those 3 increments.

I think the other thing that I want to say about the market—but I've spent a lot of time on busted biotechs recently, right? These are biotechs that have $300 million in cash on the balance sheet and trade for $150 million in cash. I think the main thing the market looks at is corporate governance risk, right? The market is really worried that at these busted biotechs, the board doesn't own any stock and management doesn't own any stock.

I've called it a YOLO problem, right? Management could say, “Hey, we could return stock to shareholders, and then we put ourselves out of a job. We get nothing because we don't own any stock. Or we could take that $300 million and buy literal lottery tickets with it. If they hit, we're going to make a fortune, and if they lose, well, hey, we're actually better off because we collected another 3 years of salary.”

So this is controlled. TUSK is controlled by Wexford. They own about 50% of the stock, so you don't have that misalignment problem that you might have at some of the busted biotechs. But that does carry other issues. I've certainly seen 50% shareholders create a lot of problems at their companies before. So I just want to toss it over to you: What do you think about, when you're buying a cash shell and relying on the corporate governance, Wexford and what their plans for this cash are?

Yeah, so that's kind of your risk: that somehow they do something that's not favorable to the minority shareholders. That's always possible. I've known Wexford—they've been in and out of the public markets with IPOs, and at some point they kind of create companies and then have them go public, right? If they do that, they'll lose their reputation and won't be able to access the public markets in the future.

I think they've had a long history of accessing the public markets for IPOs and such. So I never say never. I don't have a reason to believe that will be the case. It appears that everyone is aligned here. But yeah, you are essentially without a voice, and you're hoping that Wexford acts in your self-interest and theirs, and everyone's aligned.

Could they go private at a really cheap discount, and then you get a little bit and they get the rest?

Yeah, I mean, that's always a possibility. In theory, there are fairness opinions that they pay banks for, so you kind of get whatever number you want there. When you're kind of pay-to-play on those fairness opinions, the risk is that they decide to take this thing private at a discount to what I view the NAV at—at least 2x above it.

But why would you do that? You have an asset. You have a public company asset. You've got all the controls, and they can incubate things privately or buy them publicly. It's another option for them because they're a kind of more diverse hedge fund/private equity blend.

You're absolutely right: the risk here is that you're on the outside. We're in the cheap seats. But again, I would just say I don't expect them to do something like that. I've known them; their reputation has been solid.

Strange question here: They own—round it up to 50% of the stock, right? Half the stock. I believe they have board members. The CEO—the old CEO—used to be a consultant to Wexford. They filed a 13G here, and I don't know of any—it's really rare for a company to file a 13G once they go over 20%. Almost every investment manager flips to a 13D once they go over 20%. How are they a 13G filer here? Is there less control than I'm thinking, or is there something else I'm missing here?

That's a great question. I actually don't have the answer to that in terms of all the legalities. But they're essentially in control. I don't know if they have the majority of the seats on the board. I think they own 45% to 46%, but my understanding is they're essentially calling the shots, right? The chairman of the board is the former, retired general counsel from Wexford.

No, that's just why I find it so strange that they've got a 13G. Let me flip to a different question: capital allocation, right? One of the tough things—and we can talk timing and everything—but one of the tough things when you buy something with $10 in cash and the stock's at $8 is that if you got that $10 next week, the IRR is insane, right? If you got that $10 years from now, your IRR is—you'd have been better off having a bank account, basically.

But Wexford controls 50%, so I'd hope for rational capital allocation. It's not lost on me that when they announced the deal—the deal to sell the division—they didn't just announce the sale of one of their divisions. They said, “Hey, we amended our revolver so that we can buy back shares and everything.”

But it's not lost on me that I think they announced the share buyback in August 2023, extended it again in 2024, and never executed on it. So what do you think is the most likely outcome for this cash? Is it coming back to shareholders, or is it going to incubate and build new businesses, which can be fine, right? That could create value. But I look at that and worry: Again, I know plenty of companies where there's a big controller, even a rational, financially sophisticated controller like Wexford. I know plenty of companies where there's a big controller and they've sat on a big cash balance for 3, 4, 5 years because they were always looking for that big deal they never hit.

