Activist Barry Rosenstein Takes 9% Stake In Oil States International, Inc. (OIS)

Oil States International, Inc. (NYSE:OIS) rose over 15% on April 30^th following the news that activist investor Barry Rosenstein’s JANA Partners owns 5 million shares of the stock (or 9.1% of the total shares outstanding) and will push to split up the now $4.9 billion market cap oil and gas equipment and services company. We track JANA’s quarterly 13F filings alongside those of other hedge funds as part of our work developing investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see that the fund did not own any shares of Oil States International, Inc. (NYSE:OIS) at the beginning of this year (see which stocks JANA owned).

A breakup of Oil States International, Inc. (NYSE:OIS) has some potential to increase shareholder value. For example, one of the company’s business units provides temporary housing to workers in extraction industries (including mining and oil and gas) and could be eligible to convert to a real estate investment trust (which would then enable it to receive preferential tax treatment as long as it distributed sufficient cash to shareholders). In addition, management of the new companies is often able to better manage operations without having to concern themselves with the needs of the larger organization (read more about spinouts). It’s also possible that at least one of the smaller business units would be acquired by a strategic at a premium valuation.

Currently, Oil States International, Inc. (NYSE:OIS) trades at 12 times its trailing earnings. While Wall Street analysts have been optimistic in their outlook, with forecasts for the next several years implying a five-year PEG ratio of 0.6, recent performance has not been particularly strong. Specifically, in the first quarter of 2013 Oil States reported a small decline in revenue versus a year earlier with earnings dropping by 24%. As such we’d hesitate to consider the stock a good value based on its current makeup. Chuck Royce’s Royce & Associates was one major shareholder at the end of December, reporting a position of over 3 million shares (find Royce’s favorite stocks). Atlantic Investment Management, which is managed by Alexander Roepers, was a heavy buyer of Oil States International, Inc. (NYSE:OIS) in the fourth quarter of 2012 and closed the year with a total of 1.3 million shares in its portfolio (check out more stocks Atlantic was buying).

Other oil and gas equipment and services companies include Superior Energy Services (NYSE:SPN), Weatherford International Ltd (NYSE:WFT), Baker Hughes Incorporated (NYSE:BHI), and National-Oilwell Varco, Inc. (NYSE:NOV). Superior Energy Services (NYSE:SPN) and National Oilwell Varco are in a similar situation to Oil States International, Inc. (NYSE:OIS) in terms of their valuations: each carries a trailing P/E of 12, with the sell-side bullish on each of these companies as well and as a result their five-year PEG ratios are below 1 as well. Revenue growth was quite strong at each in their most recent quarter compared to the same period in the previous year, although National-Oilwell Varco, Inc. (NYSE:NOV)’s earnings were down by 17%. Baker Hughes Incorporated (NYSE:BHI) trades at a fairly small premium to these companies, and with that business also struggling recently we think that we would avoid it for now. That leaves Weatherford International Ltd (NYSE:WFT), whose adjusted earnings numbers have failed to meet expectations each of the last three quarters and earned almost no profits in Q4 2012. The sell-side expects the company to improve, and it trades at 9 times forward earnings estimates.

Still, we’re not particularly excited about Weatherford International Ltd (NYSE:WFT) given its recent performance, and certainly think it’s probably best to wait before considering a purchase. Out of the peers we’ve mentioned, Superior looks somewhat interesting from a value perspective as the stock is moderately cheap and the company appears to be doing all right. As for Oil States International, Inc. (NYSE:OIS), we can see some potential sources of upside from JANA’s activism but would probably want more details as to management’s reaction before relying on the breakup as the core of an investment thesis.

Disclosure: I own no shares of any stocks mentioned in this article.