At the beginning of December, Idiscussed one of the smaller positions in Seth Klarman (Trades, Portfolio)'s investment portfolio. The company in question was a Mexican oil and gas company called Vista Oil & Gas SAB de CV (VIST, Financial).
According to the hedge fund's third-quarter 13F filing, Klarman spent $32 million acquiring 6.2 million shares in the hydrocarbon business, giving it a 0.4% portfolio weight. This isn't a particularly important position in the overall scope of Baupost.
The hedge fund manages around $30 billion in assets for clients around the world and has achieved annual returns of nearly 20% since inception. Considering Vista's portfolio weighting at the end of the third quarter, this holding is unlikely to ever move the needle for Klarman's returns.
Still, it is always interesting to take a look at the smaller positions in the guru's portfolio, because we never know what we are going to find. Since I last covered the company, shares in Vista have risen around 26%, and it now looks as if other hedge funds are trying to get in on the action as well.
Fund buying
David Neuhauser's Livermore Partners also initiated a position in the stock last year. Livermore is nowhere near the same size a Baupost, but the small fund has been punching above its weight.
For 2019, it returned 138% for partners following an event-driven strategy based around commodity companies. For example, London-listed Jadestone Energy (LSE:JSE), which has been a core position for the hedge fund for some time, ended the year up 200%. Livermore also has sizeable stakes in several gold miners.
According to the fund's fourth-quarter letter, it decided to take an "opportunistic" position in the oil and gas producer in the third quarter of 2019, following the country's surprise election results.
Livermore reports that following the election, the stock price crashed to $5. However, only a few weeks before, the company was able to complete a capital raise near $10 per share, indicating investors were willing to pay substantially more for the stock.
Livermore's letter goes on to say:
"Vista is a strong growth company lead by Miguel Galuccio, the former CEO from YPF and founded by energy private equity mammoth, Riverstone Holdings. We met the Vista management team in Chicago the previous year and continued to monitor their progress. With the stock trading at an all-time low and major potential to meaningfully increase future production and cash flows, it was an opportunity we did not want to miss, and we didn't."
The letter also highlights the fact that Klarman owns a position and holds around 5% of the outstanding shares, which is a big vote of confidence in Vista and the company's management.
Oil and gas investing is always a risky business because there is so much that can go wrong in the industry. Nevertheless, when it comes to Vista, it seems as if these two successful investors believe that the company has the experience as well as know-how to overcome any obstacles that may inhibit growth.
As I noted in my previous article, there's also the potential for substantial growth. From a production rate of 24,500 barrels of oil per day in 2018, the group is targeting 29,000 barrels of oil per day in 2019 and 65,000 and by 2022. If the firm can hit these targets, then its oil production will grow at a compound annual rate of 28% by 2022. At the same time, production costs per barrel are expected to fall by around 30%.
Only time will tell if the company can hit these forecasts, but it would appear that the smart money is betting it can.
Disclosure: The author owns no stocks mentioned.
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