A Mammoth Opportunity
Deep value idea with majority of market value in net cash, plus a subscription service update
Today I wanted to share an intriguing deep value opportunity trading for less than 2x expected net cash and with potential upcoming inflection in its existing business.
But first, an important Hidden Rock Capital service update:
I have decided to discontinue the paid subscriptions at the end of this month (October 2024). I will return to writing occasional public (free) posts going forward.
The main reason behind this change is that I want to provide value to all of my subscribers and be free to write on whichever topics or ideas I am interested in. Having to choose whether to put something behind a paywall or not was restricting my creativity. And having started this blog originally to give back to fellow investors, I believe sharing my ideas with the broader community will be a more meaningful endeavor.
What this means tactically is that at the end of this October, I will suspend indefinitely payments for all existing subscriptions.
If you would like to cancel your subscription earlier, you are welcome to do so although I’m not sure how Substack will process refunds on the back end. I plan to provide one final update on the Model Portfolio holdings just for paid subscribers sometime this month before enacting the aforementioned changes.
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Now let’s go back to the investment opportunity, which is Mammoth Energy Services (TUSK).
To give a little background on TUSK, it has an eclectic mix of businesses focused on 3 main verticals:
Oilfield services
Infrastructure
Sand proppants (for fracking)
The key catalyst for TUSK currently is in its infrastructure business, as the company helped with disaster recovery efforts in Puerto Rico and was owed almost $200M in work that was never paid out by the Puerto Rico Electric Power Authority (PREPA).
Fast forward to July, and TUSK announced that it had reached an agreement to receive total proceeds of $188M from PREPA. The company already received $150M of this payout on October 1st, and I expect will receive the remaining $38M shortly.
To put the magnitude of this payout in context, let’s do some math:
TUSK’s market cap is $215M based on today’s share price ($4.50/share over 48 million shares outstanding)
Net debt of $37M based on balance sheet data as of Q2 2024 (so not reflecting payout)
If you add the $188M expected payout and subtract out the net debt, you get expected pro forma net cash position of $151M, which represents ~70% of its total market cap!
Put another way, the market is assigning only $64M of value to TUSK’s operating businesses after stripping out net cash value
So what are we getting with that $64M value? For starters, TUSK owns 52 dual fuel pumps for oilfield services as well as 3 frac sand facilities with 4.4M tons of annual production capacity.
But in my view, the most promising business for TUSK is its infrastructure services, where the company provides various turnkey solutions for electric & telecom infrastructure (transmission lines, substations, storm repair, telecom cable, etc.).
Below is a more detailed view of this infrastructure business segment for TUSK.
Source: TUSK investor presentation
With growing power demand for AI as well as increasing weather-related catastrophes (like the recent round of hurricanes this year), I expect this business should benefit from secular growth for years to come.
The $188 million dollar question is… what will management do with the cash now that they have received most of it? Management used some of these proceeds to pay down their debt, and increased CAPEX plans for 2024.
Management mentioned they may conduct a strategic review to determine the future vision for the company. If I had a say, I may advise them to monetize their sub-scale energy business segments (oilfield services & proppant sand) and double down on their infrastructure business. In my view, their energy business is too small to effectively compete as an independent entity, and may generate more value in the hands of a roll-up private equity or a larger public player (ProPump, ACDC, Liberty Energy, and several other potential acquirors).
In any case, while the stock price has increased substantially since the PREPA settlement news, I don’t think the market fully appreciates how transformative this payout can be for TUSK. There’s a lot of optionality for TUSK going forward which you can currently buy for a pittance given how much of its current market cap is covered in cash. As such, I believe TUSK is certainly a mammoth buying opportunity for deep value investors!
I’m hopeful the combo of new CEO + clean balance sheet + industry tailwinds drives solid results. The next few quarters will be telling in terms of understanding Lancaster’s strategy.
I can’t figure out what the company’s true DNA is. Infrastructure services has become the largest segment and I don’t think that was intentional- Cobra was spun up in 2017 seemingly because of the PREPA contract. I don’t know how they won that contract and they certainly haven’t replicated it since. No one segment stands out and I doubt there’s some hidden value to be unlocked through divestiture.
Removing interest expense and experiencing even moderate cyclical demand should get them profit-positive these next few quarters. That’s interesting to me insofar as it gets the stock to trade closer to book. I’m more interested in two other things:
1. Use of capital: Last earnings call management said most capital in excess of debt repayment would be spent on Capex. I wonder if Lancaster follows this. I’m iffy about reinvesting in mediocre segments or papering over those segments through acquisition. This is his time to swing for the fences and I respect his history working within various lines throughout his career.
2. Take-private threat: This is a major negative tail risk and the likelihood of occurrence is not trivial. Wexford owns 47% of Mammoth and could force delisting that would be very painful for minority shareholders if they take board control. Alternatively, they could tender a full buyout (or whatever they need to force a short-form merger) and could finance the entire buyout with the cash on Mammoth’s balance sheet. Forced delisting seems to make more sense for Wexford. The fact that Wexford could do this at any time in the past tempers concern they’d do it now, especially at a time when I’d expect cost to do is increasing with an improving valuation. Something definitely to keep an eye out for though.
Looks like TUSK received another $18M due from PREPA today:
https://ir.mammothenergy.com/news-events/press-releases/detail/128/cobra-acquisitions-llc-announces-receipt-of-18-4-million