And then, at the end, shareholders kind of look around and say, “My $8 in a $10 example.” They look and say, “Oh, cool. We’ve generated a 1% IRR over the past 5 years as this company has just held on to the cash balance, hoping for a grand slam.” So I’ve kind of thrown a lot at you there, but I’d love to get your thoughts on the cash and how likely it is that something gets done there.

Yeah. There is a repurchase. Obviously, I would like them to do it because you’re buying 50 cents on the dollar. I think it’s a smart use of cash. I don’t think companies this small, with this limited a float, typically exercise the repurchase. There’s a scale thing there. So I don’t expect the money to come back to shareholders in that form or in a dividend.

I think you’ve nailed it: the key here is the timing and the use of the capital, right? They’re going to have a lot of money to deploy. And the key, I think, is continuing the shift away from the energy, frac, and sand assets and more toward the industrial businesses that are a little bit more stable and less cyclical.

Now, the time’s not necessarily right to exit the energy businesses. In fact, they just spent, I think, $12 million upgrading Tier 4 engines to get their frac fleets competitive and get them working, so they had something they could offer. So the market’s like, “All right, you’re just investing back in frac. What has really changed here on the capital allocation? I know you’re not just going to invest into a cyclical, capital-intensive business where there’s not a lot of scale.”

Now, my conversations with management indicate that they know they don’t have the scale at this point to compete in the frac business. I think when they did the T&D sale, they made a point of saying, “Hey, we exited this at 4 times tangible book value.” They’re not looking to exit things at liquidation value. They’re looking to operate them and exit them at 2, 3, or 4 times the asset value. They could be more patient.

Again, we have to go back to the natural gas market being almost the worst ever last year. The actual outlook for the natural gas market—I know the frac business and energy are obviously oil and gas—is that they’re much more levered to the gas market in the Northeast. Obviously, most of the equipment has wheels, so they can move it.

The gas outlook is around 105 Bcf per day of demand, and there’s talk that, with more LNG exports and demand from AI data centers, that could easily be 120 or 130 Bcf per day. That’s kind of what the consensus is pointing to. I’d probably have to dig into that and haircut it, but that would be pretty good.

The other thing is that this is kind of a closet play on gas, too. What’s happened in the gas market is that a lot of the incremental demand has been filled for free as the Permian and the oil basins have grown. We had all this associated gas for free. There were even negative prices in the Permian, but the Permian is starting to slow down—not just because of prices, but because it was slowing down before that due to Tier 1 acreage and interference.

So you never really had the need to drill in the Haynesville; you had free natural gas. Now, if you actually need to go back to drilling in the Haynesville and the Northeast over the next handful of years, it’s kind of a free call option on their energy assets and gas. I think this time the company would actually exit if that happened.

What you’re seeing is that they started as an energy company, but they’ve gotten into all these infrastructure businesses, including transmission and distribution. They obviously got into Puerto Rico, which was a huge headache, but what’s left in the infrastructure and industrial businesses is more stable. You think 8 to 10 times EBITDA, less cyclical, with steady ROIs in the low double digits.

They have an engineering business, which is like a Jacobs—a higher-margin professional-services business—that they built kind of from scratch. They have another business that they still own that’s similar to transmission and distribution. It’s a fiber business; think Dycom. I guess Quanta and MasTec have those businesses as well. So those are little businesses they’re slowly incubating.

Overall, the way I think about this is that you’re buying into a private-equity fund with no 2 and 20 at 50 cents on the dollar. But yes, you are trusting Wexford to do the capital allocation, to exit energy in a couple of years, and to find good industrial deals or something else. Hopefully, they’ll stick to industrial.

They’re investing in rentals, which are rental telehandlers and cranes, but that equipment is going somewhat to the oil patch. It is industrial equipment that they’re going to start using in construction, too, to kind of build that out. So it’s like a little tiny United Rentals, right?

