"The Family Behind Pinelawn Memorial Park Cashed in During COVID"

Earlier this month we posted an excerpt on the blog from the Oddball Stocks Newsletter about Pinelawn Cemetery. A journalist from ProPublica has just published a long exposé on Pinelawn Memorial Park, which has "land share certificates" that trade on the OTC:

All those new graves and higher prices at Pinelawn translated into cash for the Locke family, the descendents of the cemetery’s founder. The explanation lies in an obscure but lucrative financial instrument called a “land share,” which in Pinelawn’s case dates back to 1904 and pays dividends twice a year. Those payouts more than doubled during the early months of the pandemic, from $13.65 per share in August 2019 to $28 in August 2020, before subsiding to $20.70 in August 2021.

The Locke family owns 51,964 of the 127,850 land shares that were issued by Pinelawn during the presidential administration of Theodore Roosevelt, and which still circulate today. The shares are unusual in another regard: Some of the rest are traded on an over-the-counter Nasdaq market — their price has more than doubled over the past five years — and a small coterie of investors have bought shares, coveting their reliable revenue stream. No other cemetery land shares are listed on Nasdaq’s OTC Markets Group.

Calling them “land shares” is a bit of a misnomer, since they don’t actually entail owning land. Instead, they’re an investment, originally used to fund the creation of the cemetery, that entitles the holder to dividends derived from the sales of cemetery plots. Half of the proceeds from each sale of a plot go to pay the dividends, with the other half used to take care of the property.

The shares remain valid until the last plot is sold and the empty land at Pinelawn has been used up. That day is far off. Of Pinelawn’s 839 acres, more than 600 remain unsold and undeveloped today. In 2018, Pinelawn president Justin Locke said that at the current pace the cemetery wouldn’t run out of land for at least 206 years.

That is much more unsold land than we had previously estimated. However, it seems plausible because Pinelawn has enough undeveloped land that they have proposed to develop warehouses and office buildings on some of it:

Justin Locke was appearing before the Cemetery Board to sound them out on a new idea: leasing 100 acres of Pinelawn’s property to develop into warehouses and office buildings.

Justin Locke made his case to the Cemetery Board, starting with the surprising claim that the area of the cemetery he wanted to develop was blighted. He described the 100-acre parcel as filled with “crime, trespassing, quality-of-life issues that are affecting the neighbors, complaints. It’s hurting our reputation.” (The “crime” he was describing seemed to consist largely of trespassers riding ATVs on the property.)

Noting Pinelawn’s extensive unused land, Locke touted the potential revenues the cemetery could earn by leasing the parcel. He called it a “cake-and-eat-it scenario where we can leave the property over there, maintain control over it, but generate a substantial income off of it in the meantime.”

The Pinelawn certificates are now "expert market" on the OTC. Recently they have been trading in the low $500s, which is about an 8% distribution yield on the most recent two distributions.

Oddball Stocks Newsletter Excerpt - Pinelawn Cemetery (Issue 38)

This is an excerpt from our Company Updates in Oddball Stocks Newsletter Issue 38 (January 2022): 

We recently did a deeper dive on Pinelawn Cemetery and its “purchase money certificates” that trade as PLWN on the OTC and collectively are entitled to “one-half the gross proceeds of the sale of the use of lots in Pinelawn Cemetery.” One thing that we were able to confirm is that there are 127,850 land purchase certificates outstanding. That means that the market capitalization of these interests, in total, is $67 million at $525 per share. We have a list of certificate shareholders that, while not current, shows that members of the Locke family, which control the cemetery nonprofit, owned something like 30,000 of the certificates. Rather than worrying that the cemetery management would want to disadvantage the certificates, it actually appears as though their incentives are aligned with the PLWN holders. In fact, if anything the State of New York has gotten upset that too much was being paid to the certificates.

