Description

I believe TUSK is a no brainer. TUSK is an oilfield services company with an infrastructure services segment as well. There is a very neat special sit angle given their $390M claim against the bankrupt Puerto Rico Electric Power Authority (PREPA) which stems from their hurricane Maria restoration work done over 5 years ago. This is a post-petition claim that should soon be an admin claim and I am very confident a large chunk of the claim will be paid, and likely in the not too distant future. 

The stock is coming down due to estimates having to come down due to softness in nat gas creating a bit of a lull in the calendar for TUSK. But I believe TUSK should relatively soon return to a higher earnings level for this well completions biz, TUSK could also move its frac fleets to oil basins if nat gas completions degrade. This has provided an opportunity to buy TUSK at below the intrinsic value of the OpCo and get a free shot on its mammoth $390M claim for which I believe the risk adj NPV is north of 50 cents on the dollar.

I believe TUSK should be valued as follows:

6 frac fleets that should normalize 12M net (of overhead) EBITDA each. I’ll haircut to avg utilization of 4.5 fleets at 12M net EBITDA or $54M. I’d value this segment at 2.75x EBITDA or $148.5M.

TUSK's sand proppant business should do $15M+ net EBITDA on average and be worth around $50M.

TUSK’s infrastructure services business has a wide potential of outcomes but with large emerging tailwinds from infra act should do north of $200M in revenue in 2024 with ~10% normalized EBITDA margins or $20M, TUSK could underwhelm here and only generate single digit MM EBITDA, they could also catch some large storm work which would have very high contribution margins that should be north of 20% and make infra services a ~$30M EBITDA business.

Infra certainly has potential to be a decent earnings multiple business if they execute but I am just valuing it at $50M to be conservative.

For the OpCo, this leaves you with $250M in value, less $50M in YE net debt, or $200M in equity value across 47.5M shares or $4.21 per share for the opco.

I believe you are absolutely getting no credit for the claim and every dollar TUSK gets should go straight to the equity value. HF/PE firm Wexford Capital owns just less than half of the shares, they have had plenty of success in the O&G industry for a long time and I believe they will do wise things with the cash and believe a special would be highly likely (especially when the final tranche rolles in from PREPA).

Now you value the claim. What’s particularly interesting is I believe $99M of the claim is very close to being mailed out to TUSK – TUSK provided a very helpful update on their last earnings call (and was also spelled out in the 10-Q). My summary of the below would be, FEMA has shipped $99M to COR3 and those funds can only be used by PREPA to pay Cobra (TUSK Puerto Rico infra subsidiary) for the emergency work they did. It seems like PREPA is continuing to talk tough against paying Cobra (TUSK) in what I believe is a negotiating tactic, and they just move slow and love to kick the can down the road. If you go back and read the bk docs I believe PREPA’s arguments against paying Cobra have either been discredited or are largely bogus and will not stand in a US court when this is allowed to be litigated.

On March 27, 2023, Cobra was notified that FEMA had approved $233 million in Cobra invoices related to the December 21, 2022 determination memorandum. The 90% federal cost share of the approved amount was $210 million, which was obligated and made available for drawdown on March 27, 2023. Of this $210 million, approximately $99 million has been represented by both PREPA and FEMA as intended to pay Cobra for outstanding invoices and the remaining $111 million is a reimbursement to PREPA for payments already made on Cobra invoices.

PREPA inexplicably refuses to pay Cobra for the work accomplished in the aftermath of Hurricane Maria and has so far failed to take the steps necessary to obtain the funds from COR3 funds that were appropriated by Congress to FEMA and then obligated to COR3 for payments to Cobra. We continue to vigorously pursue payment of the over $390 million owed to us from PREPA and continue exhaust efforts with congressional members, legal teams and frequent meetings with decision makers.

Michail Paraskevopoulos

Okay. Got it. And if you can allow one more question, coming back to that news on PREPA, I just want to make sure that I've fully got the implications. Is the Fed share that has been approved payable directly to you? Or does it have to go through PREPA and is complicated by their unwillingness to play?

Arty Straehla

It has to go -- what -- the way the system is set up is COR3 is the grant recipient. And they have to submit the they received the paperwork from PREPA. PREPA has to do an RF or request for reimbursement. And then COR3 will pay them and then PREPA will pay us. now inexplicably -- and we're a month into this. So we found out about it on March 27 through some of our congressional leaders that we're acquiring for us.

And -- we think that they have received that they put in a request for requisition of $130 million. So the timing for that is starting to come upon us. And I'm not trying to indicate that payment is imminent and all that type of thing, PREPA has been tough in this regard. But they have, as I said in -- as we went through the earnings part, they have funds that have been appropriated by Congress for a specific FEMA determination memorandum, and those funds have been made available to COR3 as the grant recipient. So they can continue to refuse to pay. But I don't think Congress will appreciate that very much that the -- that those funds are not going to the people who perform the work.

