Pardee Resources: Assets Exceeds Market Value

Summary

• Asset Value Exceeds Market Value.
• Since 1995, Firm Has Maintained An Pretax Return On Investment Capital Of 19.3%.
• A Resource Management Company That Great At Capital Allocation.
• Has A Very Nice Dividend.
• Has A More Consistent Earning Power.

Company Summary

Pardee Resources (PDER) is one of the grey company's that few investors follow or then know about. The company clearly isn't on the watch list of Wall Street which is great for investors looking for companies that have been over looked. Pardee Resources is a resource management company, that has been in business for 174 years. The company has an diversified set of properties across three types of resources. Since the company has a diversified source of earnings across multiple types of resource produce more consistent earnings power.

Company History

The company was founded in 1840 by Ariovistu Pardee to mine coal in Northeast Pennsylvania. Over the last 174 years the company has expanded its business beyond coal extraction to other resource related businesses. The company grew from a coal mining company to a resource management company in 2012. Properties that the firm purchased a 100 years ago produced million's of dollars in revenues.

Operations and Resource Assets

Pardee Resource has four divisions; coal and minerals, oil and gas, timber and surface mining and alternative energy. The company does not mine its coal properties, instead the company leases it out for royalties. The firm does a little oil and gas exploration, however, the majority of their wells are run by major oil and gas companies. This is also true for the company's timber and surface operations where the firm plants the trees and local operators harvest the forest. At the end of 2013, the company owned 154,813 acres of timber and surface, 313 million tons of coal reserves, 42.8 billion cubic feet equivalent of gas reserves and 10.9 megawatts of alternative energy generation capacity.

Oil & Gas Division

In 2013 the company acquired approximately 436,000 acres of mineral and royalty interest in West Virginia, Kentucky and Virginia with 2,500 producing natural gas wells operated by 19 leases with several are major operators. Oil & Gas revenues increased 12% from $5.7 million to $6.7 million 2013. The average price the company received for its natural gas increased from $2.95 per Mcf to $3.74 per Mcf in 2013. As the price sold increased while production decreased 7% from 1,017 MMcfc to 944 MMcfc. The weight average price of oil received rose 2.7% to $96.92 per barrel. By using the purchase price of the company's 436,000 acres there is a rough estimate valuing their total oil and gas holding's of 644,00 acres at $88.38 million.

Timber and Surface Division

In 2014, the firm completed a full appraisal of its timber lands and posted the results on their website. The report shows that 84% of the land was forested and the land holds approximately 547 million board feet that is worth $885.19 per acre. The total value of the firms timberland is $137 million however this doesn't include the 7,780 acres of Virginia softwoods acquired in 2010 for $13.5 million. As well 8,920 acres held for real estate development. During 2013, the company's Timber and Surface Division revenues increased 272% from $3.6 million in 2012 to $13.4 million in 2013. This was helped through a pre-tax gain of $9.6 million realized from the sale of approximately 40,000 acres of non-strategic timberland. When you take out the sale of 40,000 acres, revenues from operations totaled $3.8 million an increase of 6% from 2012.

Coal and Mineral Division

About 41% of the firm coal reserves are metallurgical coal or 131 million tons. The company is valuing its metallurgical coal reserves at $3.82 a ton, as in 2013 the company made $28 million in revenues from coal. After taking out coal expenses of $7 million the company had $21 million in gross income from coal. Coal and mineral revenues decreased 27% from $39 million in 2012, which was due to a 20% deduction in production from 9.8 million tons in 2012 to 7.8 million in 2013.

Alternative Energy Division

In 2013, the company's Alternative Energy Division acquired eight solar photovoltaic (PV) projects on the campus of Arizona University with a total capacity of 2.3 megawatts. To acquire these projects the company invested $9.1 million. Since 2010, the firm has invested $30 million in solar projects totaling 10.9 MW of capacity. These projects have power purchase agreements between 15 and 20 years, which requires the off-taker to purchase the electricity generated by the solar arrays. The majority of the PPA's are with states or municipal off-takers. Pardee as of 2014, has projects operating in three states; California, New Jersey and Arizona. During 2013, the company reported revenues $3.4 million from solar projects with a tax saving of $2.5 million from federal investment tax credits.

