Jeremy Raper on the event driven market July 2022 (podcast #116)

Jeremy Raper return to the podcast to talk about everything he’s seeing in the event market in July 2022. He also recently published a letter to the board of Evolve Education, which you can find here.

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All right. Hello, welcome to Yet Another Value podcast. I'm your host, Andrew Walker. And if you like this podcast, it would mean a lot if you could rate, review, and subscribe wherever you listen to it. With me today, I'm happy to have on for the record-setting, seventh time, my first guest on the show, my friend Jeremy Raper. Jeremy, how's it going?

Jeremy Raper: It's going great. Well, it's going okay. I just checked my portfolio because I woke up and it's going okay. I'm happy to be here. Let's put it that way.

Andrew: Unless you were invested in, you know, Mega-Cap Utilities. June was probably not a kind month for your portfolio, but look, I'm happy to have you on the Pod. I don't know how many you listen to, but every guest comes on to say, "I'm coming for Jeremy's Crown." But you come at the king, you best not miss, because you're running quite late. Let me start this podcast the way I start every podcast. First, the disclaimers remind everyone that nothing on this podcast is investing advice. I think Jeremy and I are going to run through quite a few names today. We're probably going to mention some very small, very liquid names. So, everyone should just remember, please, nothing on here is investing advice. Do your own due diligence. Consult your financial advisor. Keep that in mind.

Second to pitch for you. My guess is that the pitch speaks for itself. You're on seven. This is your seventh appearance. I don't think anyone else has it third or fourth. So, if that doesn't speak for you, I don't know what does. We wanted to have you on because a) you just launched another new activist campaign. The company there is Evolve Education. The ticker is EVO. It trades in Australia. I think we'll mention that towards the end of the podcast, but the other reason we want to talk is that you and I've just been exchanging Twitter DMs and there's so much interesting going on and kind of the event. Small cap space that we just wanted to run through a bunch of names. So, I'm going to stop talking and I'm going to interview. What name should we start by talking about?

Jeremy: Well, I mean, I hope you put enough tape in the recorder because this could be a really long pod. Yeah, I mean, I think it's just worth making a few general comments just on the environment. So I mean, the last time I can remember this kind of juicy environment from a special situation's perspective was obviously March 2020. That came and went in a matter of weeks, less probably. And there were a few things to do, but man, this is kind of like drinking from a fire hose right now, you know.

Andrew: March 2020. People have thrown that out on me. And people forget that a) it was really fast and b) we didn't know if the world was going to reopen. But people were like, "Am I going to be stuck in my apartment for two months or six months?" We were talking about- GDP went down 33% in one quarter. People were talking about like the world's stopping for 6 months. This is not that.

Jeremy: Absolutely, absolutely. So, you're right. The environment is quite different from, I mean, look, financial conditions. It's definitely tightening. Credit spreads are blowing out. At the same time, the sanctity of a signed merger contract is still the sanctity of a signed motor[?] contract. So, I think it's really important to understand base rates when we talk about some of these things, right? So, someone on Twitter pointed out. I think it was Julian Klymochko. Anyway, he said that in 2008, they looked up all the announced signed deals. The numbers that actually fell through were under 5%. Now that includes deals that got pulled for regulatory reasons or whatever.

This is not people walking away. One out of 20 people, you know, buyers get buyer's remorse and walk away, and somehow the deal doesn't close. It was literally 5% of announced paper deals that failed to close, and I would guess the vast majority of those were for regulatory reasons. So, that's kind of the base rate when we talk about some of these spreads that we'll get to. The amount of uncertainty being priced into a lot of these deals is frankly mind-boggling for event. I mean, as it should be. A signed, definitive merger agreement in most all states of the world will close.

Andrew: If I could just throw it--COVID. People forget that during COVID, a lot of people tried to walk away from deals, and some of them got out because at the time, pandemics hadn't been carved out of merger agreements. But many of them ended up having to close, like Tiffany & Co., Louis Vuitton, the ones I'm sure a lot of people will point to if we talk to Twitter. They took a token here, cut too close. But the only one that somebody really managed to walk away from was Sycamore. Victoria's Secret managed to walk away because Victoria's Secret sued Sycamore for walking, and they oversued. The merger contract said, "If we walk you can only sue us for X," and Victoria's Secret sued them for X, Y, and Z. And they were able to say, "You broke the merger contract route." And that's the only real one I can remember where an LBO walked during COVID.

Jeremy: Absolutely. Look, I think you did a lot of great work breaking down with Chris on the lost[?] on the pod before, one of your recent pods where you kind of went through about how difficult it is to break a deal. And also, you know, the historical prison for invoking a MAC, and how...So, a material adverse change is, for some help, extremely difficult to prove with the legal standard, and how that kind of informs every other kind of potential MAC clause discussions going forward. So, I don't want to cover too much ground. Just keep... I think it's worthwhile for everyone listening to keep that point in mind. The base rate on deals failing is very, very, very, very low, even in the much more strenuous circumstances in which we find ourselves today.

But the second point is one, I've been trying to focus on with my own merger event investing, and that is I have a huge preference for one paper deals, not rumored deals or in negotiation deals, right? I don't think you need to, as we saw with calls, for example. But there have been a few other examples like Alphaman, right? There's just no way you're not getting paid to bet on unannounced paper deals. And two, I have an almost overwhelming preference for strategics, not financial bonds.

Andrew: Yep.

Jeremy: Even though... So for example, there's a paper deal Apollo's agreed to buy with the auto parts company called Tenneco, TEN is the ticker. Super levered. It's a pretty crap business. The price is wrong, but it's a paper deal. They don't have many outs, and it will probably close. But even so, I don't think you're getting paid to do that kind of trip.

Andrew: I have a unique thing where I will put my flag out there. If you read through the merger agreement, because I've been back and forth with people on this, if you read through the merger agreement, they need Russian regulatory approval. And the merger agreement specifically has a break fee. If they don't get Russian regulatory approval, and this deal was announced after Ukraine, anyone who follows all of their peers is down 50% since the deal was announced, and the deal was announced at a 100% premium. So my bet is Apollo's just waiting for the merger to timeout and then they're going to say, "We didn't get Russian approval. Here's your check. We're gone." So that's my personal belief. I know people who think I'm being too crazy that Tenneco can shoot with that. That's my out. Their belief on that one. I have...

Jeremy: You mean Apollo would actually use the minutiae of a given deal to wriggle out of a financial obligation. Quelle surprise, mon ami. Quelle suprise.

Andrew: I've done a lot of work on that one, though. So, I just wanted to throw that out there because every now and then something comes and we lose. And I got to show, I'm not davender of the day[?].

Jeremy: I appreciate it. You are definitely in the weeds and all of this stuff. So, look, I'm not involved in that spread. But what I'm just trying to say is focus on strategics over financials. Focus on paper deals over in discussions. I'm about to break that second rule as I'll explain. But in general, there is a lot of... there's a relative amount of stress in the financial markets, and some of these acquires know that they're overpaying. But if you're a strategic who's buying an asset for 10, 20 years, you can live with that much easier than if you're Apollo trying to squeeze out. You know, if you squeeze a little lemon before you dump this in 3, 4 years, if your entry prices are strong, you're just screwed, right? So, look, I mean, we can. Where should we start? You want to talk about Shell? SHLX. I'm [chuckles] actually violating one of the rules that has meant but it's not an announced deal yet, but it's close enough. It's close enough.

Andrew: One of my absolute favorites right now, the ticker there is SHLX. That's Shell Midstream Partners. This is an LP which people should consider that there might be some things to consider tax-wise. We're not tax people, so people consider that. But yeah, I'll flip it over to what's going on with Shell?

Jeremy: Yeah, so look, I just mentioned that you should only stick to paper deals. It's not technically a paper deal. It's a majority owner of an MLP buying out the minorities. So, Shell owns the majority, and Shell Oil ENP integrated ENP owns. I'm sorry. Integrated large oil company owns a controlling stake in the midstream entity. They bid $12.89 a share in February. And the way it works is because it's a controlled entity, it's not as if you ask for a vote of share or whatever. There is a conflicts committee that will examine the bid in negotiations with the parent and come up with a price that they deem to be fair. Now, the stock today is trading at $14, just over 40 volts. So it's trading at a, what is it called? A 7 and a half percent premium to a deal that is theoretically unannounced. I'm not already breaking one of the first kinds of rules I mentioned, but what's interesting here is I cannot recall in the last 2, 3, or 4 years a parent entering a discussion to buy out the minorities and MLP, and then subsequently just dropping it. What's generally been the pattern is that they've entered a discussion, they've entered a negotiation, and it's been 3 to 6 months. They've come to an agreement. Then they've closed the deal, another 2 to 3 months thereafter. So, while this isn't actually a paper deal, and I think Andrew, on your site, you wrote this up in some detail, there are a huge number of incentives that were shelved to actually close this transaction at this time. Some of them are financial, some of them are strategic.