Michail Paraskevopoulos

Right. again, was struck by their unwillingness to pay even when they themselves have been paid. So I wanted to make sure understanding when money is likely to fall into your hands. It sounds though like if I understood what you said, there is some possibility of getting $130 million maybe sooner rather than later. Is that fair?

Mark Layton

To clarify the portion of that $210 million that relates to unpaid invoices for Cobra is $99 million.

Arty Straehla

Correct.

Mark Layton

And that money to the extent that COR3 draws is not fungible. So that money can only be paid to Cobra once drawn.

I believe ~$99M will be in the mail to TUSK within the next couple of months, this would leave $290M left on the claim. Of the total claim of $390M, ~$230M in principle and the remaining $160M is interest that has been accruing over the last 5 years.

I believe a very good comp for the TUSK claim is how fellow post Maria grid repair operator Whitefish Energy played out. Whitefish and PREPA settled in 1H22 at around the principal amount of the payments owed for the work done – similar to Cobra there was a multiyear process with countless requests for the stay to be lifted and eventually Prepa settled, interestingly this came soon after FEMA clarified and completed its review of how much it would reimburse PREPA. This is basically exactly where we are at with Cobra (TUSK).

Up until recently, the judge denied lifting the stay on the claim primarily due to a bribery charge against a former Cobra president. This has since been settled and the plea deal verdict was that gratuities were given (<$10K in value if I remember correctly – apartment privilege, plane tickets, helicopter access)  and had nothing to do with a contract that Cobra received, and nothing came out of the lengthy case that implicated Cobra. Cobra’s work has been validated by 3rd parties as done well and at a reasonable price. So Prepa’s main argument has essentially been discredited. The latest reason why judge Swain has kept the stay order is that she essentially wanted to wait until the FEMA review and appeal were complete and we are basically there, so this is another big step. The last reason is that the PREPA creditors (mainly bondholders) are nearing the date where they will likely have to have a plan of emergence struck, the judge set July but this could be extended by a couple months, judging by judge swain’s words it sounds clear she does not want this bk to spill over into 2024 – and if a deal to exit is not reached a litigation schedule will put a clock on final verdicts for claimants. TUSK will be an admin claim and be at the top of the cap stack and must be paid for PREPA to exit bk. And again if a plan of emergence can’t be reached and confirmed then a litigation schedule will ensue and we will be allowed to litigate our post-petition claim – and PREPA’s bs delaying and weak arguments will no longer fly. Cobra acted quickly and performed life saving work and did it well and at a reasonable price (per 3^rd party reviews).

Notably, the PREPA/FOMB outlined plan includes a budget to pay Cobra.

6. Pending Administrative Claims

On the Effective Date, in order to provide for the payment of the Allowed Administrative Expenses Claims, Reorganized PREPA will sell, assign, transfer, and convey to the Commonwealth an aggregate original principal amount of four hundred million dollars ($400,000,000) of Series B Bonds (the “Administrative Expense Bonds”) in exchange for four hundred million dollars ($400,000,000) in Cash.

As explained in Section V.D.6 above, pending before the Title III Court is the Cobra Admin Motion. In a recent pleading, Cobra estimated its Administrative Expense Claim at approximately $350 million. June 2022 Cobra Lift Stay Motion at 1. If the Title III Court allows COBRA an Administrative Expense Claim, PREPA will satisfy such Claim through the Claim Reserve Fund, but only to the extent not satisfied by funds PREPA receives from FEMA. PREPA believes that FEMA will reimburse PREPA for at least some the amounts owned under the Cobra agreements. However, PREPA expressly reserves all rights related to the Cobra’s asserted Claim, including but not limited to arguments over the liability, amount, and liability on interest owed on the Cobra’s Allowed Claim (if any).

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And the whitefish scenario below – which is a relevant comp