Our understanding is that in 2004, Pinelawn had half of its 785 acres unsold. It is a bit difficult to tell how much is unsold now, but keep in mind that cemeteries have evolved towards denser ways of sharing the same remaining, limited space. Suppose that Pinelawn had 300 developable acres remaining. That would mean that the current “enterprise value” is $67 million divided by a half-interest in 300 acres, or $450,000 per acre. If you can fit 400 “lots” per acre on 300 acres that would be $1,000 per lot. Since the lots are worth quite a bit more than that, the back of the envelope math is there for the certificates to still be pretty attractive at this price.

Oddball Stocks Newsletter Excerpt - Pardee Resources Company (Issue 38)

This is an excerpt from our Company Updates in Oddball Stocks Newsletter Issue 38 (January 2022): 

At the end of 2021, Pardee declared a nice special dividend of $15 per share, which was in addition to $7.20 of quarterly dividends during the year. (We are waiting by the mailbox to see how much more money Pardee made during the fourth quarter from metallurgical coal royalties.) Thinking about Keweenaw's sale of land, and doing the analysis for the Dorchester Minerals update in this Issue, got us to thinking about how Pardee's timber acreage per share has changed over time.

At the end of 2002, Pardee had 770,196 shares outstanding. They had not yet bought their 44,000 acre “Powellton” timber tract in West Virginia (for which they paid $18 million in 2003), so their timber holdings must have been about 156,000 acres, or 0.2 acres per share. It also had a book value of $36 million, paid a total of $1.78 in dividends that year, and had $4.7 million of outstanding preferred stock at liquidation value. The shares traded for about 1.5x book value.

In the third quarter of 2021, Pardee had 656,993 shares outstanding and owns 161,225 acres of land. Their holdings have grown to a quarter of an acre per share, or about 20% per share increase, during a period of 20 years – thanks to share buybacks. Meanwhile, Pardee's book value increased by 4.3x to $155 million, it paid $22.20 of dividends last year, and trades for only 90% of book value.

Oddball Stocks Newsletter Excerpt - Dorchester Minerals, L.P. (Issue 38)

This is an excerpt from our Company Updates in Oddball Stocks Newsletter Issue 38 (January 2022): 

Dorchester Minearals is a publicly-traded limited partnership that owns producing and non-producing mineral, royalty, overriding royalty, net profits, and leasehold interests in in crude oil and natural gas acreage in multiple basins nationwide.

Dorchester Minerals (DMLP) was mentioned by a participant at the February 2019 Oddball Meetup, in Catahoula's Issue 26 guest piece, “A Report from the Pasture,” his Issue 28 guest piece “Oil and Gas Royalties: Searching for Buried Treasure in the Digital Age,” in our General Commentary about “Value vs Growth” in Issue 35, and in our feature in Issue 37: “Value in 'Dying' Industries.”

While any individual oil and gas well or field depletes over time, Dorchester's production has grown thanks to an ability to make good acquisitions. Sellers of non-operating mineral interests can trade their illiquid landholdings in a non-taxable exchange for partnership interests of Dorchester that are better diversified geographically, more liquid, and which have the potential to grow.

At the end of 2020, when hydrocarbon prices (and therefore estimates of reserves) were lower, Dorchester had 35 million units outstanding and had proved, developed, producing reserves of 9 million barrels of oil and 34 million mcf of natural gas, giving each unit of Dorchester a proportional interest of about a quarter of a barrel of oil and one thousand cubic feet of natural gas. And that was just the resources that were currently developed and producing; there are sure to be plenty of undeveloped hydrocarbons remaining in their 3.7 million gross acres of property.

Something interesting is that oil prices at the end of 2004 were about the same - $50 per barrel – as they were at the end of 2020. Dorchester had fewer units outstanding then (28 million) but had much lower reserves of oil: only 4 million barrels. This means that even though Dorchester has been producing and selling oil for the past 18 years, and issuing new limited partnership units to make acquisitions, its reserves of oil per unit have grown from 0.14 barrels to 0.26 – nearly doubling. Over a 16 year period, oil reserves per unit grew at 4% annually instead of declining, thanks to acquisitions.