They’ve done 2 capital-allocation things in the last 6 months, other than the divestment. One I liked: they did a deal where they essentially bought $11.5 million of aircraft and kind of bought them with leases. So it’s not destroying capital. That’s a solid—I’ll probably add, call it $1 million, call it a 10% return. You can put some leverage on that if you want.

It’s not the best business in the world, like software, but it’s probably a solid, solid use of cash. If they grew the rental part of the business, I think that would be good.

The other thing they did that I personally didn’t think was great, kind of countercyclically, was that when they got the money last year from the Puerto Rico settlement, they decided to pour some of that into upgrading their frac equipment. It’s like putting good money after bad.

I get it—it’s countercyclical. You don’t want to just shut down the business. You want to get it marketed and going so you can sell it for more than the equipment value, and they already have the customers and the people, so it’s kind of a sunk cost. They did do that. I wasn’t excited to see that announcement last year, but I think it’s such a smaller part of the story now with the sale of the T&D business.

You went through a lot of the different segments, right? You talked about how the outlook for a lot of the segments is kind of down on their luck. With cyclical businesses, you generally want to buy them when they’re down, and I definitely hear that.

But most of the segments you listed—I don’t know, you mentioned their engineering segment and said, “Hey, you’ve got a mini Jacobs-type.” I’ve seen this company’s financials for a while, and it’s hard for me to look at this and say, “Hey, there’s a mini Jacobs in here.” You mentioned, if I remember correctly, drilling services.

Even in 2022, it was basically adjusted EBITDA breakeven. It’s like, hey, they’re barely doing anything in all these businesses. Now, this can still work without these businesses needing to be Jacobs, right? We’re buying below cash.

But if you had asked me before they sold the infrastructure-services business this year what the sum total of all these investments had done, I would have said, “Hey, they’re investing a dollar and turning it into 70 cents.” Selling the infrastructure-services business is a big mark in their favor, right? They sold it for a multiple of book value. I think book value was a little depressed, but they probably got a good return on that.

But I still look at these businesses and I’m like, “Look, these look pretty commodity to me.” I have trouble believing that any dollar in here is going to produce any economic profits, if that makes sense. I’m not saying it’s turning a dollar into 70 cents, but it’s hard for me to see how they’re turning a dollar into a dollar.

And again, coming back to the original point, you’re buying a lot of this cash. If it’s going to get invested to grow these businesses and a dollar is going to turn into a dollar, over time your IRR just keeps ticking down, keeps ticking down. So what do you think about that?

I think it’s a very valid point. Historically, the big driver here has been the frac business and the sand business. The sand business was a Northern White business that completely got priced out by local sand. They’re selling a little bit into Canada because they happen to be on the CP, but that business is worth a fraction—a couple of percent—of what it was initially. So that business has essentially been wiped out.

I’m giving it $1 million of value in my NAV: half a million of EBITDA at 2 times. And then the frac business, again, I’m only giving them credit at $8 million of EBITDA at 2.5 times. But that could be zero, or it could be $20 million to $30 million if the cycle actually picks up. Right now, there’s no indication of that. I have to scan it a little better.

But based on what they did historically, if they were going to invest in frac, I agree: a dollar could become 70 cents, or, in terms of profit, a dollar becomes 2 cents. But I don’t think they’re going toward energy. Energy is not the driver anymore, right?

They built these infrastructure businesses—all these other segments in industrial and infrastructure—and there’s more of that in their strategy, including in the rental business, to get it more toward construction and aircraft.

So, you're right. That's why I was annoyed when they—I don't want to say annoyed, but it's not my choice. They have a longer time horizon. I'm not in the boardroom, but when they reinvented, they started to reinvest in the frac business. But I guess you don't want to shut it down. They have more patience. They're longer term, right?

We tend to be a year out and say, “All right, we'll just wait till the cycle tends to pick up at some point when we're short this equipment.” Usually, you have 1 or 2 good years out of every 5 in the frac world. And if they invest in frac, I agree—I wouldn't want to do this, but I don't believe they're going to do that. I think they're going to get it going and punt it, and hopefully invest in more aircraft and other industrial businesses.

