08 Aug 2011 FPA Capital - Q2 2011 Commentary ( Portfolio )
Cabot Oil & Gas has continued to perform well due to its exposure in the Marcellus shale. The company‟s results in this prolific natural gas area have been exceptional. It is becoming clear that Cabot has one of the better positions in the Marcellus. The flow rates from Cabot‟s wells in this region are among the very best in this field.

Foot Locker has also performed well. It has a clean balance sheet and management continues to operate as we expected. This has now gotten the attention from Wall Street and the stock has moved up. As a result, we trimmed our position during the quarter.

Rosetta had another good quarter. Its crown jewel, the Gates Ranch in the Eagle Ford located in Texas, continues to perform well. The 26,500 acres contain more than 12 TCF of oil and natural gas, with production increasing from 7mcfe/day to 90 mcfe/day in one year, and is now 60% of the company‟s total production. More importantly, the economics of these wells are extraordinary. The company estimates that each well, on average, should recover 7.2 bcf per resource of oil and natural gas. This translates to a per well PV-10 (before tax present value using a 10% discount rate) of over $13 million, using commodity prices around $80/barrel for oil and $5/mcfe for natural gas.

Using the current development pace, well spacing, and type curve in the Gates Ranch area alone, Rosetta looks to have continued development through 2016, while recovering less than 20% of the resource in place. The company is already testing down spacing to 50 acres instead of the existing 100 acres spacing. Should this turn out to be economical, then Rosetta could have another 250 wells to drill in this highly economic area.

Rosetta has another 23,500 net acres in liquid rich areas in the Eagle Ford that it will continue to assess. Several areas show promise based on wells already drilled by Rosetta and by surrounding competitors. In addition, the company has 300,000 net acres in the Southern Alberta Basin. It has drilled 11 delineation wells across the entire acreage. It is planning 3 horizontal wells to assess the commerciality of this play. Should it be commercial and the economics favorable, the Southern Alberta Basin could be highly additive to Rosetta‟s intrinsic value.

The balance sheet has improved significantly with debt coming down from $350 million to $250 million. With cash of $80 million and an undrawn revolver of $300 million, Rosetta has the balance sheet to develop the highly profitable Gates Ranch area and use the cash flows from this to support the development of other promising areas. The stock price has moved up significantly since we invested in Rosetta, but the economics of the Gates Ranch area, the potential in other areas in the Eagle Ford and the Southern Alberta Basin, leave

room for further upside. With that said, we continued to trim the stock during the quarter in response to the share appreciation.
Patterson-UTI Energy, the leading land rig company in the U.S., continued to benefit from increased drilling. The company has performed well by adding new rigs to its fleet, taking advantage of demand for the higher- end equipment that is needed and preferred in the more demanding shale developments. Patterson-UTI has also added significant frac capacity over the last few years. This is now paying off since this equipment is being used in shale developments.

We started accumulating shares in Oshkosh Corporation (OSK) during the second quarter. Oshkosh is a specialty vehicle manufacturer. Its products include off-road armored army trucks, fire trucks, aerial work platforms, telehandlers, ambulances, snow removal vehicles, concrete mixers, and refuse collection vehicles. The Company was founded in 1917 and is based in Oshkosh, WI. What attracted us to Oshkosh was its long history and strong leadership positions in the markets it serves. The Company has great reach and invests heavily to provide superior products and services. An investment in OSK is about anticipation of future industrial recovery and a continued belief that our military is a logistics business, and therefore, the Department of Defense will at least maintain its vehicle fleet. The current strength in Oshkosh‟s defense business should protect shareholders until there is a recovery in industrial and commercial markets. The company‟s valuation during the second quarter met our parameters which resulted in initiating the position.

InterDigital, Inc. (IDCC) is another new company we added during the second quarter. It is a non-practicing entity that monetizes intellectual property in the wireless technology space. Although it does not manufacture any products, the company is not a basic patent portfolio manager or a patent troll but, rather, is an inventor of patents (they have invented 98% of their patents). It spends significant sums on R&D and files patents on technology considered essential for the wireless device industry. In turn, it demands licensing revenues. It is our belief that mobile communication will continue to grow in a rapid fashion. IDCC is well-represented in this growing wireless market due to the technology they provide to different vendors and should benefit from the proliferation of wireless voice, data, and internet service regardless of the eventual winners in the space. The company has a pristine balance sheet and a valuation that supports an initial position.