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The Energy Stocks Prem Watsa Loaded Up on Last Quarter

April 01, 2013 | About:
Holly LaFon

Holly LaFon

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Prem Watsa, Canada’s most eminent investor through his insurance company Fairfax Financial (FFH), rearranged his portfolio somewhat in the fourth quarter. The prescient market reader cut back on his bets in financial services and healthcare and boosted his energy weighting to 11.2% of his portfolio, from 2% the previous quarter. It was his biggest plunge into the sector in over five years. Watsa touched on his outlook for oil in his 2012 investor letter, saying “While commodity prices have yet to collapse (i.e., complete the down cycle), almost all the major mining company CEOs have retired, including at Vale, Rio Tinto, BHP Billiton and Anglo-American, reflecting the sin of making acquisitions at the top of the market. Rio Tinto’s purchase of Alcan is a great case in point. Purchased for $38 billion in 2007 at the height of the commodity boom, Rio Tinto has already written off $20 billion or half of the purchase price!”

He also noted that oil prices spiked from $91 per barrel in 2010 to $99 per barrel in 2011, and flattened out at $92 per barrel in 2012. The price of crude oil per barrel has declined almost 8% over the past year to $97 per barrel on Monday.

Watsa’s fourth quarter energy stake increase was timed well, as the Energy Select Sector SPDR (XLE) rallied almost 9% year to date.

The stocks holdings he increased the most during the fourth quarter were EXCO Resources (XCO) and SandRidge Energy (SD).

After holding 659,000 shares of EXCO Resources since the latter quarter of 2010, Watsa increased the size of the position by 1,519% in the fourth quarter of 2012. The price averaged $8 per share that quarter. EXCO, now a holder of 4.93% of the company, has given EXCO a 2.9% weighting in Fairfax’s stock portfolio.

EXCO’s share price has bounced between $5.65 and $9.08 in the past 52 weeks. Shares are trading at $6.95 each on Monday after a slight 3% lift since the year began.

EXCO engages in the exploration and production of natural gas and oil properties in East Texas, North Louisiana, Appalachia and the Permian, with 50% interest in midstream joint operations in East Texas/North Louisiana and Appalachia.

The company’s fourth quarter loss, reported Feb. 20, narrowed to $269 million, or $1.25 per diluted share, from $346 million, or $1.62 per diluted share, for the previous quarter. Both quarters, the losses included steep write downs and for oil and natural gas properties. In 2012, it reduced its operating rig count to five from 24 in 2011.

Due to weak natural gas prices, EXCO has had to reduce operating expenses. Actions it took in 2012 included closing down marginal producing wells, reducing compressor rentals, renegotiating disposal arrangements and modifying chemical treatment programs.

In February, EXCO formed a partnership with Harbinger Group Inc. (HGI) wherein its Permian Basis assets in West Texas to the partnership for $573 million in cash consideration, a 24.5% limited partner interest and a 50% interest in the general partner of the partnership. It used proceeds from the deal to reduce its debt. It will also use its interest in the partnership to acquire more assets in the future.

In his second largest energy move in the fourth quarter, Watsa increased his stake in SandRidge Energy (SD) by 645%. He thereby stretched the position to 8.2% of his stock portfolio and his ownership to 6.62% of the company’s outstanding shares. The total share count ended the quarter at 32,463,200.

SandRidge is a horizontal driller focused on high-return operations in the Mississippi Oil Play of Northern Oklahoma and western Kansas. The company’s shares last traded for $5.20 on Monday after declining 18% year to date and 87% over the past five years. Watsa noted in his 2012 letter than his firm sustained “$36 million in unrealized losses, mainly on Sandridge convertible preferred stock” in 2012, offsetting its $649 million in unrealized net gains.

The company has been the center of a fight with TPG-Axon Capital, 6.7% owner of its outstanding shares, in recent months. TPG-Axon has accused the company of making it more difficult for shareholders to vote on replacing its board of directors, issuing $37 million in additional shares to senior management, putting a poison pill in place, and shortening the amount of time shareholders had to vote.

In addition, TPG-Axon accused SandRidge CEO Tom Ward and his son Trent of front running the company, among other unethical behaviors, in a vigorous letter-writing campaign.

After fighting the allegations for months and calling TPG-Axon’s offensive as a false and misleading campaign in an attempt to replace your experienced board,” the company in March announced it would add four of TPG-Axon’s nominees to its board of directors. In addition, it agreed to hire an independent firm to review related-party transactions TPG-Axon outlined, make a decision on whether to terminate Ward’s employment and conduct a comprehensive review of the company’s strategy and costs. As part of its emphasis on optimizing capital expenditures and reducing overhead, it slashed compensation for directors from $375,000 to $250,000 per year.

The board has over the past several years been focusing on transitioning the company from a natural gas production, whose price has declined significantly, to more oil-based production. The company drilled 296 wells in 2012 and expects to drill 581 more in 2013, and increase rig count from 32 to 41 in 2013. This position in the Mississippian would support development for the next 18 years.

Regarding financials, SandRidge reported a widened net loss of $294.5 million in the fourth quarter, from $159.8 million in the third quarter. Total revenue reached $1.34 billion, from $532.8 billion. Improved revenue came on the strength of its record oil and total production growth in 2012.

SandRidge’s year-end estimated consolidated proved reserved increased 37% from the same time in 2011, as it increased drilling in the Mississippian Play and the Permian Basin, and acquired new reserves in the Gulf of Mexico. The increase was offset by downward revisions primarily of its PInon Field due to lower natural gas prices.

At year end, SandRidge carried $1.01 billion in cash on its balance sheet, an increase from $414 million at the same time in 2011. Its long-term liabilities and debt totals $6.25 billion, an increase from $3.89 billion, over the same periods.

Expressing confidence in the company in a November 2012 interview with Bloomberg, Watsa said, “We believe Tom Ward is one of the best operators in the business and that the company he has built, SandRidge Energy, is poised to do well in the long term.”

See more of Prem Watsa’s trades in his portfolio here. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Prem Watsa.


Rating: 3.7/5 (11 votes)

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