7. Whitefish Energy Administrative Expense Motion and Settlement Agreement In the aftermath of Hurricanes Irma and Maria, PREPA engaged various contractors to repair the electrical system on an emergency basis, including Whitefish Energy Holdings, LLC (“Whitefish” or “WEH”), who was the first transmission line contractor engaged by PREPA to assist in repairing Puerto Rico’s island-wide blackout. On September 26, 2017, PREPA entered into a contract with Whitefish (the “WEH Contract”) for the repair of Puerto Rico’s electrical system main structures (the back bone of the system) composed of approximately 200 miles of transmission lines and towers, many of which were located in the mountainous region of Puerto Rico’s rugged interior, and therefore, were only accessible by using a helicopter. The work requested by PREPA and completed by Whitefish under the WEH Contract, included, among other projects: (1) clearing right-of-ways, access roads, and helicopter staging areas so repair equipment and manpower could be transported to repair sites and repair work could begin; (2) replacing over 50 electrical towers, dismantling a similar number of towers, and completing corrective actions on over 200 other transmission structures; and (3) restoring electricity to customers in major residential and industrial areas across Puerto Rico, including in San Juan, Calguas, Manati, and Juntos. On October 31, 2017, PREPA subsequently terminated the WEH Contract in accordance with its terms, after Whitefish completed all work required by PREPA in connection with the island-wide blackout repair work, which termination became effective on November 30, 2017. On October 30, 2020, Whitefish filed the Motion of Whitefish Energy Holdings, LLC for Allowance of Administrative Expense Claim [ECF No. 2281] (the “Whitefish Admin Motion”), seeking allowance of an administrative expense claim arising from various services provided to PREPA to respond to the devastation wrought by Hurricanes Irma and Maria to the electrical grid. [ECF No. 2281]. The parties subsequently engaged in discussions to seek a consensual resolution of the claims asserted in the motion. To facilitate these continuing discussions, the briefing deadlines were consensually extended several times. [ECF Nos. 2334, 2351, 2371, 2413, 2451, 2489, 2527, 2543, 2585, 2613, 2626, 2648, 2662, 2682, 2707, and 2749]. PREPA remains primarily liable for payment required by the WEH Contract, but the federal government authorized one-hundred percent (100%) federal-share emergency protective measures, including direct federal assistance, for 180 days, starting on September 17, 2017 for the WEH Contract, subject to FEMA review and approval. This leaves PREPA liable solely for any remaining amounts not approved and paid by FEMA. Whitefish completed all the work requested by PREPA within the federally designated 180-day period. After the work was completed, Whitefish submitted invoices to PREPA, with the invoices totaling approximately $144,249,543.00. Prior to entry into the Whitefish Settlement Agreement (as defined below), PREPA made payments on account of invoices in connection with the WEH Contract (the “WEH Invoices”) in the amount of $37,056,105.00. In addition, finance charges had accrued at a rate of 1% per month for all overdue WEH Invoices (the “WEH Finance Charges”). As of February 11, 2022, Whitefish asserted all WEH Finance Charges accrued through that date in the amount of $51,887,962.60. On June 29, 2018, PREPA submitted documentation supporting its claim for reimbursement by FEMA (the “WEH FEMA Documentation”) to the Governor’s Authorized Representative (the “GAR”) for review. On or around August 24, 2018, the GAR submitted the WEH FEMA Documentation to FEMA, requesting reimbursement of approximately $144.3 million. On August 19, 2021, FEMA issued Determination Memorandum Number FEMA-4339- DR-PR, in which FEMA determined, of the $144,249,543.53 submitted by PREPA for reimbursement for the WEH Invoices, $111,352,417.00 was eligible for reimbursement, but that PREPA had not sufficiently demonstrated that the remaining $32,897,126.53 was eligible for reimbursement (“FEMA Denied Amounts”). On October 18, 2021, PREPA filed a first appeal in which PREPA appealed FEMA’s determination that the FEMA Denied Amounts were not eligible for reimbursement. On December 17, 2021, Puerto Rico’s Government Authorized Representative, the COR3, submitted the first appeal to FEMA. On March 1, 2022, the Oversight Board, as representative of PREPA in their Title III Case, entered into a settlement agreement (attached hereto as Exhibit C) with Whitefish (the “Whitefish Settlement Agreement”) and filed a motion for court approval of the Whitefish Settlement Agreement [ECF No. 2281]. The Whitefish Settlement Agreement provides for, among others things, the allowance of an administrative expense claim in the total amount of $133,369,078.00, of which $127,345,388.00 has been paid, with the remainder of payment to be comprised of the remaining administrative expense claim amount of $6,023,690.00, to be payable on the effective date of the Plan, but in no event later than December 31, 2023. The Whitefish Settlement Agreement also (i) requires the Oversight Board, PREPA and Whitefish to collaboratively pursue the administrative appeal process for the reimbursement of FEMA Denied Amounts and (ii) reduces the overall accrued interest charges by $19,004,808.50, with no further interest accrual to occur as of the date of the execution of the Whitefish Settlement Agreement, provided all payments by PREPA under the Whitefish Settlement Agreement are timely and fully made. On March 21, 2022, the Title III Court entered the order approving the Whitefish Settlement Agreement in resolution of the Whitefish Admin Motion [ECF No. 2763].

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I think we get $99M in the next 1-2 months, this should go right to the stock price and add $2 per share, or 55%. It also should help validate and remind the market of the value of the remaining claim, we should receive a final tranche of another $100-200M with a 60-70% chance that check is in the mail by YE, and a 30-40% chance it spills over into 2024. This would add another $2-4 per share.

Catalyst

• $99M being passed through soon to TUSK seems like an inevitability to me. 
• then further progress on the remaining claim, which I fully expect to follow the Whitefish path a lead to a sizeable settlement (most likely this year), and if not - we will soon be able to litigate the claim.
• Big contract wins - infra services coming into a big tailwind from IIJA, and TUSK should eventually find more pressure pumping utilization