On a recent conference call, Main Street Capital's (NYSE:MAIN) CEO, Vince Foster, pointed to an odd trend at one of its Texas restaurant investments: Sales were declining despite falling gas prices, which have almost always been a positive for the restaurant industry.
The implication is concerning: Oil prices may be too low for Texas. What consumers are saving at the pump is overshadowed by the lost jobs and income as a result of a slowdown in the oil industry.
It made me wonder how many more of its portfolio companies might be affected. What we know is the obvious -- about 6.6% of its investments are in businesses that share a direct link to oil. But how many more have a weaker link because of their proximity to the oil patch?
Mapping Main Street's Portfolio
It's no secret that Main Street is a Houston-based financier, and many of its oldest portfolio companies are located in and around Houston. Though many of these businesses don't share a direct link to oil, their performance will naturally ebb and flow with the local economy. And the local economy -- especially Houston's economy -- is very much driven by oil and gas production.
I think the best way to truly understand Main Street's geographic exposure is to map its portfolio. The control and affiliate investments are the most important, since they're typically smaller companies in which Main Street Capital also owns an equity stake. I focused on these.
As you look at the following maps, take note of the labels. Red labels indicate no obvious oil exposure. Green labels indicate obvious oil exposure. By obvious, I mean really obvious. One company had "pipelines" in its name, which is pretty obvious to me. Others noted in their corporate bios that energy-related businesses were important clients. That's what I mean by obvious.
We can probably disagree on how I classified a few of these given the tiny amount of information I have to work with, but I think the maps do a pretty good job of showing what I thought it would show: Direct oil exposure is only half the battle. A number of its portfolio companies have oil exposure to energy if only because they are located in and around Texas, and, more specifically, Houston.
Main Street Capital's control investments
This map shows all of Main Street Capital's control investments, which collectively make up about 29% of investments at fair value.
You'll notice that most of the investments in and around Houston have minimal links to oil and gas. This group includes a lighting store, a shooting range, and an RV dealership, just to name a few. However, control companies located in and around Houston collectively make up about 6.5% of book value at fair value.
Other companies located in Texas, but excluding Houston, are collectively worth $108.3 million at fair value, or 10.1% of Main Street's book value at fair value. Importantly, Main Street's Houston investments are 68% equity and 32% debt. A higher equity component means greater potential for losses in a downturn.
All Texas control investments (Houston and ex-Houston) add up to 16.7% of Main Street Capital's book value as of March 31.
Main Street's affiliate investments
A map of Main Street Capital's affiliate investments looks very similar to the company's control investments. Again, you'll notice that investments are clustered in Texas, specifically Houston and Dallas.
True Texas exposure may be more limited than it appears, given that a number of its investments are in funds that are merely managed in Houston. Houston exposure in this portfolio tallies to just 1.3% of book value.
Investments in Texas companies outside Houston add up to 9.2% of book value. Major investments include stakes in Daseke, a trucking company, and Volusion, a software-as-a-service company that sells products to other businesses, neither of which seems to have substantial local or oil exposure.
Interestingly, the Texas-based affiliate investments that would be negatively affected by low energy prices are probably already included in the 6.6% of assets that are in the oil and gas or services industries. There seems to be very little potential for knock-on effects of lower oil to cause substantial damage to its largest affiliate investments.
Puts and takes
At least some of Main Street Capital's historically strong performance is simply due to being in the right place at the right time. Many of its Houston-based investments are carried at several times Main Street Capital's historical cost basis and contribute handsomely to its income in the form of recurring dividends.
As energy prices find a new equilibrium, probably at a much lower price than we've seen in several years, all of Main Street Capital's Texas investments should be watched carefully. That goes double for Main Street's control investments, which make up a sixth of its book value. These smaller companies may represent additional energy exposure that isn't accounted for.