There is a lot of funky stuff in the background here where the managers of SHLX for the midstream entity cut the dividend with interesting timing last year. They mentioned they thought the stock was very, very cheap, started buying some on the open market, and then very shortly thereafter, Shell came with the zero premium bid of $12.90. So there's that. The other point would be typically, in situations like this, the conflicts committee or the board of the midstream entity will at least extract a team's percent premium to the original bid. That's kind of like part of the course. So, if everything else is vanilla and kind of average compared to 20 other MLP minority buyouts, you would probably expect a price even north of where we are today. Maybe even north for $14, maybe $14.50, maybe slightly higher. And then there are few other wrinkles which are a bit more technical. I'm not sure we're going to spend too much time going in to, but essentially, Shell has a bunch of assets that aren't really earning anything. Colonial Pipeline, for various reasons, are being under dispute or disgust. And so, when you look at the actual earnings power of Shell, the number upon which Shell based their bid, SHLX's earnings power today is far less than it would be in a normal pre- you know, 2019 or 2020 steady state number. But even that understates the earnings power because they have all these escalation kickers in their contracts for inflation because inflation is becoming so high. Essentially, their take rates are going to go up 7 to 10% in the next 6 plus months. Anyway, so the idea is that Shell is making a no-premium bid on a bunch of assets where 10 to 15% of the runner[?] bids are offline and not contributing to earnings, where management had cut the dividend for minimal reason then said the stock was really cheap, but nevertheless got this bid at a zero premium shortly thereafter. In a situation where a parent has never really walked away once, they said they're going to buy these kinds of things, and we're already 4 and a half months into the negotiation. That's the key.

Andrew: If I can just add some because this is one of my favorite stocks-companies situations right now, I've done a lot of work on it. I like to think I had no small part in this becoming one of the event-driven Swing Finch's favorite names. I've done a lot of work here. I've done more work since I put it on my premium site. If people can go check that out, I've done work since then. And the 2 things to say are: a) their assets are a lot better than I had originally thought. I was just like, "Oh, generic MLP." A lot of these assets are offshore pipelines and offshore pipelines, you know, like if you have an entry[?] pipeline, it's really, really difficult to go build a new pipeline like you've almost got. But if you've got an offshore pipeline, almost certainly, never get any building in, and if they did, it'd be billions of dollars of investments. These things are just unbelievable. The Gulf of Mexico is kind of having a little mini-resurgence.

And then the other thing you mentioned, the conflicts committee. I think that they've been fighting for, as you said, 4 and a half months. I think that's a good sign that they're not just going to roll over. And then the third thing, as you said, is that they cut their dividend last year. The management talked about how cheap the stock was last year. I know they've communicated with the board. I know a lot of other shareholders have communicated like, "Hey, if you take a bad deal, there will be recourse for you, you will get sued for- I don't want to say sued, but there are people looking at this. You care that, this is it. It makes sense as a deal for these to go private, but it needs to be at a number that's fair to minority shareholders. And it's not like we're going to use your own words against you in the past." Then I would just say, if anyone's looking at this, again, this isn't financial advice, but I encourage you to contact the company and say, "Hey. Yes, this makes sense. But the price, the current price, is too cheap. You need to pay a fair value for the company." So anyway, I kind of rambled... [crosstalk]

Jeremy: No. No, no. Look, you've done a lot more work on the actual assets than the fundamentals. I focus a lot more on the set up of these kinds of things, so... [crosstalk]

Andrew: I think it's fantastic.

Jeremy: Yeah, it's worth highlighting why this is so attractive, why you can knock on wood and swing big at something like this. It's not really so much about the upside. I mean, yeah, there are scenarios where this could be close to $20 per unit. In fact, I would also recommend, I think a firm called Wolf Capital. W-O-L-F, Wolf.

Andrew: It did, yeah.

Jeremy: They have a public letter that broke down evaluation in quite a nice way. Some of the numbers are slightly dated given what's happened to the Alerian MLP Index. But nevertheless, it's a very good open letter explaining why the valuation was disconnected, why Shell were going to bang, but just a remote event kind of setup perspective. Okay. Basically, the worst case outcome in 95% of the outcomes on the table, the worst case outcome is that you get $12.89 plus a small bump[?], like a smaller and current bump. The kind of the worst worst worst case scenario is, of course, Shell walks away. But again, it was a no-premium bid when the oil price is much lower and it's still an 8 and a half percent yielding stock, so who knows where the stock could go short term? But capital impairment risk and the inner scenario where Shell just walks and says, "We'll come back to it later," given all that we know about the assets, the Oniks trajectory, creed deal, bid specifics, and the current valuation seems very, very low. The most likely, not likely, but the most punitive base case outcome in which I don't do very well in this situation, is basically an outcome where I get my money back, $12.89 plus some kind of bump. That's disappointing. Essentially, it gets me my money back, and I've just, you know, put in a lot of effort and time and capital and I haven't lost anything.

In this kind of environment, if basically, the worst case outcome is that you're getting your money back, plus 2-3%, whatever it is, then sign me up. Sign me up and I will talk about it in one of my largest positions later on maybe. But is it kind of a similar situation where I think it's basically the worst key outcome? I really have to start breaking things really aggressively before I get to a place where I lose money. Now, Shell is very liquid for most retail investors. SHLX is, you know, $25 million a day stock. Yeah, so that's highly interesting to me in this kind of environment. You could make, you know, 10, 20, maybe even 30% upside low-altitude, lower outcome potential. But we're talking about something that should get resolved in 6 weeks, okay? Six to eight weeks and I don't think it was money. Those are very attractive.

Andrew: The other thing you said, six weeks- I do think the board is going to have some- I think there's an active negotiation going on. I hope there is. But I do think there's some reason to get the deal done sooner, because if you get the deal announced right now, the next dividend will get paid in August or something, so you'll have to pay 1 dividend, right? Thirty cents. That's 2% of the deal value or something, right? If you don't get the deal done by let's call it late August or early September, you're going to have to pay another dividend because these things never cut their dividend before they go private, right? So if you don't get it done by September, you have to pay an extra dividend. So in effect, you're paying an extra 2% because you sold it. So, the longer this goes on, the more those dividends add up. You know, last year, Hurricane Ida hit some of their offshore facilities. And the longer this goes on, the more the Hurricane Ida facilities come back online, which kind of just highlights the undervaluation of the company. So, yeah.

Jeremy: Totally, totally. And I mean, one final comment on that deal that I always like to kind of look at. When we have a relatively small important piece of a very large entity like Shell's EBITDA is, what, north of 50 billion pounds, okay? This year and looking at this consensus EBITDA, this is a five-plus billion market cap where they're being asked essentially to pay a call at a 20% premium over the initial bid, right? We're talking hundreds of millions of dollars of incremental call that even at the upper 5 to 7 hundred million dollars of incremental payout for the shares they don't own against an entity that has a couple hundred billion market cap, right? So, I mean, you're right. The guy who's running this negotiation is not Shell's CEO, probably, and has a smaller remit than the entire value of the company. But at the end of the day, we're still talking, you know. It's like you and I are arguing over 10 cents we found on the subway.

Andrew: Edge shows borrowing at 4%, which is tax deductible, even with the rise in interest rates. And they're going to buy—let's say they paid $15 per share for Shell. That's an 8% dividend yield with the dollar twenty annualized dividend. So, they're buying an 8% yield that they're currently paying out, which is pre-taxed, and they're using it for 4%, which will be get tax deductible. So, it's this great financial art as well to take these guys out.

Jeremy: Definitely. So that's SHLX. That fits the mold of a strategic, very long-term perspective, power mismatch between the size of the buyer, size of the seller, and a very asymmetric skew. There is another one that I like, which is in a similar role but is nowhere near as asymmetric, and that's TRQ. Turquoise Phil.

Andrew: You're the one who turned me on to this. I love this idea, but it is certainly not a heart[?].

Jeremy: It's a bit more high-octane just given its, I mean, okay, so very, very high level. TRQ is a Canadian listed company. They own Mac[?]. They... yeah. I guess look through the basis there in half at the Oyu Tolgoi copper project in Mongolia, which is currently... I think it's the fifth or sixth largest copper mine in the world, but with the expansion it will become the second or third largest copper mine in the world. The balance of the project is owned by Rio Tinto. Rio Tinto's 50.1% owner and they're beating to take out the minorities. So they bid 34 a share Canadians. It's also listed on your social change, but all the deal terms are being done in the Canadian, the Canadian dollar. So I'll use the Canadian dollars as kind of a reference point. You could trade it either way, just trade to FX differentials. So, maybe 34 kaddish a share in... I have to look it up, I'm sorry. I'm shooting from memory for all this stuff, but at least 3 months ago...

Andrew: March, April.

Jeremy: Yeah, it was, you know, mid-first quarter. At the time, it was a decent premium. I mean, the stock was in the mid-low to mid-20s cads. It was a good 35% plus premium, but on an MPV basis, it was, you know, a very, very low number. I think a number of minority shareholders came out. Basically, the minority shareholder owns 10% of the company. So, 20% plus of the minorities, given Rio Tinto owns 50.1%, came out and said, "This is ridiculous. The invested cost of real estate is $60 a share. Now you want to get out the rest for 34. If you think this is such a good deal, I'll buy Rio's shares at 34, basically." And then another active- sorry, another minority came out. So from the get-go, and by the way, this is in the context of copper prices at the time when they made the bid, probably 4.10 or 4.20 a pound. After that, they went up to 4.50 a pound. And now today, they're trading it for 3.50.

Andre: I think that's right. I'm trying to pull it up on my screen right now, but yeah...

Jeremy: They're off about 25-30 percent in the last 2 weeks or 3 weeks. So the copper's been absolutely smashed. So in the context of then copper prices... here's a way to think about it. In the context of what Rio Tinto and Oyu Tolgoi or Turquoise Hill said about the NPV of the project, the true NPV when you dilute for the Mongolian government interest all that is probably north of 50 kaddish a share, using probably a slightly high copper price. I think the long-term copper price they use in the original scoping study of the feasibility study was 3.75 to 3.80, something like that, maybe closer to $4, at least 10% higher than where we are today. So, this has gotten a bit hairier in the last few weeks, but the setup is reasonably similar to what it was when they announced the deal, and that is $34 per share is not a price that gets a deal done, okay? The minority position may have changed slightly versus, you know, 3 or 4 months ago because coppers are so much, but you know, they were asking for $60 a share and I'm going to just hit a bid at 34.