Although Dorchester Minerals has not released its annual report for 2021, they did announce that the fourth quarter 2021 cash distribution will be $0.64 per unit. On an annualized basis, this is $2.56 per unit, which is an 11% yield on the current price of $23.50 per unit.

Oddball Stocks Newsletter Excerpt - Canadian Oil Sands (Issue 37)

 This is an excerpt from our Feature article in Oddball Stocks Newsletter Issue 37 (November 2021), "Value in 'Dying' Industries":

One of our theories is that mineral landowners (i.e. energy royalties) and pipelines are the best part of the hydrocarbon value chain. In particular, we shy away from explorers and producers, which have trouble creating as much long term value for shareholders because management's incentives are bad. They get paid to grow asset size, and they only have the money to do that at the top of the cycle when properties are expensive. An exception to this is oil producers with very long reserves. If you have decades worth of oil in the ground, you can focus on producing it instead of trying to outbid other producers for new reserves. The prime examples in this category are the major Canadian oil producers.

Suncor Energy is fully integrated with oil sands, conventional oil production, refining (462k bbl/d), and retail operations. Together, Cenovus and Suncor produce about as much oil (~1.2mm boe/day) as the entire Bakken region in North Dakota, or a smaller OPEC member like Algeria or Angola. The big story with Suncor's business is the upstream (oil sands and conventional) production, which produced almost 700k barrel of oil equivalents per day in the third quarter, of which 600k was from oil sands production. Oil sand is a mixture of bitumen, sand, clay, and water. It does not flow like conventional crude oil which is a liquid; it must be mined or heated underground before it can be processed. Suncor extracts bitumen in two ways: mining and in situ.

About 20% of the oil sand is close enough to the surface (under 200' depth) to be mined. They use large trucks and shovels to extract these, and then use hot water to separate ("extract") the bitumen from the sand. Bitumen is heated and sent to drums where excess carbon (in the form of petroleum coke) is removed. Vapors from the coke drums are sent to fractionators where they condense into naphtha, kerosene and gas oil. The end product is synthetic crude oil, which is shipped to refineries across North America to be further refined into jet fuels, gasoline, and other petroleum products.

The other 80% of oil sands are too deep to be mined with trucks and shovels. This is extracted in situ, using Steam Assisted Gravity Drainage. Horizontal wells inject steam to heat the reservoir of underground oil sands. The heat separates the bitumen and gravity brings it into a lower horizontal well bore which collects it and pipes it to upgrading facilities.

Suncor was founded in 1919 as Sun Company of Canada, a subsidiary of Sun Oil. In 1979, Sun formed Suncor by merging its Canadian refining and retailing interests (Great Canadian Oil Sands) and its conventional oil and gas interests. In 1995 Sun Oil divested its interest in the company and Suncor became an independent public oil company. In 2009, Suncor merged with Petro-Canada, a downstream refiner and retailer. In 2016, Suncor acquired Canadian Oil Sands, which had a 37% ownership stake in a project called Syncrude in Alberta. Together with Suncor's existing 12% ownership of Syncrude and the purchase of Murphy Oil's 5% stake, Suncor became the majority shareholder in the project, which produces 350k bbl/d from the Athabasca Oil sands outside Fort McMurray, Alberta.

Suncor is listed on both the NYSE (SU, US$25) and the Toronto Stock Exchange (SU.TO, CAD$31.67). (As you can see, a CAD$ is equal to 0.79 US$). The market capitalization is $36 billion. (This and other figures in US$.) They have $15 billion of debt at Sept 30 and $1.9 billion in cash for net debt of $13.5 billion and an enterprise value of $49 billion. (Suncor is able to borrow long term very cheaply: their debt due in 2047 yields only 3.2%.)

For the third quarter, Suncor's cash from operations (excluding changes in working capital) was $2.1 billion and its capital expenditures were $990 million, for free cash flow of $1.2 billion. That's just for the quarter: annualized that would be $4.8 billion. They have another metric that they call "discretionary free funds flow," which was $1.2 billion for the quarter as well.

