In the first quarter of 2013, David Einhorn, the famous hedge fund manager, initiated long positions in six new stocks, bringing total assets under management to more than $6.5 billion. He is getting bullish about two oil/gas companies, including Oil States International, Inc. (NYSE:OIS), Hess Corp. (NYSE:HES), Should we follow Einhorn into these two companies? Let’s find out.
Oil States — a 50% potential upside
Among four segments, including Offshore Products, Well Site Services, Tubular Services, and Accommodations, the Accommodations business has been the largest income contributor, with $364.6 million in the total operating income. Well Sites Services was the second biggest income generator, with nearly $157 million in profits in 2012.
Einhorn argued that the Accommodation segment, with high return and growth, should be worth much higher than the overall current valuation, as the current valuation was associated with lower multiple businesses. He placed an EV multiple of 8.6 on Oil States International, Inc. (NYSE:OIS)’ 2013 EBITDA, valuing the company at around $120 per share. Like JANA Partners, a 9.1% owner of the company, Einhorn favored the idea of REIT conversion for Oil States International, Inc. (NYSE:OIS)’ Accommodations segment. He thought that the conversion would push the value of the company up to $155 per share.
I estimated its Accommodations had more than 64 million square feet of the property, around 26.4% of the real estate size of Simon Property Group, Inc (NYSE:SPG), the largest mall operator in the world. Interestingly, Barry Rosenstein also has the same agenda, accumulating 9.1% stake in the company to potentially unlock its hidden value. He also targeted the conversion of the Accommodations segment into REITs. If the REIT conversion happens, a lot of value would be unlocked for Oil States International, Inc. (NYSE:OIS)’ shareholders.
Hess — great assets and being undervalued
Einhorn seems to like Paul Singer’s activism idea on Hess Corp. (NYSE:HES) as well. In the first quarter, he purchased nearly 1.25 million shares in Hess, accounting for 1.4% of his total portfolio. Elliott Management, Paul Singer’s firm, believes that Hess Corp. (NYSE:HES) could be potentially worth $126 per share, more than 80% higher than the current trading price of $69 per share. He recommended that Hess should spin-off several non-core assets, divest the downstream assets, monetize the midstream assets, and streamline its international portfolio.
Elliott Management has been fighting for board seats in Hess Corp. (NYSE:HES) vigorously. Recently, according to Bloomberg, Hess and Elliott Management reached an agreement to add three of Elliott’s five board nominees. John Hess would be no longer hold the dual role as the non-executive chairman position has belonged to Mark Williams, a former executive committee member of Royal Dutch Shell plc (ADR) (NYSE:RDS.A).
What makes me interested in Hess Corp. (NYSE:HES) is its great oil/gas assets. In the Bakken area in North Dakota, the company owns around 900,000 net acres, a bit smaller than the Bakken area of Continental Resources, Inc. (NYSE:CLR) with more than 1.1 million net acres. However, the petroleum engineering and geological service organization Von Gonten commented that Hess’ Bakken acreage had a similar value to Continental’s Bakken acreages. Thus, per acre, Hess’s Bakken value should be higher than Continental Resources, Inc. (NYSE:CLR).
Continental Resources is the major oil/gas player in the North, South, and East regions in the U.S. At the end of 2012, Continental Resources had nearly 785 million BOE, of which 66% were from the North Dakota region, while Montana Bakken’s proved reserves were 45 million BOE. In the first quarter of 2013, Continental Resources increased its net production in the Bakken play in North Dakota and Montana by 60% to around 76,900 BOE per day.
The total revenue in the quarter rose significantly, from $395.1 million last year to nearly $710.3 million, mainly due to the lower loss on derivative instruments. Net income witnessed 100% year-over-year growth, from $69 million, or $0.38 per share, to $140.6 million, or $0.76 per share. The market values the company at 8.78 times EV/EBITDA.
Hess is valued much cheaper. At $69 per share, Hess is worth around $23.6 billion. The market values Hess at only 4.11 times EV/EBITDA. Moreover, Hess is currently paying shareholders a 0.6% dividend yield, while Continental Resources has not paid any dividends yet. Hess could be worth much more in the buyout transaction. If Hess has the comparable valuation to its peers, it should be worth around $80 to $90 per share.
My Foolish take
Indeed, both of these oil/gas companies, Oil States and Hess, seem to be good opportunistic plays for investors. Oil States could deliver much more value for shareholders if it could separate the Accommodations segment and turn it into REITs. If Hess could spin off several non-core assets, restructure the midstream and downstream assets, and streamline international portfolio, it could experienced the upside of more than 80% as mentioned above.
The article Einhorn Favors These 2 Opportunistic Stock Ideas originally appeared on Fool.com and is written by Anh HOANG.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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