Rio Tinto not only owns 50.1% of the operator, but also the developer of the underground mine. This underground mine is key to creating a huge amount of value, essentially almost all the value of the project. And theoretically it's on track and relatively there have been some cost overruns, but not large relative to 2 or 3 years ago when they had some massive cost overruns. That should be done and dusted by early next year, or first quarter next year. Thereafter, the underground mine should be operational and absolutely gushing cash, even at current copper prices, even at lower copper prices with cash costs should be extremely low first quartile. So, this is a mine with a 30-plus life. Rio Tinto is obviously in almost no debt. Couple hundred billion dollar market cap corporates one of their future facing metals where they stated to grow. This is one of- if not, not the only, but one of their few pure low-risk Brownfield expansion projects where they can contribute meaningfully to mid long-term either Doug growth.

So, the question is simply whether we are willing to negotiate to get a deal done now, even in the... and by the way, a month ago, I would have said the odds are hugely in our favor if TRQ minorities agreed to pay up to get a deal done. Now, the balance of power has shifted slightly, but the prices have also come down. So, right now the price is trading at essentially a deal price, maybe slightly under the deal price. I need to pull up the last ticker. But you know, this was trading 8 to 10% north of the deal price. It's essentially thinking that Rio would have to bump the deal at least 25% plus 2 to even get minorities to the table. So right now, where we stand is we're in a similar position to SHLX in that the board is in negotiations with Rio. They've commissioned an independent valuation, which has not been, or at least, even though it was commissioned, what? Three months ago, two-and-a-half months ago, quite a while. I mean, they definitely don't have to value this kind of thing, given that a full feasibility study was only published in 2020; they just have to update the numbers. So I'm pretty sure they have the numbers.

I think the only real explanation for the delay is that they're talking to Rio, and if you talk to the management, they're quite the straightforward and say, "Listen. We're negotiating with Rio, and I think they are relatively open." They're looking for a bump. I mean, they've put out some material suggesting that the bid from Rio is still reasonably below comparable transactions, which tend to take place at a premium to NAV, whereas Rio's bid is still a slight discount to NAV, I believe. I'd have to pull up the slide, but I think what happens is, if you'd asked me a month ago, this would probably have paid up a fair bit to try to get it done. For example, they would have paid, say 41 to 45 range. Now, I don't think that's feasible, but I still think Rio is much more likely to offer a bump to try to get it done, just from a strategic perspective. Like this is basically the last chance, I believe, that Rio can try to take this out at a big discount to fair value, like copper is on its knees at the moment. But what happens if the FED pivots and all of a sudden we're back off to the races and copper goes back up to where it was and then they've missed their chance to buy other minorities because, you know, we're basically going to see first production in 9 months from today. So...

Andrew: And people can argue like there's a case for oil, that oil is going away in the next 5, 10, 3, whatever time frame. Oil neck is... like, copper isn't going anywhere, right? This is a critical component of everything you do in life. So, if you're Rio, you're looking at, you're saying, "Hey, this is a really strategic asset for us that we already own. Getting the minorities out is great for us." And it's almost like they're saying, "Hey, if we're buying now, we're buying at recession prices, like that kind of trout and leash prices, that all looks really nice for you." And as you said, the difference between 36 Canadian and 44 Canadian is not huge for these guys in the grand scheme of things.

Jeremy: Absolutely. Absolutely. I mean, there is a lot of detail in the background here that is probably relevant if someone's really interested in the case. So, for example, Rio is the owner and operator of the project and also the majority owner of Turquoise Hill. Turquoise Hill is essentially just a holding company for the portion of the assets tit owns. Rio has inside information. So, Rio is the one building the mine development underground at the same time as they're bidding for the state they don't own. So that's curious two-timing. Secondly, they had what's called a heads of agreement, where they came to an agreement with the Mongolian government on all outstanding issues and put them all to bed, literally a month before they bid for the minorities. So the two biggest risks in something like this are 1) massive cost overruns lag on the project, which historically was an issue, and 2) Mongolia, screw you. Know the two issues. Okay.

Andrew: And both of them. Hopefully it's behind you at this point.

Jeremy: Both of those were theoretically behind you, like literally a month before we opened for the assets. So that's kind of the, I mean, the downside--its worth talking about the downside. So it just took- not to cut you off, but the risk here is there is still a funding gap for finishing the mine.

Andrew: Yep.

Jeremy: And again, the governance is not great, but essentially, Turquoise Hill committed to raise equity financing for their portion of the finishing costs of the underground development, which is substantial by the way, which could be a couple... I think the equity component was going to be $600 million with some additional debt laid on top of it. But, I mean, $600 million against the minority stake here. It's still, you know, we're talking greater than 20% dilution, so you'd have to assume it's done at a discount, right? So the downside case is that they can't come to an agreement or Rio plays really hard ball and you're looking at an equity offering in a tough copper market. You know, there are probably so many buyers for a copper equity, given where Tech and all these other guys stray. So that might be priced at 20 bucks a share, 20, 25 bucks a share, something like that.

Andrew: That relates to... the most common pushback I've heard from people is they're like, "Oh, look. We think Pentwater is going to ask for $100 per share, 120," and then if Rio bumps to, I'm going to throw a number out, 75 to, I don't know if Pentwater would take 75, and I just keep looking and be like, "Look, the market's down 20% this year. I don't know what Pentwater's returns are, but the market's down 20%." Are you really going to go to your LPs and say, hey, we had a deal in hand that would have given a big position, a 30% bump. And we turned it down and sent the stock down by 50% plus, needed to throw more money into the company for the equity raised. We turned all of that down because we were hoping for some pie-in-the-sky thing where a controlled company was worth X of what we turned down for it three years from now, like, I don't think that's gonna fly.

Jeremy: I agree with you. I also think there's the negotiation posture, which we are both aware of given the Great Canadian precedents. Both you and I were involved in Great Canadian, which is the casino company that sold themselves for a song to Apollo.

Andrew: They did sell those for a song. That would have been worth quite a lot of money 9 months later.

Jeremy: Yeah. So, and then this guy got on the call, a furious shareholder. You've never heard of such venom. He was irate. I mean, he uses language you wouldn't hear on a street in New Orleans to describe the board and their conduct with regard to accepting this bid. And then he rolled over at a 10% bid. That literally is what happened. So, look, I'm not trying to say that's what Pentwater would do. I think the more interesting way to think about it is whether or not Pentwater would actually take a 30% bump. Isn't it in Rio's best interests to try, right? So, from a pure trading perspective, stocks are at 34. Rio comes out and says, "Okay, we're going to bid 42, 43, 45, 42 plus some kind of CDR for the copper price for something I don't... And then, you know, obviously the stock will trade up and we'll price that in to some extent. Then, even if you think Pentwater ultimately rejects it, you should probably still own the shares today. I mean, not to get too cute, and the other thing is, you could apply some price pressure, right? So, this isn't an illiquid stock by any means. Pentwater owns, I believe... what is it? Nine, ten percent. You need a majority of the minorities to pass the deal. So Pentwater is extremely important, but they're not the be-all and end-all and if enough shares did trade at or around or close to the raised bid, Pentwater would have to worry. The deal would go through anyway.

Andrew: Do you remember there was some stock- there were some company that Oracle was buying a few years ago, and it was at a big premium. And it was like Tiro and Brown and Brown or something owned a big share. And everyone was like, "Oh, are these guys going to tender or not?" And they kept saying they weren't. They kept saying they weren't. And at the last second, they caved in because, look, when it comes down to it, if you put a bid out at a 30% premium, it's really hard. It's really hard to turn that down, even if you think it's worth a lot more in the future. And do you remember at Home Group? I know a lot of shareholders there who... [crosstalk]

Jeremy: Yes, yes. I do.

Andrew: This company is getting stolen. Vote it down, take appraisal rights, and that stock is like, I think the bonds are in distress right now. It's like, when you've got a deal at a big premium, it's really tough to turn down, especially if it's a controlled copper miner where Rio could do some really funky things with accounting and equity issues and stuff like that. I think it's going to be tough to turn that down. I'm sure they'll... [crosstalk]

Jeremy: There was a more interesting one. You missed good old Houghton Mifflin. Houghton Mifflin. Your favorite HMHCs, the publishing company. You had a guest on a few months ago to talk about that deal in the tender and it got through at a crazy price. Those 7, 8 times free cash flow normalized or something, where everyone was saying we're going to vote against it whenever and the tender was very close at the end of the day. Half the guys took the money and ran. So, you're right. I mean, I think, in that sense, a lot of people give me that negative feedback. Like, "Dude, how can you own this?" The downside is scary, who doesn't go through, and I have, look, I have a very strong view. Rio wants to get it done. I have a very strong view that they've plastered like they're willing to offer a bump. I mean, in the deal documents themselves, they say, "Look, we want to engage in negotiations in good faith. We will be priced with discipline, but we want to engage you on this proposal." Again, Rio, couple hundred billion market cap, or maybe 150, you know, 30 minutes...

Andrew: It's huge.