Keep in mind that WTI oil in the third quarter averaged $71 and WCS crude sold at an average $13.6/bbl discount to this. Crude oil is now $10 higher (low $80s) and the differential is about $16/bbl, for a crude oil realization that's about $7.5 higher. The FCF yield on the current enterprise value is 10% at a lower oil price than today. That provides room, even if oil prices were to retrace from here, to pay a 5.6% dividend ($1.36 US on $24.18 share price) and buy back significant amounts of stock, i.e. 4.4% of the market cap annually if the share price and earnings stay at this level. So no wonder they are buying back stock aggressively. You will also notice that in the third quarter they returned 83% of free cash flow to shareholders through dividends and buybacks.

As of December 31, 2020, Suncor had proved and probable (2P) reserves, net of royalties, of 6.7 billion barrels of oil equivalent. This was calculated when oil prices were lower, which would mean that less of the resource was booked as being profitable to extract than may ultimately be extracted. At the present production rate of ~0.7 million barrels of oil equivalent per day, or 255 million barrels per year, those 2P reserves are enough to last for 26 years. And the enterprise value per 2P barrel of oil is $7, a figure about the same as Cenovus. (This also ignores the value of Suncor's refining and marketing operations.) The oil sands business spent $2.2 billion to produce about 54 million barrels of oil during the quarter, which is a production cost of $40 per barrel.

Another Canadian oil producer is Cenovus Energy, listed on the NYSE (CVE, US$12.12) and the Toronto Stock Exchange (CVE.TO, CAD$15.34). The current market capitalization is US$24 billion and the enterprise value is $37 billion. The third quarter's CAD$1.7 billion of free cash flow, which annualizes to CAD$6.8 billion (US$5.4 billion) gives a FCF/EV yield of 15%. Thanks to the leverage and the low cost debt, Cenovus equity is trading at only about 4.4x cash available for distribution. Also impressive is the level of FCF conversion; out of $2.3 billion CAD in adjusted funds flow, $1.7 billion is "free" (in excess of capital expenditure), which is 72%. Management commented on further uses of cash flow in the Q3 conference call:

“We finished the third quarter with net debt of about $11 billion, a reduction of $1.4 billion since the end of the second quarter. And today, we are very close to achieving our interim net debt target of below $10 billion, which takes me to our shareholder returns announcement. We have been clear that increase in shareholder returns would be our first priority, upon reaching our interim net debt target. Delivering on that commitment, our Board has approved doubling the dividend on our common shares effective for the fourth quarter dividend to $0.14 per share. In addition, the Board has approved filing of an NCIB application with the TSX for share buyback program of up to about 150 million common shares, which we expect to commence following the achievement of net debt below 10 billion. We will provide more context on how we think about capital allocation at our virtual investor day on December 8th. However, as we have said previously, when we are below 10 billion net debt, you should expect to see a more balanced approach to free funds flow application between further de-leveraging and shareholder returns. And at current commodity prices, we would expect to be able to execute our buyback plan in 2022, while achieving net debt under eight billion around mid-year.”

Dorchester Minerals, L.P. (DMLP) was mentioned by a participant at the February 2019 Oddball Meetup, and in Catahoula's Issue 26 guest piece, “A Report from the Pasture”. It is a publicly traded partnership that owns royalty, overriding royalty, and net profits interests in crude oil and natural gas acreage in multiple basins nationwide. Unlike exploration and production companies that drill wells, Dorchester has no debt, little capital expenditures, and high margins.

The current market capitalization of Dorchester is $631 million, and year-to-date it has earned $54 million of EBITDA. Free cash flow conversion is extremely high (actually above 100% due to the sale of some properties). The result is that the FCF yield to the enterprise value (annualizing the first three quarters' results) is about 11.9%, but of course this was in a lower oil price environment than what is prevailing now. (Dorchester distributed $48.2 million to limited partners in 2020. Their average selling prices of oil were high $40s/bbl and for natural gas a bit below $2/mcf.)

