It makes sense that Seth Klarman (Trades, Portfolio), a deep value investor who prizes “margin of safety” in his investments, would pounce on the worst-hit sector of the S&P 500, energy, down almost 58% in the past year.
Klarman has three energy stocks within his top seven holdings, each of which he increased by double-digit percentages in the second quarter, and he added one new energy stock. His No. 1 holding, Cheniere Energy Inc. (LNG, Financial), he also started last year. Overall, his concentrated equity portfolio of 32 stocks is 39.3% energy, sharply increased from 10.4% at the end of the second quarter last year.
Klarman discussed his keenness on energy in his year-end letter, obtained by Bloomberg:
“Baupost wasted no time in redirecting additional investment team members into the energy area to sift through the carnage,” he wrote.
He added: “The broader market climbed relentlessly higher with no significant correction. Bargains became increasingly scarce as the year progressed.”
The weakness in oil prices is set to continue, with the U.S. Energy Information Administration last week lowering its crude oil price forecast through 2016. The administration expects West Texas Intermediate (WTI) crude oil prices to average $49 per barrel for 2015, $6 lower than it had previously forecast. For 2016, it is expecting $54 per barrel, an $8 lower price than previously forecast.
The agency attributed the dimmer outlook to potentially lower growth in emerging markets, continuing supply growth, increased inventory, and the possibility of greater Iranian crude oil volumes entering the market.
Klarman’s limelight-shunning Baupost Group managed $28.5 billion as of the end of 2014, with a long portfolio valued at $6 billion.
The three top energy stocks Klarman added to in the second quarter were: Cheniere Energy Inc. (LNG, Financial), Pioneer Natural Resources Co. (PXD, Financial) and PBF Energy Inc. (PBF, Financial).
Cheniere Energy Inc. (LNG, Financial)
Klarman bought 5.66 million shares of Cheniere Energy, a liquefied natural gas company, in the first quarter of 2014 when the price averaged $48 per share and had moer than doubled the holding by the end of the year. In the second quarter, he boosted the stake by 1,558,000 shares, or 11.3%, for a total holding of 15,365,230 shares at quarter-end. The second quarter’s price averaged $75, but by Wednesday it is trading around $57.58 per share, almost a one-year low.
Klarman’s Cheniere stake comprises 17.9% of his portfolio and 6.5% of the company’s shares outstanding.
Notably, Carl Icahn (Trades, Portfolio) took an 8.18% position in the company, disclosed Aug. 6, saying that the shares were “undervalued.” He reached an agreement to add members to the company’s board on Aug. 24.
On Dec. 31, the company received approval from the Federal Energy Regulatory Commission for its second natural gas export terminal, in Corpus Christi. It had secured funding for the project in November.
For the third quarter, Cheniere reported a net loss of $89.6 million, or $0.40 per share, compared to a net loss of $100.8 million, or $0.46 per share, in the same quarter a year ago. Third quarter revenues were $66.8 billion, compared to $67.7 billion a year ago.
Pioneer Natural Resources Co. (PXD, Financial)
Klarman increased his Pioneer Natural Resources stake by 28.4%, adding 898,063 shares at an average price of $159 per share in the second quarter. He held 4.065 million shares of the company in total, accounting for 9.47% of his portfolio.
Pioneer Natural Resources is an oil and gas exploration and production company operating in the U.S. Shares have fallen 28% year to date to $107.50 Wednesday, off their April highs around $213.
The company announced second quarter results on Aug. 4, including revenue of $648 million, compared to $938 million in the second quarter last year. Its net loss was $218 million, or $1.46 per diluted share, compared to net income of $1 million, or 1 cent per share the previous year.
Pioneer Natural Resources has a market cap of $15.99 billion; its shares were traded with a P/E ratio of 30.19 and P/S ratio of 4.37. The dividend yield of Pioneer Natural Resources stocks is 0.07%. Pioneer Natural Resources Co. had an annual average earnings growth of 7.9% over the past 10 years. GuruFocus rated Pioneer Natural Resources the business predictability rank of 2-star.
PBF Energy Inc. (PBF, Financial)
Klarman also increased his position in his third-largest energy holding, PBF Energy, 27.3%, adding 2,361,886 shares at an average price of $23. His total holding stood at 11.025 million shares, making up 5.26% of his portfolio and 11.6% of shares outstanding. Klarman started the position in third quarter 2013 with the price averaged $23 and added more shares in each of the next quarters through 2014.
PBF Energy is one of the U.S.’s largest petroleum refiners, supplying unbranded fuels, heating oils and other petroleum products. Its shares have gained 6.6% year to date, trading around $28.39 Wednesday.
On July 30, PBF reported $3.55 million in revenues, down from $5.3 billion in the same quarter the previous year. It also had net income of $158.5 million, up from $45.84 million the previous year.
PBF Energy Inc. has a market cap of $2.68 billion; its shares were traded with a P/E ratio of 33.79 and P/S ratio of 0.15. The dividend yield of PBF Energy Inc. stocks is 4.24%.
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