Rodriguez has spent 39 years in the investment business. In his latest Morningstar conference Reflections and Outrage, he said “DISCIPLINE… discipline is a key attribute to becoming a successful investor. I stress that, without a strong set of fundamental rules and a core philosophy, they will be sailing a course through the treacherous investment seas without a compass or a rudder.”
How Robert Rodriguez practiced discipline? He sold off technology dot-com stocks during 1998-2000, and held it as cash to prevent heavy losses. The fund at the time was reduced to below $300 million from $700 million.
Rodriguez commented on the mutual funds industry: Last year, “Diversification effectively failed as a strategy” for the mutual fund industry. The explanation: exposure to energy stocks caused short-termed decline, and in financial-service stocks caused “permanent capital destruction.” He named a few: Fannie Mae, Freddie Mac, Washington Mutual, and American International Group. Robert Rodriguez believes the fuel for the credit crisis is ultimately “the destruction of capital, liquidity, and the access to liquidity.” FPA Capital held two-thirds of its investments in energy stocks prior to the market crash in September 2008. Rodriguez believes decline in energy stocks is only temporary. FPA devotes over half its portfolio in the energy sector. “I believe superior long-term performance is a function of a manager’s willingness to accept periods of short-term underperformance. This requires the fortitude and willingness to allow one’s business to shrink while deploying an unpopular strategy.”
In the energy investments, FPA Capital added several positions in Patterson-UTI Energy, Atwood Oceanics and Rowan, Companies. They initiated new positions in two oil service companies, BJ Services and Pride International, and five exploration and production companies, Newfield Exploration, CNX Gas, St. Mary Land & Exploration, Cimarex
Energy, and Cabot Oil & Gas. Rodriguez wrote, “These companies are unlikely to spend capital outside of their cash flows during this downturn… the up cycle comes, they should be well positioned to benefit.” He explained his concentration in energy stocks through three factors: decline in non-renewable resources—30% for natural gas, 9% for oil, historical increase in consumption for natural gas and oil, and cheap stocks priced at replacement values from 1999—equivalent to $10 a barrel. “In our view, it is unlikely that we’ll revisit these levels.”
PA Capital had negative 34.8% performance in 2008, which was better than the diversified mid-cap fund Lipper with performance of negative 39.3%.
Average Annual Total Return
1 Year 5 Years 10 Years 15 Years 20 Years Inception
FPA Capital Fund, Inc. (NAV ) . .. -39.05% -4.43% 5.80% 10.00% 12.09% 13.25%
FPA Capital Fund, Inc. . . . . . . . . .. -42.25% -5.46% 5.23% 9.60% 11.79% 13.00%
Lipper Mid-Cap Value Fund Avg…-39.27% -4.28% 4.24% 6.41% 7.61% --
S&P500 …………... . . . . . . . . . . . -38.09% -4.76% -3.00% 5.91% 7.43% 9.58%
The Fund’s six-month total return ended March 31, 2009.
Robert Rodriguez announced that he will be taking a sabbatical for 2010. He is planning his business partners as successors (Dennis Bryan, Rikard Ekstrand, and Tom Atteberrry) to manage the funds beginning in 2010.
Mercury General Corp. (MCY), St. Mary Land & Exploration Company (SM), PattersonUTI Energy Inc. (PTEN), BJ Services Company (BJS), Newfield Exploration Company (NFX).
Mercury General Corp. (MCY)
Mercury General Corp. provides insurance for home, auto, and commercial properties with its main market in California. Mercury General Corp. has a market cap of $1.97 billion; its shares were traded at around $36.25 with a P/E ratio of 18.67 and P/S ratio of 0.7. The dividend yield of Mercury General Corp. stocks is 6.44%. Mercury General Corp. had an annual average earning growth of 31.1% over the past 10 years.
Robert Rodriguez began investment in Mercury General in May 2006. The second quarter ended in June, the insurer reported profit increase of 38% on investment gains. Income increased to $114.4 million, or $2.07 per share, compared with $70.7 million, or $1.29 per share, in the same period a year ago. Investment revenue tripled from $23.7 million to $67.1 million.
Robert Rodriguez owns 763,900 shares as of 9/30/2009, which accounts for 3.36% of the $823 million portfolio of FPA Capital.