Management

The company management views themselves as capital allocators running a royalty trust. When assets outlive their use management sells it and they are willing to cut their losses. Management uses return on investment capital as a measurement off their ability and performance. Since 1992 the company as an average 19.3% pretax return on investment capital. Management runs a lean and efficient operation with only 31 employees. In 1992 the company had 30 employees and by the end of 2012 the firm had 31 employees. During this time the firm grew its cash flow per employee from $72k per employee to $959k per employee. Management has shown through multiple business cycles their ability to invest prudently at the bottom of the cycle, and manage throughout the cycles. This has been proven true with the fact that over the last eight years the company has been able to grow revenues, net income, cash flow and book value. The company's book value alone has grown 19% year over year. As the company has grown its revenues and net income has also grown its dividend from $2.64 per share to $6.8 per share. Management has proven to be shareholder friendly with the company concluding its tender offer for 3% of shares outstanding on June 14, 2014 for $265.50 per share. The company tendered 51,300 shares for $13,620,150.

Financials

During 2013, the company's operating income increased 2.4% to $51 million, while operating cash flow decreased 3% from 2012 to $28 million. As well, earning per share increased 6.1% to $25.76 from $24.27 in 2012. During 2013, acquisition of properties made in 2003 contributed 69% of total revenues of the company. The average royalty per ton decreased from $3.88 in 2012 to $3.47 in 2013.

Fourth Quarter Of 2014

During the fourth quarter of 2014, the firm earned $6.11 per share, a 35% increase over $4.54 per share in the fourth quarter of 2013. Three of the firms divisions posted revenues gains, while Coal and Mineral division saw a moderate decline of 5%. The firm EBITDA for the quarter was $8.7 million which is a 35% increase from the previous year. However, the year to date EBITDA of $23.1 million is 31% lower then the result of the third quarter of 2013.

Valuation

The company has a more consistent earning power from it's diversified resources properties and it allows use to value the firms earnings from 12x to 14x its 2013 $25.76 per share. At 12x to 14x the firm is valued at $309.12 to $360.64 and currently the company is selling for 10.3x earnings. The company has pretax earnings of $39.81 and is selling for around 6.8x its pretax earnings. Clearly the company should sell for 10x its pretax earnings, at 10x its pretax earnings would sell for $398.10 per share. The market is currently valuing the companies assets for the firms coal, alternative and oil and gas at $52 million, while valuing its timber at $132 million. With a market cap of about $188 million, the bulk of the value is the firms timber investment, while undervaluing the firms other assets.

Asset Value:

• Timber Division Value - $136 million.
• Oil & Gas Division Value - $88.38 million based on the firms purchase price of 436,000 as a rough estimate for valuing their total oil and gas holdings of 644,000 acres.
• Alternative Energy Division - Based on the current cost of non-residential all-in solar build is between $3.57 and $3.60 per watt. Using this metric we can valued the company's alternative energy assets at $35.7 million to $36 million.
• Coal and Mineral Division - Based on the company Coal reserve which 41% are metallurgical coal (131 million tons). The company is valuing its coal reverse at $3.84 per ton. In 2013, the company noted that 26% of their coal reserves are currently permitted, which is enough to sustain their production for the next 10 years. Discounting its coal income of $21 million for 10 years at 15% results in a value of $107 million. While the company values its coal reserves as a whole at $500 million.

Put it all together an you get an asset value of $373.38 million in assets verses a market cap of about $188 million. Asset value is roughly double the firm market cap, putting asset value at $526 per share. The company is undervalued based on earnings and assets, the value of the firms earnings and assets exceed the current value of the firms stock price. This firm, Pardee, because of the market is offering at least a 35% margin of safety for any investor who invest in this company at its current price.