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from Outstanding Investor Digest's July 31, 2000 Edition
LONGLEAF PARTNERS FUNDS'
MASON HAWKINS, C.T. FITZPATRICK & STALEY CATES
(continued from preceding page)
OUR SMALL CAP PORTFOLIO IS EXTREMELY CHEAP.
FOR EXAMPLE... LET'S MAKE THAT THREE EXAMPLES.
Common sense tells us the best bargains are in shares….
John Buford: Longleaf Small Cap Fund's
portfolio is extremely cheap.… I have three companies I'd like to highlight today - three
of our larger positions. But before I do, let me read a quote from a recent presentation
given by Deltic Timber -
a Small-Cap Fund investment.
I think it summarizes the feelings and actions of the managements of most of the companies
in our funds:
"In our continuing efforts towards locating and acquiring
timberlands at a price that is discounted from fair market value, we're increasingly drawn
to the timberlands we already own. Your Board firmly believes that the value of
Deltic's
timberland is significantly greater than the current aggregate price accorded the enterprise
in the stock market."
"Good common sense and sound judgement lead us to take advantage of
this disconnect by allocating capital to buy in our own shares, thus increasing the number
of acres allocated to each remaining share and, in effect, growing the value of those shares.
It is just that simple."
And we would concur with that.
We like what we see at Gulf Canada….
Buford: [Each of the] three securities [I'm] highlighting
today [has] its own unique partners and its own unique
|
PORTFOLIO REPORTS estimates the following were
|
opportunity to grow value and realize that value in the marketplace. I'll start with Gulf Canada [GOU/NYSE] - a large oil and gas firm in Western Canada. The stock price today is about $4-1/2 and the value is about $8.00.
Our partner at Gulf Canada is Dick Auchinleck, a career oil and gas engineer. Since becoming Gulf's CEO two years ago, Dick has cut the company's cost structure by 40%, significantly lowered its finding costs, and cut the company's debt from C$2.7 billion to C$1.9 billion.
Gulf has several avenues of value growth open to it. It's currently finding reserves at an average cost of $3.30 per barrel. That's compared to $5.50 per barrel in value for every barrel that they find. Gulf's also selling assets at prices significantly above our appraisal - which in turn raises the value of the firm. And the company's seeing continued development of market infrastructure in areas where they have huge reserve pools - development that will greatly increase the value of those reserves.
Recent transactions and buyer interest confirm our view.
Buford: In terms of market realization of this value, we've
filed a 13D to give us the flexibility to explore all options with the company's management
or with interested third parties. The company has numerous non-core assets which can be
sold as well as a large position in a publicly-traded entity [Gulf Indonesia]. Proceeds
from these sales would, of course, be available for share repurchases.
And there's been increasing interest in Canadian oil and gas reserves. Recent proposed
transactions for Union Pacific,
Ranger Oil, and
Ulster Oil support our appraisal and the high level of interest from large oil and
gas companies looking to boost reserves through acquisition.
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