But that's the key: building a pipeline. A lot of that pipeline probably comes from Wexford. Do we do it privately? Do we do it in TUSK? I don't really know that dynamic, but that's exactly right. I feel like an aircraft lease business that got a 10% return—

Let me pause you there, because anybody who's followed small public companies before can point to a dozen companies that announce an aircraft purchase, and what it is is they bought a small private jet for their CEO to fly around on the company's dime. This is not that. They bought, I believe, 8 small passenger aircraft for $11.5 million or $12 million, right? This was in April, so this is kind of using 10% of the proceeds of the infrastructure business they just sold, let's say.

I don't know the business well enough to know one way or another, but I was surprised. This is a very small company with not a lot of people following it. When I said, “Hey, I'm going to be doing a podcast on TUSK,” I had 3 different people reach out and say, “Ask them about the aircraft.” People were really upset about the aircraft.

I think these are smart shareholders. I don't think they think the company bought a PJ or something. But maybe they did. It's another thing where you go, “You buy aircraft. These are literal commodities. You buy them for $11.5 million.” I look at that and say, “Hey, a business that I'm not sure is earning its cost of capital—you throw $11.5 million at aircraft.” I can kind of get the concern. It sounds like you're pretty bullish on the aircraft purchase, so I'd love to discuss that real quick.

Well, I wouldn't say I'm bullish. Relative to reinvesting in frac, yeah, I think they're more likely—because it came with contracts—to get a return on capital there, with contracts that actually add free cash flow to the P&L. It's not energy; it is industrial.

If I had to think about it, energy is cyclical, so you have to time it right. I'd kind of put those in the C category. I'd put some industrial businesses in the B-ish category. Then you look at some amazing businesses, whether it's software, a capital-light business, or professional services. Those would be more in the A category.

As long as they're still moving up from the C to the B, that's positive. But it also has to do with their partners at Wexford and where they're seeing their deal flow. In my conversations with the management team, they're more focused on the rental segment, which is like a URI. You call that stuff commoditized, where you're providing a service, right? It's telehandlers, cranes, stuff like that.

That's an okay business. It's not Apple, but it's fine; it's solid if it's run nicely. I think you also have to look at the businesses beyond the P&L over the years, which was this Puerto Rico disaster and the frac cyclicality. We don't really talk about the T&D business, which actually had a good return, or the tiny engineering business, the fiber business, or the rental businesses.

Those businesses are tiny, but they could be more meaningful if they put capital into them. I kind of think of this as a little private equity firm. They're incubating little companies, and they have a handful of choices in the industrial world.

In the energy world, they're kind of doing one more hurrah: invest, get it running, get the customers, get it flowing, and then hopefully exit to someone who has more scale, where it becomes an industrial company. You have to believe that they can execute on that vision to become an industrial company—someone who can consistently grow a solid industrial business and allocate capital in a way that is accretive to earnings. It's kind of like a blank slate right now.

No, that's what makes it a little hard to talk about, right? It's like, hey, a stock trading at $2.50 with $3 per share in cash. You can talk about everything till the cows come home, but ultimately it's like: what is the cash? What gets done with it?

Speaking of what gets done with the cash, the company has a strange setup, right? The CEO is going with the infrastructure assets that they sold, so he's going over there, but he's also staying on with the company as the interim CEO while they try to find his replacement. He's running the other assets, but he's interim CEO here. That's a very strange setup.

This is a small company; I understand that, but it's a very strange setup. The next big catalyst here is probably going to be a CEO announcement, with the CEO saying, “Hey, I'm excited to be coming here. Here's what I think I'm going to do with this $150 million cash pile that this company sits on.” What are you looking for in the next CEO?

Is it going to be an operating guy? Are they going to announce, “Hey, we've got a 38-year-old former private equity guy who's coming in. He's going to actually turn this into a mini private equity firm. He's not an operator at all”? How do you think about that?

Yeah. That is essentially the next key catalyst: who is the next CEO, and what is their vision? When I met with Phil, who was essentially the head of the T&D business, the utility, I thought, “All right, they're going to grow this into a baby little Quanta, right?” That's the business they're focused on. It's the steadiest part. It makes sense that he would go with them; they probably wanted him.