Jeremy: ...to business. No debt. I mean, we're talking about hundreds of million dollars, cents on the dollar almost, in terms of whether it's a 10% bump or a 25% bump. I'm taking a view on the behavioral biases of the actors here more so than the near term market dynamics, and that is not for everyone. But I think that's perhaps the right way to think about this.

Andrew: I agree. And like, as you s- it's not MLPs where, as you said with MLPs, I'm not aware of a single example where a parent did for an MLP or put out an offer on an MLP and didn't bump or close it in some form. Like, I have seen Stubbs not get taken up it, but it's pretty rare. Once the parent puts out an offer, they don't at least sign the agreement and bring its shareholders. It's extremely rare. I can't think of any off the top of my head. I'm sure it has happened, but it would be pretty shocking if you didn't get hit something here.

Jeremy: I'm sure we're going to get- We're going to talk about enough names. I'm sure we're going to get done badly on at least one of these names. I can feel it. So, I mean, look, what I would say about TRQ is that in the conviction stakes it obviously has to be much smaller. From my perspective, it's a much much smaller position than SHLX, just the downside upside skew is quite different. I do think it has a positive EV, a positive expected value from this level, and I really do like it. But again, the position size is much much smaller than SHLX for me, just for everyone's information.

Andrew: Let's switch over to one that you know. It might get dated by the time of this podcast post, but I've been really fascinated by the Spirit-Frontier-JetBlue little merger triangle. I know you've written some great stuff about it. I mean, I feel like you've traded this one. So, well, and options are risky, everyone can remember... But every week, I was getting little options trades and I felt like all of them, you just destroyed the premium on those and everything. So, let's talk about Spirit because, as it stands, right? Well... I'll just flip it over to you. Where does it stand? What's the history here? How are you...

Jeremy: This is... yeah. This is a pretty complex one. I don't know if we have time to go through all the background. It's essentially a three-way love triangle. Spirit Airlines, SAVE, is trying to sell themselves to Frontier Airlines, ULCC. ULCC is the ticker for Frontier Airlines. That transaction has gone through various iterations. It's currently... Honestly, I don't have the documents in front of it. It's a majority stock deal, plus I think 40 13[?]of cash, plus an enhanced reverse break fee if the deal gets blocked for regulatory reasons, plus a prepai- and of that, excuse me, of that, I think it's it 3... Is it 3.50 million[?] at the moment? The reverse break- I think it's about $3.20 a share reverse break fee.

Andrew: I think it bumped to 400, but I can look that up while you're talking.

Jeremy: Let's say that SAVE currently trades at $25 a share. Most of the value is in stock, but you're going to get $4 plus of cash, plus, if the deal doesn't get approved by the regulators, you're going to get $3, plus a reverse break fee. But, of that $3 plus of gross break fee, you're going to get prepaid for some amount of it, like a dollar and 50 or something.

Andrew: Yep.

Jeremy: Now that's the current deal from Frontier. To refresh everyone, Frontier offered in almost all stock transactions. A few months ago, JetBlue came over the top. JetBlue came over the top with an all-cash deal at a huge premium. At the time I think it was 30...

Andrew: There's 33. The first bid was 33, and Spirit was trading at like 20 when that went through, with all stock...

Jeremy: You know, like, a huge... like a 60% premium to the implied value of the Frontier deal. Nevertheless, Spirit stonewalled hard, really hard. They have gotten really ugly. They both started to sleep mad at each other. It's JetBlue in front and Spirit and since then, I mean, things have progressed. Essentially, there have been 1 or 2 overbids on both sides that vote on the deal. So, at the moment, sorry to kind of bring everyone up to speed. There is a paper transaction, meaning signed between Spirit and Frontier, which was scheduled to go to a vote. Most recently, June 30th, that got pulled for the second time and delayed to July 8th, mostly because Spirit is why they don't have the votes to pass the Frontier deal.

Andrew: They still make sure that [laughs] I don't think they're worried. I think they know of it, but it's...

Jeremy: So, they don't really have the... I mean, it's spending a huge amount of energy trying to denigrate JetBlue's deal. Look, it's a very interesting situation. JetBlue has shown themselves to be extremely creative and extremely tenacious. To highlight a couple of the points that you and I have picked up on, one, they put out a very comprehensive pro-deal merger deck where they actually said, "Look, if the deal goes through the other side, go to appraisal. exercise your appraisal rights and tell the judge that we offered to pay $33 cash and you'll make them pay with $33 cash, which you and I have never seen in a merger competition before."

Andrew: I'd never seen that. You know, I've never seen JetBlue when Spirit kept saying, "Hey, when JetBlue put their initial deal out..." Spirit kept saying, "We don't think this can go through," and JetBlue said, "All right, that's fine. Here's a reverse breakup fee. And we will fund part of it as soon as shareholders vote on this as one of the dividends you're talking about." I'd never seen that before. Like, JetBlue has been extremely creative. I've been extremely impressed with how they've communicated this whole thing. They put out these great decks. I just think A for effort for their PR strategy, or whatever team who's doing this.

Jeremy: Hey, A for effort. And also, again, like a lot of the value I think in event investing is really not so much about the fundamentals. It's more about picking up on the signals that the players are giving you.

Andrew: Yep.

Jeremy: So, when you see a deck that is clearly cut-and-dry from a McKinsey pitchbook deck, 40 pages, extremely detailed, it's roomy thought-through with these kinds of creative solutions. It doesn't tell you JetBlue is going to win. It tells you... They're not going to tell you that for real. It tells you they're not giving up without a fight, which means... That's the kind of information that gave me the confidence to do things like sell puts. So I sold a bunch of puts because it was the implication to me that the market was pricing this close to the Frontier deal price. But my view was, look, if it actually comes down to the vote and it's close enough, JetBlue's going to bump it, put in too much effort. This is too central to their plans, and they have evidence of that with their communications.

Andrerw: You were the one...

Jeremy: So, that's kind of how I try to...

Andrew: When the market was melting down in mid-May, late-May, early-June, whatever, you were the one who was saying, "Look, I was getting worried because JetBlue, you know, you can look at the stock price, Japanese stock prices down there bidding at 33. And the Spirit stock is at would be like 15 standalone." And I was like, "Oh well, JetBlue doesn't have a papered over transaction. They're probably going to walk full." And you were the one who kept saying like, "No, these guys are thinking long-term. They're not thinking st- they put this deal together. They've obviously been thinking about it for months, and months, and months. Like, they're not going to walk because of a little short-term velocity[?] or something. This is the last asset they can buy. They view this as their last chance to get much-needed planes, much needed pilots, much-needed stocks. I mean, you were just absolutely spot-on. And again, that's why you like strategics more than financials because your teachers are playing a longer game than mark-to-market. What can I get right now?

Jeremy: Absolutely. I mean, look, if I can put this in the context of one where I actually lost a bunch of money, where I got it wrong, where's the Bali situation where there was a massive overbid from a financial player? Again, from step general, the financial buyer and I gave far too much. This is a recent situation. This isn't like... [crosstalk]

Andrew: It's a painful one for me and it's still ongoing.

Jeremy: Yeah, yeah, but I mean that's kind of what I learned. I tried to learn a little bit of a lesson there. And that is locally in the words of financial players, you know, the words of a hedge fund or an Apollo, they come and they go. But when you're Jet-, I mean, there was actually, there was another article that came out regarding JetBlue thats said they've been planning this deal for a very long period of time and that they had a 5 to 7 year plan for the Spirit integration. And I mean, it's quite obvious when you look at the specifics of the transaction that even if they were to win and convince the board to give them the keys to the Spirit kingdom, this is an 18 to 24 months regulatory process. So, and also, I should mention that the hostile tender decks have already been filed. So it's not as if this is... You're right. It's not a paper transaction, but it's an airline merger. I mean, these are not things you just pop on and pop off. This is a multi-year kind of drawn-out battle. So without taking a specific view on who wins this deal, I think Spirit votes 90 votes for the downside puts with a stock was trading... I'm going say goodbye to my kids, they're going to school. [laughter]

Andrew: Bye, guys.

Jeremy: Where there, you know, where it's trading basically at the break price for the Frontier transaction with no upside a quarter for any JetBlue overbid optionality, that just seems wrong. Now to bring us up to speed with where we are today. I actually, I mean, look, most of my puts are either expired or out of the money. I mean, I think the most likely outcome is still Spirit can't get the deal done with Frontier. I think that's the most likely outcome. But I don't really have a strong view on the equity itself at 24. I kind of want to see how the vote goes. Now, if the stock comes back to 19.20, look I wrote a bunch of puts around that level, right? I would... and I also wrote some calls because I thought the deal would trade very wide to any announced deal even if JetBlue got over the top. Those who are a bit hairier when JetBlue started overbidding but the vote was high enough that I did okay. But yeah, I think if the stock comes back closer to 20 bucks, it's probably worth another look. But again, this one's changing. This one's moving so fast. I feel like I can't apply without seeing the news of the day.

Andrew: I should note that we're talking about the night of July 5th, the votes, July 8th. So this podcast will be up by July 8th, but this part of the conversation could still rapidly- let me just return to different one. This is one. I've done a lot of work on the space. I'm really interested in it. I'm really interested in the space in general. I'm interested in this name because there's a lot of torques on the upside. It's a pretty crazy story. You can see, I could see how, like a year from now, you and I are doing a podcast and we're saying, "Oh, that was a stupid idea." Like the risks were obvious in hindsight, but I could also see a year from now, maybe more likely we're saying, "Yeah, this was a no-brainer hitting you over the head and that company is Vertex Energy. The ticker there is VNTR, if I'm remembering correctly. So I just want to talk...