Oddball Stocks Newsletter Excerpt - Big Tobacco (Issue 37)

This is an excerpt from our Feature article in Oddball Stocks Newsletter Issue 37 (November 2021), "Value in 'Dying' Industries":

Back in Issue 20, we mentioned a McKinsey & Co research piece “Could Roger Federer be as successful playing badminton?” that tracked the economic profit of the world's couple thousand largest companies over a ten year period and found that about half of firms' performance is attributable to industry. There were twelve tobacco companies in their sample, and nine of them were in the top 20% of performance. And there were twenty paper companies, but none of those were in the top quintile of performance. Overall, their conclusion was that it is better to be an average company in a great industry than a great company in an average industry.

Investments in tobacco companies generated immense shareholder returns for more than a century, after cigarette rolling machines were introduced by James Duke in the late 19th century. The question now is whether this will continue, and do the tobacco company valuations compensate for the risk? There is a perception that the cigarette business is dying – but this has been the perception for as long as some of our subscribers have been alive, for about six decades since the U.S. Surgeon General's report on harmful effects of smoking was published. Linear extrapolation predicted that tobacco companies were doomed again because cigarette smoking dropped from 21% of American adults in 2005 to 14% in 2019.

However, humans have been using tobacco for thousands of years, since it was first introduced into human culture by the native inhabitants of South America. The Columbian exchange quickly brought it worldwide in the 16th century. Nothing about human biology has changed that would make people not want to use nicotine. The desire is there but it has been suppressed – rationally, no doubt – because of the connection between cigarettes and lung cancer. There are now far safer ways of consuming nicotine than cigarettes, such as vaping and oral nicotine products. The big tobacco players (Altria, Philip Morris, and British American Tobacco; essentially a duopoly of Marlboro versus Camels) are priced at a low multiple of their current cigarette earnings, and each one is an option on potentially very valuable reduced-risk nicotine businesses.

The most expensive big tobacco company, valuation-wise, is Philip Morris. It is also the largest by enterprise value and the most profitable. For the first nine months of 2021, revenues net of excise taxes are up 9.6% and operating profit was up 14%. Year-to-date, the company has generated $7.9 billion of cash from operations, and it spent $1.9 billion on future oriented acquisitions (Vectura and Fertin Pharma), $459 million on capital expenditures, $2 billion on debt repayment, and $5.6 billion on dividend payments. Philip Morris is the most expensive stock because it has the #1 cigarette (Marlboro) but is geographically diversified (as opposed to Altria which sells Marlboro in the U.S. only), has a popular reduced-risk heated tobacco product (the IQOS), and has not committed acquisition bungles the way that Altria did with Juul and Cronos. Philip Morris also has the least financial leverage.

Altria, the American counterpart to Philip Morris, has more moving parts. The enterprise value is currently $100 billion, but the company owns 10% of Anheuser Busch Inbev, which is worth $10 billion or so at market price. Revenues net of excise taxes are up about 1.5% year-to-date and operating income is up 6.4%. Year-to-date, the company has generated $5.7 billion of cash from operations, and it has spent $100 million on capital expenditures, repaid $1 billion of debt, bought back $972 million of stock, and paid $4.8 billion of dividends.

Finally, British American Tobacco is the most leveraged of the big three companies (debt/EV of 42% as opposed to 15% and 24% for Philip Morris and Altria) and has the second-best cigarette brand. The enterprise value of is currently $135 billion. For the first half of 2021, cigarette volumes were up 2% but revenues were down 3%. Note that for the tobacco companies (PM and BTI) with multinational operations, it can be difficult to untangle the effects of currency movements. At constant exchange rates, the revenue for cigarettes was actually up 6%. Non-combustibles revenue was up 20%, with "traditional" oral tobacco volume down 3% but vapor (Vuse) up 70%, heating products (Glo) up 99%, and "modern oral" (Velo pouches) up 124%. At constant exchange rates, non-combustible revenue was up 29%. Operating income was down 4% (although in constant currency it was up 5.4%).

Just Published: Issue 40 of the Oddball Stocks Newsletter

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