Carl Icahn (Trades, Portfolio)’s portfolio has three big name energy companies: CVR Energy (CVI, Financial), Cheniere Energy (LNG, Financial), and Chesapeake Energy (CHK, Financial). Together they make up 17% of his holdings, yet each are down significantly from their reported prices.
If you want to make a broad play on the energy market going into 2016, this could be a buying opportunity and one that is obviously backed by a guru investor with a long history of building wealth.
First up is CVR Energy. Icahn owns more than 71 million shares, or 82% of the Sugar Land, Texas company. CVR is a petroleum refiner and nitrogen fertilizer manufacturer and conducts business through two limited partnerships: CVR Refining LP and CVR Partners LP. In the last 12 months, it generated $6.2 billion in revenue, $170 million in net income, and delivered $2.25 per share in dividends. The company is sitting in a great financial position with over a billion dollars in cash and around $675 million in total debt.
From the company’s last conference call, the refining segment produces approximately 200,000 barrels a day and at the fertilizer segment “the installation of new equipment that has resulted in ammonia production rates over the last several weeks that are highest in the facilities history.” Icahn owns the majority of the shares at reported prices higher than the current trade price. I think investors can rest assured their money is in good hands; however, it is worth noting that there are 2.5 million shares short, about 16% of the float.
Next up is Cheniere Energy. Icahn owns 28.5 million shares and just upped his stake by more than 2,500% - he now controls 12% of the shares. Cheniere trades at $36.93 (as of 1:51 p.m.) and Icahn’s reported price is above $48. This one is very interesting because another high profile guru investor owns roughly 10% of the stock - Seth Klarman (Trades, Portfolio).
In fact, Cheniere is Baupost Group's largest holding with 18.43% of its capital behind the liquid natural gas company. Right now, Cheniere is burdened with a ton of debt and has lost close to $850 million in the last year. Cheniere Energy reported Q3 sales fell to $66.1 million, hurt by marketing losses and a loss of $1.31 per share were made even worse by a long-term derivative loss and a jump in interest expenses. The stock is held short by 13% of the float holders (26 million shares) and many believe that without Icahn stepping in, the company was headed off a cliff. The good news is that with two great money managers involved and controlling over one-fifth of the stock, investors can definitely see the light at the end of the tunnel.
Finally, Chesapeake Energy has lost Icahn close to a billion dollars since he first bought in during 2013, yet he has continued to add to his position in what some may one day consider the biggest turnaround of all time in the energy industry. Chesapeake has a year-to-date deficit of $18.37 million due to non-cash writeoffs from declining natural gas and oil related asset values. The company is slashing costs to preserve the $1.76 billion it has in cash, as well as CapEx, which is being cut by $2 billion this year.
The dividend has been scrapped for now, SG&A costs are down 25% through the first three-quarters of the year, and its book value has dropped under $2. To top it off, Chesapeake laid off 15% of its workforce. Short selling comes in at 48% of the float with close to 250 million shares short. Icahn owns 11% of the stock, putting him alongside a who’s who of institutional investors, each with good reason not to see CHK fail. Morningstar has a fair value estimate of $13 on the stock, but even if it rises to half that, investors who get in now will make money. The question remains if the company survives the obliteration in oil and gas prices, will it matter?
Regardless of what you or I may think, it’s hard to bet against Icahn and his prowess for great investments, especially turnaround situations. Despite his lackluster performance in 2015, don’t forget that this is all his money. He’s not managing others' capital and he’s not risking corporate profits. If he loses, he feels the pain directly. I think that’s enough to pay attention and even buy each of these stocks right now.