Jeremy: VTNR. I think it's VTNR.

Andrew: Oh, yeah. I've got it backwards. Yep.

Jeremy: No worries. I'd do the same.

Andrew: So I just want to toss it over to you. Vertex Energy. Maybe you can give like a two-minute background history of how we got to today and kind of what's going on there.

Jeremy: Okay, so Vertex Energy... I'll say this in the most polite way possible. Former Total Shit Co. Absolute Shit Co. [chuckles] This was a small refinery of used motor oil that fell into the proverbial gold mine when they acquired Shell's Mobile Alabama Refinery for $75 million plus working cap. Okay, to put this in context, they just said... look, I'm sorry, I'm shooting for memory on this one because I have a lot going on, but basically they're going to pay for that refinery in one quarter.

Andrew: Yeah.

Jeremy: More than that, I think they're going to... [crosstalk]

Andrew: I think they said one month. I think they closed it for one- I think they paid for it by like May 15th or something.

Jeremy: Sorry, I thought it was... Yeah, I've been- if you take crack spreads back to more normal as the devil's they probably[?] pay for it in a quarter, as you said. Right now it's paying for itself for a month. So they bought an asset, and so they bought an old low Nelson complexity index refinery for almost nothing. So, what does that mean? The Nelson complexity index is kind of a benchmark metric for the complexity, the sophistication of a refinery. The higher the number, the more sophisticated it is. Normally, you don't want to buy a 4 NCI. That's a very, very low number. It means it's old. It means it can't process crude into much other than finished, you know, diesel and gasoline. You can't do the more sophisticated napkins or downstream products. Normally, in this environment where playing crack spreads are just off the charts, processing vanilla crude into vanilla refined products is just a gold mine. And most other refineries, for example, I'm involved in another one, Calumet. We can talk about in a moment.

Andrew: Oh, we will.

Jeremy: They can process much more sophisticated finished products, but what they're actually just trying to do is pure... I don't even know if that's the right time to go home. It's just that the most vanilla former of finding as they can just given how widespread Czar at the moment.

Andrew: So just to...

Jeremy: Yeah, go on.

Andrew: Jeremy mentioned but I'll just [inaudible]. Crack spread is you take oil and you turn it into some type of product, right? Gasoline, jet fuel, diesel, whatever it is. The crack spread is how much money you make when you run the oil through your refinery and put out your out think[?]. So high crack spreads means we're making money like crazy. Low crack spreads means, oh gosh, there's not a lot of profit when we do this type of thing. So, just so everybody knows that jargon that we kind of threw out there.

Jeremy: You know, that's helpful. Sorry, we're using a few technical terms here, but yeah. So Vertex, formerly a very small company, has a couple hundred million dollar market cap. You know, serial underperformer actually used motor oil is pretty commoditized business. The assets are so-so.They kind of bought this Shell refinery for nothing, because Shell was an enforced seller. No one wants to buy or if- I mean, talk about the political overtones and the current environment, there was literally no buyer for this asset, major or larger companies, smaller companies. So they did this somewhat levered transaction. They raised a bunch of convertible equity and a bit of debt as well to finance it. Then what they're going to do is they won't, actually, the irony is they weren't actually buying it for the refinery. They were buying it to turn it over time into a renewable diesel facility. Now, of course, you know, the first of the current production, only 10,000 barrels a day are actually getting turned into renewable diesel. So that means, you know, 75, 80 percent more. 80% of production is still going to be conventional refining. But over time, the plan was obviously to throttle up the renewable diesel portion and move away from vanilla refining and turn it into, you know, a green product.

And of course, cracks spreads exploded, and now they're just making money hand over fist, so they really looked into it. But look, at the end of the day, the stock is trading at $10. They're going to do $4 of EPS- no, $4.50 of EPS this year. If cracks spreads go back to normalized levels, nothing really unusual about that. In terms of this tons of oil-related names, refiners or EMPs trading at say two, two and a half times current earnings. What's interesting, perhaps, is that they are doing this renewable diesel transition. These are kind of much higher valued projects. They still have the used motor oil business, which should be making, you know, peak peak peak earnings, which probably was a few bucks a share.

Andrew: Yep.

Jeremy: And the business has been so profitable in the last months that they've- I think they've almost totally delevered. I mean, maybe there's some working capital build or whatever and they're spending a bit of CapEx to start the renewable diesel transition, which should be probably about a 12-month process. It's not as advanced as Calumet. But this is essentially a debt-free entity, massively pure-play exposed to refining economics on the Gulf Coast, trading at two times earnings. And yet, has 120 a day, real 120 realized full ability. It's kind of hilarious.

Andrew: It's also interesting. I've got so many questions about this. So I've started working on it. I see everything you do, right? I'm like, "Oh my God. This is... this is a lair." As you said, two times earnings. One of the nice things is they locked in half the crack spreads for the next 6 months which, you know, when crack spreads go up every day, it looks crazy. But it's great because it allows them to be lever, pay off the transaction, get the money to do the renewable. So, I do have a couple questions here. First, Shell was a force up. Yes. Shell had to get rid of old, dirty refineries but at the same time I could see Shell pitching a renewable story. So, why were these guys the only person? Because people think this renewable facility. When they do, it is going to be worth hundreds and hundreds of millions of dollars. Why were these guys the only ones who were willing to go out there and say, "Yeah, I know Shell sold in 2020," but nobody else looked at this and said, "Hey, let's do this for me?" Renewable story. Put some money into it and create hundreds of millions of dollars in value.

Jeremy: Look, a lot of the other natural biases... Remember, this is a refinery in Alabama. A lot of the other integrated players who are active in the Gulf Coast have already announced renewable diesel transitions. Or in the subsequent period they've bought, some names exposed to the renewable diesel story. Look, I don't think we should sugarcoat it. This is a really, really old asset and it's- there is what Vertex Energy said about the asset and what they could do with it. And it's obviously a lack of belief in the market that that's actually doable. But again, it's not a huge... I mean, it's not a huge ticket, right? In terms of the actual amount they're investing through transition, I think it's around 100 million. So it's not kneel moving for any of the typical integrators doesn't move. It's not big enough. 10,000 barrels a day. Even over time, if they could repurpose most of the 90,000 barrels a day of capacity, it's not really very large. It's unproven. The location... I mean... So, I'm involved in Calumet as well. Full disclosure of a much bigger position in Calumet than in Vertex. There is a location advantage for something like Calumet, which is much closer to the kind of Northwest Grain Belt and the California, Oregon, and Canadian regulatory markets versus the Gulf Coast where you have to rail the product all the way to the West Coast to get all the government subsidies. Because a lot of the value with the renewable diesel is actually... this is market economics....

Andrew: Getting it to California?

Jeremy: Basically. Getting it to California, getting paid by Gavin Newsom and the greens, right? So, or to Canada and Oregon, right? So, it's not the most locationally advantaged project. And given the age of the Shell asset, I mean, it's a hydro cracker conversion. So philosophically, it's not complicated, and it's theoretically similar to what Calumet did. The difference is that Calumet's asset was actually built 5 years ago. It's a brand new recliner. In fact, Calumet's Great Falls facility was the last refinery built in the United States, and it was a massive loser. It was a massive loser until renewable diesel, right? Until the transfer and until crack spreads moved in by 6 months. But essentially, this Shell asset is, what? 30 years old? I need to look up the exact date. But so, I mean, yeah, I don't want to sugarcoat it. It wasn't easy, fairly chunky asset. It's just that the structural improvement in the refining environment in the United States has been massive. So, what I would say about Vertex, and then I'll let you go, is that if you have a- sorry, you mentioned that they've hedged out a quarter of their production. They've hedged out a quarter of their production at a 25% cream[?] to five-year average crack spreads. Meaning, something around $15 a barrel, maybe 17, 18 dollars. Well, they didn't give the number. The five-year crack spread average being 10 to $13 a barrel or something like that. Crack spreads today are $40 a barrel. They were 50, $60 a barrel. So, I mean, they were willing to lock in economics down 70% and give their forecasts on that basis.

Andrew: Yep.

Jeremy: And on that basis, it's trading at 2 times earnings with no debt. Now, I'm not saying you can't lose. We'll probably talk about a couple of stocks that are now trading in one time zone with no debt. But, but I mean, if you have any kind of structural view that refining economics in the USA is structurally far more valuable now than they were six months ago, 12 months ago. I mean, it's entirely reasonable that in a post-Russia-Ukraine world, you would expect the value of invested or funding assets in the western hemisphere in the United States to go way up. Like, whatever you say...

Andrew: That was the question...

Jeremy: Yeah, whatever you...

Andrew: That was one of my questions...

Jeremy: Go on, go on.

Andrew: Because, look... Refiners. Their main input cost is obviously oil. But they run on energy and natural gases that are powering them. And one of the things I've really been debating is like, hey, all these refiners here are making massive profits. You can go look at any of the refiners making massive profits and they trade them at very cheap levels because nobody believes that these profits are close to sustainable, which they probably aren't this sustainable. But I keep looking, say, well, Europe natural gas is 150, and natural gas here after nice come down is like 5, 6. Like, that's a huge edge, and all these refiners out here, screaming from the rooftops, and we're never building a refinery in the U.S. again, right? And even if we did, it would take 4 years to come online at minimum. So it's like, hey, you've got this huge structural advantage. I keep looking at these and being like, all right, they're trading for Vertex, trading for 2 times earnings. Yes, it's a crap excuse[?] people like to say, but you can go find a lot of other ones. They're trading so cheap. And I just keep looking at them and be like, "What am I missing? Why are we not just like, you know, it just seems too cheap." Vertex. You mentioned operationals for getting to crack to getting to the renewable diesel. So you don't think, because one of my worries was similar to your queue, you get this massive, massive cost overrun. You think this is pretty buttoned-up. They'll get it relatively on time, relatively on budget, all that type of stuff.