The fact that he's staying on is a little unusual, but he's just staying on till July, right? It gives them, whatever it is, 90 days to find someone. They're doing a search, right? I don't know who is going to be announced. Hopefully, it won't be an operational guy.

I think the reason it was an operational guy before is because that was the biggest segment. I don't think it would be one of these segments, right? These aren't necessarily big enough to say, “You're going to run the company; you're going to be in charge.”

Hopefully, it is someone who has more of that, because the key debate, like you said, is deal flow and execution on deploying this capital at a decent pace. That is the key. Hopefully, it is someone who has more of a funnel, more of a private-equity deal-flow orientation, or just a capital allocator, which I think would be really good—someone who's savvy with investments.

I've known the CFO, Mark, for a long time. I actually think he knows all the businesses. He thinks about it properly from a capital-allocation and strategy perspective. The key, obviously, for the CEO is the ability to source and execute deals. That's what the board is looking at for now.

They probably have a bunch of people. I don't know what's in the Wexford stable either, but essentially I think they're probably looking internally and whatnot. That will be the key to giving us confidence that we could deploy this money.

Yeah. No, I would say, having followed it for a long time—and I'm just kind of flipping through my notes—I will tell you that the one thing that stood out to me is that they sold Infrastructure Services for a nice figure. But the one thing that really bothered me was that, in the old add-backs for Infrastructure Services, they kept accruing the interest on the PREPA receivable and reporting it in their adjusted EBITDA, and then they wrote all of that off in 2024.

It just kind of left a bad taste in my mouth. I know tons of friends—and I had some stock too—who invested in this, and you thought, “Rational capital allocation: buying at a big discount. It was tangible book, not cash, at that point. Buy at a discount, eventually collect from PREPA.” Then they took such a huge haircut in a write-down. It was disappointing.

It kind of left a bad taste in my mouth, but that history is neither here nor there, except to the point that you kind of question the operators here, I guess.

Yeah. That was—obviously, they got about 50 cents on the dollar: $180 million out of the $360 million. I think the actual principal amount they were owed was $145 million, so they got a little bit of the interest.

If you're arguing that you're owed it all in court, you still have to—accounting-wise, it's just accounting—you have to keep accruing it because you're owed it via the contract until you're not. I don't think I ever expected them to get the interest. I was surprised they even got the $45 million.

I don't remember what I had in my model. Maybe I thought they might get 65% of the total $360 million. I don't remember what I used to have in my model.

I never expected them to get the whole thing. Again, on the interest, I think they would have been happy enough just to get what they were owed out of Puerto Rico, and they got a little bit more. My disappointment was going back into the frac business after that. Then, also, I think they had some more sale-leasebacks and other things that I didn't realize they had to use the proceeds for. They were really running things leanly and thinly because they were liquidity-strapped for a while without that money.

I think you nailed it. It's getting confidence in the capital allocation and the running of it going forward, shifting to higher-quality businesses, and getting that deal flow.

No, I can't remember who the CEO was, but I went through all my notes on the old earnings calls. They were like, “Look, these are FEMA obligations. PREPA—FEMA's on the hook for it.” I found something from the Q4 2022 call where they were like, “Hey, we've got $650 per share owed to us by PREPA, and we're working hard to collect all that money.”

I definitely hear you, but at the same time, I don't know. I don't know if Wexford's been happy with this investment so far.

Well, I'm not sure exactly when Wexford exited. This thing used to be in the 30s when Wexford and then Gulfport owned it, so I don't know how much they exited at what price when they initially IPOed it. I haven't run the math. Originally, when they IPOed, it was at a multiple of the assets, and since then, obviously, the 2 core businesses—the frac business and the sand business—have really devalued. I don't know how they would be happy. The stock is at a couple of bucks, and before, I think when it started, it was in the 20s or 30s, so I can't imagine they're actually happy with it.

