CKX - CKX Lands: Expecting A Positive Outcome

2024-01-18 08:18:49 ET

Summary

• CKX Lands may be sold following a strategic review, as management focuses on Gulf Coast Sequestration's carbon capture project.
• CKX's land holdings and cash on the balance sheet suggest a potential value above $15 per share, higher than the current share price.
• There is evidence that CKX has exposure to the GCS project, but the value of this exposure is uncertain without further disclosure.

In August, CKX Lands (CKX) vaguely announced strategic alternatives and has not commented further publicly. While this small land holding company has long toiled in obscurity in the public markets, and only getting sparse attention after the announcement, I think the recent strategic review has a good likelihood in ending with a full sale of the company for the following reasons:

Management Has A New Focus

Mere days before CKX announced strategic alternatives, Gulf Coast Sequestration, run by many of the same people, was awarded $600m to build a carbon capture facility in Louisiana. I was initially surprised by the CKX announcement, but once someone brought this other news item to my attention, it seemed clear that the team that has been running CKX would be best-served to focus exclusively on GCS and ensuring the project is successful.

I don't have a strong view on carbon capture as a business, or on the likelihood of the GCS project becoming operational. But I expect the most valuable use of everyone's time will be making that project viable and not focusing on a subscale land business that generates about $1m/revenue per year. I don't see any other explanation for why they would decide to pursue possible sale options at this time. GCS has been making some impact hires , speaking to how serious they are going after this opportunity.

CKX Is Likely Worth More Dead Than Alive

As I mentioned above, CKX generates about $1m of revenue per year - hardly enough to justify the cost of being public . Thanks to some recent chunky stock-compensation grants, they have not generated operating income, but historically they have still been able to produce cash flow, but less than $1m total from FY18-FY22.

On the flip side, CKX entered 2023 with 13,699 acres of net land interests in the state. Assuming an average value of $2k per acre , this would be around $27m of value, with $8.5m of cash and CDs also on the balance sheet. With about 2.3m shares outstanding (including ~300k incentive shares), this implies >$15/share of value - moderate upside from the current $13 share price.

Another 2019 pitch from Merion Road makes the case for $15-19/share, if you're looking for a deeper approach on valuation.

For what it's worth, Management has a stock incentive plan that implies a belief that the assets are worth >$15/share:

Given Management maximizes their payout north of a $15 liquidation preference, I think they're properly incentivized to sell the company above where it currently trades. My understanding is that key players historically have had other, larger projects to focus on, and that the assets would have their value maximized in a new owner's hands.

CKX Appears To Have Exposure To GCS Project

Using the comment section from this blog , I'm seeing pretty compelling evidence that the GCS hub is expected to be built on CKX property:

• Rigzone provides details on the proposed site of the project here .
• CKX's ownership of the land there can be verified here (parcels 00246557 and 00246565)
• I am pretty confident this is all the same land discussed in the latest CKX proxy :

The Company and Stream Wetlands Services, LLC ("Stream Wetlands") were parties to an option to lease agreement dated April 17, 2017 (the "OTL"). The OTL provided Stream Wetlands an option to lease certain lands from the Company, subject to the negotiation and execution of a mutually acceptable lease form.

On February 28, 2022, the Company exercised the OTL and entered into a 25-year lease in exchange for a one-time payment by Stream Wetlands of $38,333. The terms of the lease provide for formulaic contingent payments to the Company based on the amount of revenue generated from activities on the subject property by a third party, with a guaranteed minimum payment of $500,000 in the event that revenue does not meet a minimum threshold. No minimum payment is due unless and until the third party engages in activity on the subject lands, and neither the Company nor Stream Wetlands is able to determine whether that will occur. William Gray Stream, the President and a director of the Company, is the president of Stream Wetlands.

Let me be clear - I have no idea how to value this "bonus" exposure. It appears $500k is the minimum revenue that could be generated if the project comes to fruition, but the terms of the lease have not been further disclosed. I have sent requests to the company asking for disclosure, but no luck thus far. One possible conclusion is the terms are not that compelling and therefore merit no disclosure. But the bar for financial materiality is pretty low at CKX.

My hope is that parties bidding on the acres as part of the strategic alternatives process are able to secure proper information on how to value the lease, and a fair price is received. If this results in substantial upside to the stock, great, but I don't know how to estimate it without more information.

Risks

The process may not result in a full sale of the CKX assets. I assume the stock would trade back to $10 in such an event, though perhaps some elevated price may remain if some assets are sold or the GCS exposure is more known.

There may not be sufficient bids to get market valuations for all the CKX properties. If CKX is set on selling them all to focus on GCS, this could result in sub-optimal returns.

Because CKX is small and illiquid, downside could be magnified in the event of the process being curtailed or other adverse event.

Conclusion

In summary, my expectation is that the current owners have too much riding on this Carbon project to continue devoting time to CKX, so a sale is a likely outcome. Prior work on this stock makes me confident the assets are worth at least $15/share without the carbon deal, allowing for full incentive award vesting. With minimal disclosure around carbon disclosure, I view this as a possible but not likely source of additional upside.

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