It’s always interesting to peek into hedge fund managers’ trade book, getting a glimpse of the evolution of their positions quarter by quarter. In the case of Tepper and Appaloosa, one sees a very fluid portfolio, with high turnover as the size of its positive equity position oscillates dramatically.
Tepper is bullish on the Oil & Gas sector
Appaloosa is quite bullish on big-cap Oil & Gas, which is evident in his new positions in Transocean LTD (NYSE:RIG), Weatherford International Ltd (NYSE:WFT), Noble Corporation (NYSE:NE) and ENSCO PLC (NYSE:ESV) positions. Oil & Gas represents an important part of Tepper´s new positions in his portfolio.
At the start of the year, Transocean had two interesting catalysts at the same time that led to a quick rally in share price: greater visibility on its Macondo liability and greater clarity on the demands of activist Carl Icahn. I bet that Tepper analyzed both catalysts and concluded that RIG could start a material rally from its consolidation range of $44/49. In fact, on Jan. 3 Transocean announced that it will settle Deepwater Horizon spill case for $1.5 billion, which led to a 20% rally fueled by a rising market.
After the huge rise, Deutsche Bank is not recommending to buy RIG at current valuation levels. Despite a recent update on downtime, yesterday’s fleet status report showed a 7% increase in ’13 downtime and the first estimate of 2014 downtime is up an additional 5% vs. 2013 (despite a shipyard stay being pulled into ’13 and ongoing efforts to improve revenue efficiency). Meanwhile, costs are rising even as rates are flattening. I doubt that Tepper still holds Transocean after the market has already discounted the greater visibility on the Macondo liability.
Despite the volatility in its stock price, Transocean LTD (NYSE:RIG) is a very interesting company from a fundamental perspective. The company is the world’s largest offshore drilling contractor and has been focusing on the deepwater drilling market to carve out a niche for itself in the increasingly competitive offshore drilling space. According to Trefis, The Gulf of Mexico is Transocean’s most important geographic market accounting for nearly 20% of overall revenue. The firm has 14 of its 27 ultra-deepwater rigs contracted in the region. These rigs command average day rates of around $500,000 and are crucial to profitability as well since they have higher revenue efficiency (nearly 96%) and better utilization rates. From a long term basis, Transocean LTD (NYSE:RIG) could be a winner from a market with that demands deeper dig as less oil is being discovered on land. Given its leadership, Transocean is currently building more capacity to meet demand.
Tepper also invested in Weatherford, a company that does not show strong fundamentals:
- Weak Cash/Debt: Weatherford’s cash to debt is ranked lower than 87% of the 53companies in the Oil & Gas Equipment & Services industry
- Declining gross margin: Weatherford International’s gross margin has been in long term decline. The average rate of decline per year is -8%
- Declining operating margins: Weatherford’s operating margin has been in 5-year decline. The average rate of decline per year is -19.1%.
- Low Piotroski F-Score (a measure of financial strength): Weatherford has a very low F-Score of 3, which usually implies poor business operations.
I do not feel comfortable investing in ¨hard-to-understand¨ businesses that are immersed in operational problems. I think that an individual investor should stay away from these kind of stocks.