I think that's a sunk cost, and now it's about how we deploy this capital to create value. You've got, call it, $280 million of cash on the balance sheet, or $2.80 per share. Then you've got another $0.87 in my value for cash that you're going to get. I actually believe the business is about free-cash-flow neutral right now, as long as the frac business is doing $1.5 million. It gets a little interest income, and that's something different from the last year or 2.

They actually did an appraisal last year, and it was about $190 million, less $45 million for the assets they sold. So there's another $3 in appraised, call it, steel value of assets. I don't get there to the sum of the parts; I get to about half of that. If you literally just liquidated this entire company, you could get close to $6 to $7 a share.

I don't think they're going to sell their assets. They're going to try to operate them and create an entity out of it. It'll be part of Wexford's stable. Wexford has hedge funds in there and all sorts of other vehicles, so I think this will be part of their stable. But that is the X factor: What is Wexford going to do, and how are they going to allocate capital? Those are both things that, as someone on the outside, we don't know until they have a CEO.

I'm glad you mentioned the appraised value because that is, again, not unique to Wexford. It happens a lot of times with these small-cap companies. It's kind of the curse of the small-cap company, right? You say, “Hey, I value these businesses at $100 million. The appraised value is $200 million.” Then we're buying the company for below its net cash, so you get the business on top. That's a really nice, very Ben Graham-style setup. I'm rereading The Snowball. That's the type of setup Ben Graham would love.

But then your counter is, “Hey, they invested in 2 businesses. The appraised value is $200 million because they invested $200 million into it, and it's worth $100 million in our valuation now.” Right? So you're like, “Hey, maybe it's trading below net cash because they've got businesses with appraised value that they're operating, and we think they're worth $100 million.” That's literally the definition of turning $1.50 into $1, right? So I've got one more thing, but I don't know if you have anything to add on that.

That was their history in the frac business. That's what you expect because that's a business where, unless you time it right or you're a premier operator like Liberty or Halliburton, most people don't really earn their stripes in that business.

I do want to differentiate a little bit, right? I have the sum of the parts of the current businesses at about $73 million. The appraised value is not the book value, right? The book value is separate. They got an appraiser to come in at year-end and do this, and this is what they think the assets could be underwritten for by a bank and what they could sell them for. So it's only worth that if they sell it.

There are some things in there like drilling rigs. They've got, I don't know, 10, 12, 15 drilling rigs with walking systems. They could sell those internationally. They're not really making any money, and you alluded to this: that business wasn't really making money for them. Those rigs could go internationally; that could be $10 million of cash that they could unlock that no one's giving them credit for.

There are some things. Now, you're right, they did spend money on that, and it's a loss, but it's still not generating cash and could be worth something if they do sell it at some point internationally. Appraised value doesn't count unless you're generating cash from it.

The other thing I like here is, again, I don't know—I think Wexford's got a lot of funds. I don't know anything about them, and I don't talk to them, but you can look at their 13F, and Mammoth Energy, TUSK, is their largest holding on their 13F. Again, it could be the 10th-largest holding across 100 different funds, and that's it, but there should be some institutional imperative to try to make the best of this investment.

It doesn't mean it works out well or not, but you should have a lot of alignment. I've seen people with huge alignment, tons of stock, and the stock goes to 0 for whichever reason. But here you've got a bunch of cash and a kind of control shareholder who should be aligned. Ninety-eight times out of 100, it's hard to think of a disaster scenario with that setup.

Yeah. I mean, I think one of the big differences now, when I'm investing, is I think a lot more about downside protection, margin of safety, and not losing money. So it's like, how do I lose in this one? I don't really see it. It's kind of an asymmetric risk-reward. How do I lose? All right, they invest in things and they go to 50 cents on the dollar, or they buy it out at a tiny premium.

There's just a lot of margin of safety when you're buying it below cash and then they're getting more cash. Then you have the businesses that they're not getting credit for. I think I see how much downside? I don't really see any. If everything goes right, it could easily be a $7 stock.

I'm just laughing to myself because that's the thesis for the shitty biotech trading at half cash that I have. Except in all of them, I say, “How do I lose?” I'm like, “Oh, I know. The management teams really enjoy taking a flamethrower to their cash balance and just lighting it all on fire for whatever reason.”

