Idea Brunch with Wyatt Sparks of Sea Meadow Capital
Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Wyatt Sparks!
Wyatt is the Chief Investment Officer for Sea Meadow Capital, an Investment Partnership that he founded in June 2021. Before starting Sea Meadow, Wyatt held the position of Chief Financial Officer at DMVans, a class-B RV manufacturer. His investment experience includes credit and equity. Today’s interview does not give investment advice or recommend the buying or selling of select securities.
Wyatt, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Sea Meadow Capital?
Thanks for having me, Edwin. I enjoy your work.
In March of 2003, I used my savings from shoveling (and poker) to “buy” four shares of Jet Blue (JBLU). In-flight TVs made flying less miserable. Buying an airline for his first investment probably doomed that sixth grader to a lifetime of value investing...
My background includes roles in management, institutional credit, and fundamental equities. This industry is built on apprenticeship. The Associate Analyst Program at T. Rowe Price gave me that foundation. I then transitioned from equity to credit, working at Delaware Life. I owe David Lee, Nina Jones, Matt Paster, and Jamie Millard for their mentorship.
In 2020, I moved to Colorado to help two friends (David Ramsay & Matt Felser) grow their business. DMVans is now one of the largest Class-B RV Manufacturers in North America. Operations taught me Kevin Kelly’s 180 Rule — when you are 90% done with any large project, the rest of the details will take another 90% to complete.
Luck played a huge role in my career. Both my parents worked, yet still found time to focus on their kids. They supported our curiosities and allowed us to follow our own paths. As the youngest of three, I got a head-start on finding some role models (and life-long friends).
Two and a half years into running your investment firm how has the experience been? What are some of the unexpected difficulties, if any, with launching a fund, and what has contributed most to your success so far?
Busy. You get it – being your own boss is the best/worst thing about starting a business. You underestimate the power of friction. This holds true with investing.
Investment Management is unique. It is the only profession where you can “change” your business on any given day. As a result, you spend a lot of time thinking vs. executing. Creating frameworks help guide you through dealing with imperfect information.
The two biggest risks are burnout (something I have done) and blow-ups. All my “difficulties” stemmed from improperly weighing new information. Since this is a positive carry business, you think a lot about the downside. Preventing money from flowing into marginal investments pays a double dividend.
Within Sea Meadow, I manage a concentrated portfolio (fifteen to twenty-five securities). My mandate is flexible. I evaluate individual positions on an eighteen-month, eighteen-month forward curve. This solves for a three-year holding period. You still make a lot of errors, some by chance and some by choice. Having a framework that fits your disposition prevents you from compounding your mistakes.
In your VALUEx Vail presentation early this year you said you look for “hairy stuff” and try and evaluate businesses where “Equity Captures the Enterprise Value.” Can you please expand on what you mean by these?”
Ha! Those are synonyms for value and momentum. VALUEx Vail is an excellent conference. My only regret was not using a larger font for Vitaliy (Katsenelson).
The company (or security) you want to buy is usually not for sale. As a value investor, you are looking to exploit risk aversion. I pitched Archrock (NYSE: AROC — $2.27 billion), which is the largest outsourcer for natural gas compression in the United States.
Oil and gas cycled twice in the last eight years. Renewed focus on capital discipline and shareholder returns would prevent supply from killing this cycle. Supply-chain disruptions (+52 weeks) and inflation (unit costs were +30% vs. pre-Covid) cemented this thesis.
With economics likely accruing to owners of existing assets (outsourcers), Archrock “spooked” investors with an increased capital program (’21 & ’22). This was the “hairy stuff” — today’s energy investor hates the idea of debt-fueled CapEx. The net impact of this supply growth was de minimis. Archrock was replenishing its fleet after a period of dispositions and attrition.
Investor fears were not alleviated, despite management’s reassurances. Compounding this fear was the negative impact of cost-input inflation (vs. multi-year contracts). This obscured the fact that utilization rates had started to recover and fundamentals were going to inflect.
Fast forward. U.S. Oil production is now at record levels (13.2mm b/d). Compression is required to gather and process the associated gas from production. LNG export demand is likely to double (adding another 10BcF/d in demand). Archrock increased utilization rates by 14.0% (to 96.0%), allowing the company to recapture gross margins (64% in Contract Operations), through net pricing and cost disinflation.
Management’s capital discipline is now better understood. Archrock will reduce Growth CapEx by 20.0% in 2024 ($160.0 million) vs. 2023 ($200.0mm). All new units are fully booked, featuring attractive IRRs. Management recommitted to shareholders with two dividend raises and a share repurchase authorization (and execution). With a new leverage target (3.0 to 3.5x), Archrock will allow its shareholders to capture a larger portion of its growing Enterprise Value.
What are some other interesting ideas on your radar now? What’s an example of your eighteen-month, eighteen-month forward framework?
Atlas Energy Solutions (NYSE: AESI — $1.78 billion) is like Archrock, but with a few more wrinkles. The company IPO’d earlier this year. This is Bud Brigham’s first public Oil Services company. Bud is a legend in E&P.