Jeremy: I think it's almost irrelevant at this point, right? I mean, whether it costs 100 or 150 million in the context of the money they're making, I'm not sure. I guess another way of kind of asking what you're asking is, what's driving the stock price today? Are people buying or trading Vertex because of the renewable diesel explosion? Definitely not. I think that's completely faded into the background. That was the reason they did the transaction. That was the reason the stock probably went from 3.4 bucks to 7 bucks out of...

Andrew: And now, people are just here for us, supernormal... [crosstalk]

Jeremy: But now, it's just a trading sardine on refining margins. Just a trading sardine in refining margins and you would think that at some point, there should start to be some real investors coming to the name or in the space in general. Like, if the market stabilizes, right? I mean, this is kind of not a unique refining. It's more commodities common. It's more like, unless prices stop moving for some period of time, even if they go lower first, people are just so afraid of the theoretical fall to come.

Andrew: Yep.

Jeremy: They can't capitalize on anything. Even though these stocks are trading at 1 times earnings or 2 times... I had this argument with people of time like, well, okay, let's take pricing down 50%. Let's take it down 70%. Let's take it back to five-year averages and just look at the pro forma enterprise value, the pro forma balance sheet of the entity, if that happens in 3 months or 6 months.

Andrew: Yup.

Jeremy: And then this, let's put a normal through the cycle multiple on. What would you pay? I don't know. What would you pay for a crappy one refining asset in Alabama given all that we know, and if it was making a five-year average margin, two times EBITDA, three times EBITDA? Okay. It's still a $20 stock. That's the point, but no one wants to own it. So, and by the way, this goes for any ENP, any gas name, a lot of coal names, right? So it's it's an...

Andrew: I've been very...

Jeremy: It's a philosophical issue where the market is having a huge number of problems capitalizing anything at all. And the only way to really get through that is to see the cash flow. It will be paid the cash flows, dividends, or buybacks or whatever, or for pricing to just kind of stabilize. Minutes[?] argan oil goes up and down $10 a day, frankly.

Andrew: Last question on Vertex, and then I want to talk about Calumet because I'm very interested in Calumet as well.

Jeremy: Yep.

Andrew: The CEO here, right? You mentioned this used to be a crack coat, and I have not talked to him. I've heard different things from different investors about him, right? But I do look at him like, "Look, he got the deal of the century, buying this asset."

Jeremy: I am listening. I just have to let them in the door. I'm listening. Keep talking.

Andrew: That's fine. That's fine. He got the deal of the century, buying this refinery in 2020. He's got a vision for the diesel. He bought the oil- he took public- the old wholesale refinery, the whole wholesale recycling oil piece. And I just look at him like, "Is this guy great or is he like a typical crack co-manager?" Because he owns like 70 or 75 million dollars of stock at this point. And I believe he said he wants to turn this into a platform. So I'm just kind of looking at him and wondering, hey, how do I look at him and think about him?

Jeremy: I wish I had a vet for you on the CEO and his track record. I can't pretend that I know a lot about him or his skills with his... I agree he has all the incentives in the world to make it work, but...

Andrew: 75 million of them.

Jeremy: I'm involved in another stock whereas, yeah, also owns like 35 millions of stock. And, you know, hasn't necessarily hit it out of the park lately. So actually, I think it's an industry bet almost as much as an asset, but here with a bit of an asset level wrinkle. So, just, you can keep talking. I just have to let in one person into the house. [chuckles]

Andrew: Go on, go on. No, just on the Vertex thing. It was just interesting because I know people who, again, say, it's a typical crack co-manager. But I look and say, "Well, he kind of like rolled this industry up and he rolled the oil industry up and he got somewhere with it." And yeah, it wasn't easy. But then he bought this deal and he made a fortune. So, anyway, Jeremy's letting someone in, but I'm going to introduce the next company I want to talk about. That company is Calumet. The ticker is CLMT. Jeremy has done just unbelievable work here. I remember he wrote it up in like mid-year 2020 when the stock was at 2. He liked it. I liked it. I think we got it off-bid actually and then it ran on. It's around 5 and you exited and I was like, I don't know, I think there's upside. But I exited and now the stock is at 10. It's come down from 15. It's been crazy. I know you're back in and I'm starting to ramp back up again. So, Calumet. There's a lot of different pieces to the story here, but I just want to flip it over to you and this might be the last thing we talk about. What are you seeing in Calumet? Let's talk through some of the parts and everything because...

Jeremy: Sure.

Andrew: ...it's really interesting.

Jeremy: Okay. So, dude you said the stock was 10? It's 9. I would kill for 10.

Andrew: Well, yeah, it had a real big sell off today. Yeah.

Jeremy: I mean it closed at 9 on $3 million [chuckles] volume, something like that. I need to look at how much it traded but basically it's very liquid. So, look, Calumet is, again, an MLP and non dividend-paying levered MLP. So the natural ownership base of the equity is...

Andrew: Zero.

Jeremy: ...probably about as large as my Japanese apartment. It's pretty small. Look, it's a very complex story. It's a combination of specialty chemicals, businesses of various degrees, various quality degrees that are going to things like automotive lubricants, inputs to paints, waxes, white oils. All these kinds of specialty chemicals that touch upon commodity grade chemicals as well that they make it in a couple of specialty refineries mostly in Shreveport, Louisiana. Then they have a merchant refining business that we were talking about, the Montana Great Falls Refinery in Montana, that largely puts in Canadian crude and largely puts in a heavy asphalt cut.

Andrew: Yep.

Jeremy: That tends to go into the construction business locally. Now, that asset is going through a transition, as we kind of touched upon. That's kind of the key to the story. And then they also have kind of a traditional refining piece of the business as well that is highly profitable right now and responsible for most of the non-renewable diesel earnings, the non-specialty earnings. And that kind of comes and goes with the cycle. But really, the key to the story is that this was a levered kind of hodgepodge of assets. Always tried to claim. They were kind of a specialty type of chemicals business. And to preserving of a higher multiple, chronically over levered, chronically poorly managed, they kind of acquired the wrong assets or acquired them at the wrong time, and then it kind of gotten rolled up into a few different businesses. As I said, the Montana Refinery asset was actually the last Greenfield refinery expansion refinery built in the United States. They invested from the get-go, and they lost a bunch of money. They had to write it down, and then a few years ago, they decided to prove to pivot to renewable diesel. Meaning, diesel created from seeds, corns, "green sources" or. you know, not taken out of a refined barrel of oil. And in order to do that, as we kind of touched upon with Vertex, they're taking their oversized hydrocracker, which is essentially a piece of the refinery, and converting it to put in things like canola oil or soybean meal. I think tallow is another product they're considering using as a feedstock. And the reason you would do that is because the gross margin per gallon is just so much higher than tradition-, not just traditional refined bezel, but even bio-ethanol, or biodiesel, sorry, biodiesel. And the reason for that is simply subsidies. So the reason the government wants to encourage the production of renewable diesel is because it's a much better product than biodiesel. You can pour it directly into a diesel engine instead of having blending limits. The problem with biodiesel is that you don't really need to have blending limits where you need to have different specs in your engine. So it's really not that usable. You can just pour a reneweable diesel straight into a straight substitute. Now, I'm not here to make the green case for renewable diesel. You know, you're taking essentially what should be a food product and turning it into fuel. But the fact is that these subsidies aren't going away, okay? So, if you just look at the gross profit per barrel, you should look it at on a per gallon basis. The gross profit per gallon, you see this historical spread no matter what the market conditions are, and there's a good side to the Calumet that you can pick up.

Andrew: Yep.

Jeremy: ...where Calumet is... Sorry. Renewable producers are able to stably extract a huge spread over typical biodiesel margins. So this is the spread that you would hope to capture if you're Calumet. That's the spread of the gross profit level in terms of picking up those as biodiesel. That's why you don't make pies do[?] but if your input costs are actually structured lower as well, then you can make even more money now. Why would your input costs be structured lower because you're located in a better position? So, for example, they're located in the Northwest Grain Belt. They can get all these seeds and grains directly from Montana, from Southern Canada, and from North Dakota. What are you from? I was right there and so you get your pick of the best products to create a similar yielding renewable diesel product from a much lower input bust.

Secondly, you can also rail it to the West Coast much cheaper than you can rail it from the Gulf Coast, where a lot of the other facilities are actually located on the Gulf Coast, if that's where refineries happen to be. They were historically... There are few facilities in California that are also getting converted by the majors. But essentially, you have a transport infrastructure advantage and you have a feedstock advantage. And those 2 points should underpin a structural cost advantage for a facility at Great Falls. So, they came up with this plan. They're almost... I mean, the facility is going to start pumping renewable diesel in September. September should be the first production, and they went through a few various transitions to the finance to finance the transition. They raised a bunch of money from Oak Tree, which was kind of an expensive form of non-recourse debt, with a conversion option into equity. And then the credit markets closed for the last two months, so they haven't been able to refinance that out. I think a lot of that swaying on... So, I should mention this is a very levered entity and the credit markets have kind of gone, not haywire, but definitely gotten a bit stormy out there. And so, when you have 1.4 billion of debt against an entity that LTM only did, you know, 150 million of EBITDA and even this year... So, renewable diesel has come along till September, right, so even though that theoretically could do 250, 300 million of EBITDA, that's not coming online until September. And you know, their specialties business has been beset by supply chain issues and cost inflation, as you could imagine. So, you look at the entity. That's looking seven or eight times levered at the moment on LTM or whatever. So that's why the stocks have been killed.

