Vadim Perelman’s Baker Street Capital Management disclosed yesterday a new –activist- position in Swift Energy Company (NYSE:SFY). According to a Schedule 13D form filed with the SEC, the fund owns about 4.38 million shares of Common Stock, which account for 9.99% of the company’s shares outstanding (as of July 31, 2014). Along with the SEC filing, the fund included a letter to the company’s Board of Directors urging it to consider a “drastic change in strategic direction towards a sensible plan of extracting value from existing assets and thoroughly evaluating strategic alternatives both for individual assets and the entire Company” (SEC).
Baker Street Capital Management is a Los Angeles-based, value-focused investment firm founded by Vadim Perelman in 2009. Mr. Perelman currently serves as the fund’s General Partner and Chief Investment Officer, and previously worked as a Research Analyst for Robert Jaffe’s Force Capital Management, a US long-short equity firm that specializes in deep fundamental research in middle-market companies in financial, consumer and industrial sectors.
Swift Energy Company (NYSE:SFY) is a $325.8 million market cap company engaged in acquiring, exploring, developing, and operating oil and natural gas properties. It is engaged in oil and natural gas reserves in Texas as well as onshore and in the inland waters of Louisiana. According to the filing, Baker Street Capital acquired most of the company’s stock between August 21, and October 15, for prices ranging from $7.16 per share to $11.18 per share. The aggregate purchase price of the 4.38 million shares beneficially owned by the fund was approximately $41.33 million, including brokerage commissions.
As mentioned above, the SEC filing also included a letter to the company’s Board of Directors. According to the epistle, Mr. Perelman believes that Swift Energy Company (NYSE:SFY)’s current stock price (approximately $7.43 per share) does not reflect the intrinsic value of its assets, which Baker Street estimates to surpass $15 per share. This undervaluation, Mr. Perelman argues, derives from the market’s loss of confidence in the company’s current leadership. The letter states:
“The accumulated debt from poor capital allocation policies, lagging operational execution and a reckless lack of an effective commodity hedging program demonstrate that Swift is suffering this overhang as a result of entirely self-inflicted wounds. In light of this long-term underperformance, we are alarmed by the degree to which the Board has allowed these glaring and destructive issues to persist (…) Swift’s stock price is lower today than it was 20 years ago despite a 4x increase in oil prices during that same period. Put simply, the leadership of Swift has failed to create shareholder value over the long term.”
Swift Energy Company (NYSE:SFY)’s stock price has fallen almost 45% year-to-date, enormously underperforming both the Oil & Gas sector and the broader market index; and this is more of a trend. The underperformance persisted over the last 1, 3, and 5-year periods.
To solve this, Baker Street proposed the following steps: “(1) Add shareholder representation on the Board; (2) Focus on shareholder value above all other considerations by: (a) ceasing all acreage acquisitions until Swift’s financial position and operational performance have been effectively addressed and (b) evaluating low risk strategies to improve shareholder value; (3) Thoughtfully evaluate strategic alternatives.”
Despite this underperformance, other major institutional investors, like Chuck Royce’s Royce & Associates and Israel Englander’s Millennium Management are also betting on Swift Energy Company (NYSE:SFY). Royce & Associates last disclosed ownership of 1.52 million shares (as of July 30, 2014), following a 3% increase in its stake, and Millennium Management started a position over the second quarter of 2014, with 95,564 shares.
Disclosure: Javier Hasse holds no positions in any stocks or funds mentioned
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