Yeah. The question is, is it their cash or is it shareholders' cash? Literally, half the dollars are theirs, right? The question for them is: Do you take this thing private, or do you keep a public vehicle even though it's discounted and build something? I just think of it as private equity in the public market, with no fees and at a discount. So it's like buying into a private-equity firm at 50 cents on the dollar with no 2 and 20.

And no 100-page deck that you never end up reading, with disclosures and management changes that you get and can't load into whatever portal you have, right? You can actually—

I like that transformation, hopefully from energy to industrial.

Cool. I think we've covered—I mean, I know we've covered all of my notes. Any parting thoughts or anything you think we should talk about?

No, I think you've kind of nailed it: why it's at a discount, why the history was choppy, the lack of credibility from Puerto Rico and in the returns, and the importance of capital allocation going forward. That's really the most important factor, and it's something that's not even on the table yet.

On Puerto Rico, it's funny: when I started, there were so many Puerto Rico investments. All the bond insurers had huge exposure to Puerto Rico; the MBIA and Ambac of the world had huge exposure to Puerto Rico. There was Liberty, LUMA. There were a few others—I'm trying to think of them. I think the Puerto Rican bank, Banco Popular, actually has worked out well. It is kind of the exception that proves the rule.

In general, in my history, if you had told me, “Hey, this investment touches Puerto Rico,” it would have been better for me to just go, I don't know, drink a fifth of bourbon and take a nap at 2 p.m.

In the afternoon instead of even spending any time, because the brain damage on all of them has just been enormous, and almost all of them have gone straight down again, maybe with the exception of Banco Popular. But this is another one, and again, I think people can hear that for years it was, “Hey, we have these ARs. The interest is accruing. FEMA backs them. FEMA’s pushing them. We’re going to get it. We’re going to get it.”

Everything Puerto Rico is just so crazy. It is the place where stock market capital goes to die, you know. There—and I think that was Puerto Rico and fracking—they had so much hair on them that no one was touching it.

And yeah, that’s a great point. Between Puerto Rico and fracking, my God, they had a lot of hair on them, and I think that’s behind them now. Now it’s kind of an almost-clean slate. They still have to exit some stuff, and they’ve still got some steel in the closet, and they’ve got to allocate it.

So yeah, it’s about trusting management and the board to allocate that capital in a way that’s good. So far, in my opinion, it’s been okay. I liked aircraft; it was okay, but they’ve got to show that. So yeah, that’s kind of where I am on limited downside. That’s what I look for these days.

Well, let’s wrap it up there. Doug Garber, Pitch the PM.

I’m laughing because a lot of the Pitch the PM stuff has been NVIDIA-focused, and I was going to say NVIDIA to everybody, but I don’t even know how I could do a podcast on NVIDIA, to be honest with you. It’s the largest, most popular stock versus the smallest stock that no one’s ever heard of. And it’s funny when you think about the podcast episodes: I’m usually looking for things that no one’s ever heard of. The stuff you’re going to invest in isn’t on TV. I’m like, well, NVIDIA is kind of priced for perfection, with high expectations, but you still want to talk about large, relevant companies as well.

I’ve just been digging into that one for like a year. I wasn’t a semiconductor guy to begin with, but I’m kind of going into deep value now.

No, I wasn’t a semiconductor guy, though. I do think all the time about how, in 2022, somebody said, “Hey, the time you’ll know AI is really here is when NVIDIA stock just keeps going up and all of your smart tech friends just keep buying call options,” and it goes up and up and up. I heard that, and NVIDIA stock started going up and up and up, and I was like, “Oh, I think AI might be here. Maybe I should just do it and buy some call options on it.” My God, would that have been a good decision.

But I was like, “I’m not a semiconductor guy. I don’t need to do the speculation.” I should have just shut up, Andrew, and gone and done it anyway.

Doug Garber, Pitch the PM. This has been great. We’ll chat soon.

All right. Thanks. Bye.