St. Mary Land & Exploration Company (SM)
ST. Mary Land & Exploration (SM) has a market cap of $1.91 billion; its shares were traded at around $34.69 with a P/E ratio of 16.46 and P/S ratio of 1.47. The dividend yield of St. Mary Land & Exploration Company stocks is 0.33%. St. Mary Land & Exploration Company had an annual average earning growth of 29.3% over the past 10 years.
The oil & gas company announced 2Q loss of $8.3 million, or 13 cents a share, versus a profit of $32.5 million, or 52 cents a share, in the same quarter last year. Revenue was lower for the quarter: $205.2 million versus $356.9 million in the same quarter prior. From January to June 2009, the company made negative profit of $95.9 million compared to profit of $127.4 million in the same period 2008.
Robert Rodriguez bought St. Mary Land & Exploration around 5x trailing earnings and 1.2 times book value in the first quarter. He stated it has a strong balance sheet with 31% net debt to capital. On substantial second quarter profit losses, he reduced to his holdings in St. Mary Land & Exploration Company by 30.56%. His sale prices were between $17.7 and $32.76, with an estimated average price of $26.06. The impact to his portfolio due to this sale was -0.61%. Robert Rodriguez still held 511,100 shares as of September.
PattersonUTI Energy Inc. (PTEN)
Patterson UTI Energy Inc. (PTEN) is a oil service provider that operates in Texas & southeast New Mexico. Pattersonuti Energy Inc. has a market cap of $2.22 billion; its shares were traded at around $16.55 with a P/E ratio of 10.88 and P/S ratio of 1.01. The dividend yield of Pattersonuti Energy Inc. stocks is 1.38%. Pattersonuti Energy Inc. had an annual average earning growth of 26% over the past 10 years.
Patterson-UTI Energy was added to at one third of its estimate for replacement value and the company has net cash on the balance sheet. The company said drilling activity in September increased: 81 drilling rigs operating versus 72 rigs a year earlier. Crude oil ranged between $66.02 a barrel to $72.94 a barrel. The oil driller reported 2Q loss of $17.7 million, or 12 cents per share, compared with profit of $81.4 million, or 52 cents per share in the prior year. Soft demand damaged profits. Revenue decreased 70% from $526.3 million to $160.8 million during the last two quarters.
Robert Rodriguez owns 3,591,000 shares as of 9/30/2009, which accounts for 6.58% of the $823 million portfolio of FPA Capital.
BJ Services Company (BJS)
BJ Services Company has a market cap of $5.43 billion; its shares were traded at around $20.3 with a P/E ratio of 14.86 and P/S ratio of 1. The dividend yield of BJ Services Company stocks is 1.08%. Bj Services Company had an annual average earning growth of 24.7% over the past 10 years.
The oil pumping-service provider was summoned twice to provide information about their August 31st merge with Baker Hughs (BHI). BJ Services was acquired by FPA Capital at 1.2x book value, 6x trailing earnings, and it has a strong balance sheet with low-teens debt to capital.
Robert Rodriguez owns 2,159,800 shares as of 9/30/2009, which accounts for 5.1% of the $823 million portfolio of FPA Capital.
Newfield Exploration Company (NFX)
Newfield Exploration Company explores, develops, and acquires oil and natural gas properties primarily in the Gulf of Mexico. The company plans to continue to expand its reserve base and increase cash flow through the exploration and development of existing properties and the acquisition of proved properties with drilling upside. Newfield Exploration Company has a market cap of $5.51 billion; its shares were traded at around $45.66 with a P/E ratio of 12.4 and P/S ratio of 2.48. Newfield Exploration Company had an annual average earning growth of 19.1% over the past 10 years.
“Newfield Exploration has large prospective acreage in the Woodford Shale which is economical even at low commodity prices. Newfield will be looking to prove up this acreage over the next decade,” wrote Rodriguez. Oct. 14, Newfield signed a joint venture with Hess Corp. to explore the 140 thousand acres of Marcellus Shale in Pennsylvania. Newfield plans to cut 2.5 billion cubic feet of its third quarter production, as natural gas prices has declined.
Robert Rodriguez owns 803,500 shares as of 9/30/2009, a decrease of 36.73% of from the previous quarter. This position accounts for 4.15% of the $823 million portfolio of FPA Capital. Newfield Exploration was added at 65% of book value and has a strong balance sheet with 32% debt to capital.
Reflections and Outrage: Morningstar Conference (May 2009)
FPA Capital Fund Share Holder Letter (April 2009)