But you wanted to talk about some of the parts, and I've been rambling, but I think that's really important. Some of the parts is, if renewable diesel can generate what we think it can generate, which is kind of 250 million EBITDA base case, could be a lot higher but kind of 200 or 250 million shouldn't be a stretch. And Chevron took out a pretty similar entity, Regi, R-E-G-I, at 9 times EV/EBITDA when a lot of that business is actually not RD, not renewable diesel. A lot of it is other renewable piece of the business. Renewable diesel was only going to grow rapidly in the next few years. But they paid 9 times of EV/EBITDA. Notwithstanding that, these renewable diesel assets tend to trade, or until recently, they traded, well, north of 10 times EV/EBITDA. But even if it's the trade high single digits EV/EBITDA multiple, we're talking north of $2 billion without a stretch for an asset that should be in production in a matter of months. And so that covers the entire EV right there, because the EV today is 1.4 billion debt and say, 700 million of market cap.

Andrew: With the Oak Tree investments, well, it did $200 million into this convertible. How does that work on the convert? Because I've been trying to build out the model and figure out how much equity- like, you know, if you think this is worth 1.5 billion. How much equity value in MRL, MRL is the Montana Renewable, how much equity values actually go down to Calumet?

Jeremy: I had assumed that it would be refinanced before it ever turn into equity. So the docks state is that, if there is an equity transaction, if there is a cell down, for example, of a percent of MRL of the renewable diesel piece, then they would have conversion rates at said valuation. They didn't specify how much they would get. So, for example, if, let's say, they put in 200 million face or whatever, right? So, that plus 10- was it 200 million? Was it more? 200. 200 million.

Andrew: I think... [crosstalk]

Jeremy: If that was done at say 2 billion, then they would get 10% of the equity, but maybe maybe slightly more for the make-whole whatever.

Andrew: Yeah.

Jeremy: But that at their option. They can also just take cash, right?

Andrew: Gosh. Okay.

Jeremy: I think that transaction was announced in November last year, so quite a different market environment. And I think at the time, that was seen as a bridge. So basically, they needed a couple hundred extra million dollars to one, to delever; and two, to finish construction of the project. Since then, the credit markets have basically shut. But the business has actually generated tons of EBITDA because they're exposed to pure player point refinery, right? So keep in mind, especially that business is still not doing very well, exposed to input cost inflation and not so much issues on the demand side, but they've been really dinged by supply chain issues most of the last 6 months, maybe even 9 months. But they just guided to a hundred million of EBITDA. In the most recent quarter, almost all of which is coming from either the refining business in Montana or the crew refining business out of Shreveport, where they're trying to run vanilla or finding as much as possible.

Andrew: Yep.

Jeremy: And, so look. In terms of near term, the balance sheet is very levered, no doubt about that. But there shouldn't be really any liquidity issues or financing issues. And so the reason it's very interesting now is the market is sleeping on the fact that this is a special situation. They're actually running a process for the renewable diesel asset. Everyone kind of assumed that you'll only sell 20 or 25 percent and you'll raise maybe 500 million, but of that 500 million, a bunch of that goes to Oak Tree. And then you pay down a bit of debt, but then you still have a billion of debt. And then specialty business is still very macro-sensitive, so it's still a busted MLP. Everyone's kind of assuming that that's the base case outcome.

I think we're actually in a very interesting place here. I think, given the implied punitive cost of equity capital for this thing, they might just sell outright. They might just sell Montana for 2 billion plus. Now, if they sell Montana, so in my sum of the parts, I think at 2 billion... By the way, I think it should be worth a lot more than 2 billion, maybe 2 and a half billion or more of a time but if they just take a mercy bid, let's say, from a strategic that wants the asset, I still think the stock iss worth mid-20s. It's a mid-20s stock, even with very kind of not aggressive assumptions on the remain corp, right? And you take that 2 billion. You repay all the debt, all the Oak Tree. Oak tree gets taken out of all the residual data. Old code gets taken out and you you would still have 5 or 6 hundred million of cash thereafter to either re-invest into specialty. Or more likely, you have fully recapitalized, you turn into a c-corp and then you just sell the other pieces, it's more likely to me. But either way, for a stock at $10, I mean, the market's kind of pricing this all- not quite like a solvency risk, but it's getting there. And I think a lot of that is due to the technicals rather actual fundamentals.

So what kind of got me back interested was, you've been talking about for a while and then the stock-- it's gotten hit a lot harder recently. It's been hit quite hard, 15 to 10 to 9 today. But they filed this. It's not even akin[?]. They found an investor presentations with the cue to update with that was basically like, hey, we're minting money, and Montana--I don't think it's fully online. But it's like on the verge of coming up fully online, fully operational, and everything. It's like at this point, most of the execution risk is gone. You know, like you're just there on some of the parts. So, you mentioned getting to the Chinese. They've obviously got the slide that's like, it's in one of their decks that says, hey, we value everything that's not MRL at 9 times EBITDA. We value MRL at 12s. That gets us to a 37 to 64 dollar unit price. You think they're being way too aggressive with the non-MRL pieces.

Jeremy: Yes, they're being too aggressive with the non-MRL pieces. The problem they're making is one, that was done 6 months ago, those costs. Two, they're using non-MLP, non-busted, actual normalcy corp as the comps, mostly. So like, if anything, this most recent volatility has... I don't want to say it's been positive because it hasn't been positive for pain a little, but it's demonstrated to management of this company that there's literally no... I mean, it's uninvestable. Their equity is just uninvestable to the vast majority of investors. The only way to really fix the cost of capital is to do something strategic because the market is never going to give you that. Like, if it can trade off, its traded off at 40% on a total of $15 million, or something like that. The theoretically a billion dollar market cap company. It was a billion dollar market cap company. Three weeks ago, this traded off at 35 or 40 percent or maybe $15 mllion. So, it's a very powerful argument that the sum of the parts argument really needs to be unlocked via... I mean, it's one thing. I think I was talking with another Shell, they said it's one thing to create that, it's another thing to realize that.

Andrew: Yep. Yep.

Jeremy: They've done a great job creating value through this outset transition. There's no denying that. And yet the stock, I mean... And by the way, the stock is at 9. So 3 years ago it was 3 bucks or whatever. But it was 17 six months ago, right? So, realizing that value for shareholders are completely think all together. And I think they're starting to get it just talking to them and talking to Shell.

Andrew: That was going to be my next question. Because Heritage Group owns 15% of this or something. And I believe Heritage Group is associated with the... Now, I think he's former, but it is associated with some of the old management. And I do remember a lot of them knock on this company but Heritage just doesn't get it. They just don't care. They're going to destroy value. They did, I mean, starting Montana until they got this renewable Hail Mary, was not a good decision. I think the tracker backed positions, you know, I'd have to go back through my notes. But the tracker heard of acquisitions and been like, "This is going to be great." And then 6 months later, the market turned against us. This is awful. So you think the market gets it? I know there's a new CEO in here. You think we're set for value. Unlucky you though.

Jeremy: I hope so. I hope so. There has been a slight change in the guard. So the former head of Heritage I believe retired. It's currently being run by the daughter, a lady called Amy Schumacher. I mean they look they're based in Indiana, Indianapolis, and they're quite quiet. They don't really say what their intentions are which has been a big problem. Like they haven't made it clear what they want to do with this entity or how they think about it. But the... I mean, liquidity is just so horrendous and the discount hs just been so hideous. And moreover, they've delivered in the asset transition, right? They've delivered almost to a tee on time on budget and yet they could- he's done absolutely nothing. So, there was this idea that if you can deliver on the asset transition, show that the value is there, then the market will be eventually give you credit. That argument is largely being proven incorrect given structure of the entity in the Leverage, right? So, I think they do need to do something. There,have been some rumblings that Heritage has passion projects that require capital, like in the renewable energy space. I'm not familiar with them, but apparently they need capital. An one way to do that would be to maximize value here because this is, I think one of their largest investments among the largest.

Andrew: Yep.

Jeremy: And obviously, it's more in an asset value harvesting phase once the asset gets up and running. But I don't know.

Andrew: But that is the thing. Like, hey, you've managed to somehow turn Montana into something that's actually seems like it's going to make a good deal of money if they get the renewable, and like they get the multiple you're talking about. But these businesses are super sexy to own. Like, cool. You own a refiner? Who wants to talk about refiners? Maybe performance brands is kind of a sexy zone but that's a very small piece of the overall value here. Like, it's not like you're on the Knicks and Rangers. Why not sell this to, like, these are more gritty businesses. Sell them for the multiples, get rid of this headache, the MLP, all these. Get rid of it and go do things that you actually care about. And that is probably a little bit easier than running refineries.

Jeremy: I agree. And I know many shareholders have made this point. What I would emphasize to you guys is something I've come to learn recently is managements. So, the former CEO has become the executive chairman.

Andrew: Yes, that's what I mean.

Jeremy: And the current new CEO is a no monsters operator guy. I mean, the former CEO is the guy who really... It was his brainchild. This has to transition. He kind of stepped in windy. Former CEO Tim Go left to go back to Holly Frontier. Now, Dino, D-I-N-O, kind of tried to sell a few things. He's not the best manager. Steve is... He did a very, very nice job and he's still the chairman. And if you can, because he's very... I mean look, they've made a lot of effort with investor outreach. They spent a lot of time with me, spent a lot of time with other investors, and they've been very clear in their communication. The limit is to meet the GP has not. Heritage has not. And that's a big overhang but they get the structural discount. They get that there's only so much they can do on the execution side, and that if the market just doesn't get it, it just doesn't get it. So, I believe that conversation is being had, and as I said, it was already a swarming full process, so I believe they will consider alternatives. And not only me. Many investors have impressed to them the benefits of taking the bird in the hand, rather than selling say, 25% for a few hundred, 500 million, whatever, and then trying to turn it into a $5 billion asset in 5 years.

Andrew: And my message to them, like, look, Chevron took Regi out at a nice multiple. But as you said, these are based on subsidies, and you never know what happens with subsidies. Like, you are a small player in a subsidy-driven market. Take the bird in the hand and get out while you can. Because who knows if 5 years from now, this renewable diesel is still going to be here? Who knows where crutch braids or anything is going to be? Like, yeah, you want to take the bird in the hand if I was them and diversify into whatever you care about.

Jeremy: Totally. So, look, I like that one because again, it's very near-term. Like, they've been running this process now for 2 and a half plus months earnings. I expect there should be an update with second quarter earnings. But either way, you should get some kind of update on that process within a matter of months. It has a lot more leverage, okay? So it's not as clean as some of these other things.

Andrew: No, it is levered. It's 700 or 750 million market cap at to the current prices, 1.4 billion of debt, only 1.1 degree course, but still more recourse debt than equity, and certainly more overall debt than equity.

Jeremy: But my kind of working assumption is they do this renewable diesel transaction, and the balance sheet issues assault. Not the structural discount issues. That's another topic. But the balance sheet issues in that alone. I mean, I can't see why I should trade if I think some of the parts is 25 to 30, okay? Using my numbers and they do a transaction where you crystallized, you know, 70% of that, some of the parts. Surely won't trade It 9/10, right?

Andrew: Do you you like how you met more than Vertex? Do you like how you met more than Vertex? Is it the leverage just gives you so much more upside or do you just think the renewable diesel story at Calumet is so much better than the Vertex story that's why you like it?

Jeremy: It's the catalyst. It's the catalyst. I mean, devaluation of Vertex is undeniably cheaper and it's a clean balance sheet, essentially. But as I said, there's... The thing with Vertex is it just looks like a ton of other ENPs or calling. I mean, there's tons of energy names trading at 2 times earnings that I can explain why they traded 2 times earnings. So, what's going to change? They're not going to sell Vertex. I don't think...

Andrew: It's probably because I own them, they traded 2 times earnings and I bought them at 3 times earnings.

Jeremy: Exactly. Whereas with Calumet, I actually think there is a decent shot. They sell the whole shebang. I mean, the renewable diesel piece. And even if they didn't, let's say this whole 51%. Okay, let's say this whole 51%, got a billion dollars, billion half dollars, then you... Balance sheet claims cleansing event. No credit risk. No nothing. That alone... [crosstalk]

Andrew: And all of a sudden, they turned the distribution back on and with the balance you cleansed, it's probably dollar per share distribution. I'm doing that math right off the top of my head. But it is big distribution real fast.

Jeremy: Exactly. So, Vertex... I think you'll still get paid overtime. But yeah, I mean, what's the catalyst? The market doesn't care about earnings because I think they're one time, and what is the catalyst? So it's an excellent philosophical question, maybe for half of my portfolio.

Andrew: We have been going on for almost an hour and a half at this point. I've probably got to get out but we've got a list of like 12 names. Do you want to go through more or should we just call it and we'll have you on for part 8 in another couple weeks or something?

Jeremy: Yeah. Why don't we just do one or two more very quickly before...

Andrew: Sure.

Jeremy: Literally 5 minutes. Just because I got questions about the Montair[?].

Andrew: Yeah, let's do it. We got to keep the... [crosstalk]

Jeremy: HRBR. Harbor Diversified. So this is in Wisconsin.

Andrew: Yep.

Jeremy: Full disclosure, I currently do not have a position. Okay. No change of the fundamentals kind of name, that should do very well in this environment. Actually the stock is held up much better than almost all peers. Having said that, it's all about opportunity cost, right? It's all about opportunity cost. I think base case outcome for this equity is still kind of a quasi-liquidation where you get close to $3 a share in value. That said, at $2.15 a share with no communication from management and no real articulation of when that's going to be realized or in what fashion that's going to be realized. We're talking about IRS of, you know, 30%, let's say, maybe slightly better than that.

Andrew: The horror. The horror.

Jeremy: But my point is, I can deploy capital into things like FAR limited where I, you know, I mean, I'm not trying to talk my own but I have a very large position in FAR. It's by far my luck's position. I went through over 3% of the company, so take that for what it's worth. But on my numbers, FAR is 8.50% irr. Where I'm actually, you know, I have a very strong line into management and feel I have a lot of agency in what actually happens. So why would I invest it? Such low IRRs in a dark company with less liquidity and also a quasi-liquidation at higher IRRs where I actually seem to have much more of an input into what actually gets done with the money. Just doesn't make sense. So, I've basically taken all my money out of HRBR and put it in FAR in that kind of bid from that.

Andrew: Makes a total sense to me. The only thing on HRBR... I have been wondering, because it's not loss on me that the share price is held in well and it's obviously what I follow because quasi-liquidations are really interesting ways it Market neutral returns, right? I have been wondering if it's holding up so well because the company is just, they've got a very active share repurchase plan. The stock has risen a lot, but I've been wondering if they've just been hammering the share count to the extent that they can give him the illiquidity but if that's why I told him.

Jeremy: Yeah, no, I don't dislike it at all. Other than that, the environment has changed in this. You know, I try to be like a pig at the trough mentality. I go with the most juicy opportunity is for the given level of risk. Now, I think, HRBR, your downside... Everything goes pear-shaped, your downside is still about a dollar and 95 a share, two dollars a share, maybe less. So, I don't think you lose money. But I also think that about other stocks and I think you can do a lot better in like a flower where... Yeah, I mean, let's say, FAR is in a work out situation straight on this...

Andrew: We did a whole podcast on people... [crosstalk]

Jeremy: Hey, we did a whole pod...

Andrew: Jeremy's done great work. He's done updates. I mean, I can give the update, right? Like, the story is we've got management change. It seems like we're on the right path there.

Jeremy: We seem like we are on the right path. It's stocks at 75.80 cents with 50 cents of cash and an earn out, deep deep deep deep deep in the money earn out worth another 70 cents, plus some optionality on a few other bids and bumps that could get you up to a dollar and 20, a dollar and 25. Point is, if you forget all the other optionality on the Gambia[?] assets, if you put the discount rate on the wood side or another 25%, not 11, 12 percent right? If you just absolutely get punitive, you just take a hacksaw to it. And if you assume they don't do anything creative with capital, meaning you just keep the cash on balance sheet. They don't even invest it, even though most of its in term deposits and interest rates are going up. So actually, they are making a bit of money. Even in a scenario they still get 90 cents a share. And they've actually given you a few signals that they're basically going to do the unwind, right? Like the CFO is hired on a contingency basis month-to-month. Very unusual the they're buying out the long tail of minority shareholders. 78 and a half cents a share. They specifically said in the documentation that cleaning up the long tail of shareholders will make any subsequent capital management exercise much less painful. Now they're not moving as fast as I would probably want them to move but there is some political acitivity around the discussion on the last asset disposal, but... Look, oil price volatility, being what it is, I can't see how they're able to enter into any transaction other than one that creates a little bit of value. Or they just, you know, if they, if they just don't get anything out of Gambia, it's not great. It's not the end of the world because then there's nothing else to do but give all the money back.

Andrew: Yep.

Jeremy: So, yeah. I mean, again, size these things based on downside, not upside, really. I mean, even in this case though, I think it is a 75 or 80 cents stock. I think it's probably off today. I haven't checked the market but it's probably a 75 cents stock, where I think base base base case outcome is north of a dollar, and you get it all in under 12 months. Oh, and by the way, that assumes no pull forward in capital returns to juice your IRR.

Andrew: Yep.

Jeremy: Actually I think you do get, probably within the next 3-4 months, probably do get a third of your money back or something like that. So, and that, you know, back end up side woodside works out then goes up from a dollar and five whatever to, you know, a dollar and twenty plus. Moreover, it's all the US dollar denominated assets and some Aussie dollar stock. So the fact that the Aussie dollar has gone from 73 74 to 67 68. That's a... [crosstalk]

Andrew: That's really juicy.

Jeremy: It's kind of like a little hedge there. So, I mean, I'm talking my own book big time. You should do your own research. I own 3.4% of the company and I've been adding. I've been adding even in this market because I think it's a superior risk-reward. I really do. But do your own research.

Andrew: That's fantastic. Well, hey, Jeremy. We're going to wrap it up there. We'll have to have you on in a couple weeks to do podcast number 8 because there's 7 names I'm looking at over here that we were trying to get to, though we didn't hit but... Look, Jeremy, again, let's bring it back. Jeremy just launched a new activist campaign on Evel. I'll include a link to that in the show notes so people can go check that out. Jeremy is very active on Twitter so you can move on there. If you got questions there, FAR or any of these other things, you can hit me up on Twitter too if you want. But Jeremy Raper, thank you so much for coming on and we will chat soon.

Jeremy: Thanks man. Appreciate it.

[END]