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Graham Griffin
Graham Griffin
Articles (169) 

Independence Contract Drilling Ground Down by Michael Dell's MSD Capital

Drilling services holding could soon run dry

Michael Dell (Trades, Portfolio)'s MSD Capital has revealed another reduction in its holding of Independence Contract Drilling Inc. (ICD), according to GuruFocus' Real-Time Picks, a Premium feature.

MSD Capital is a New York-based private investment firm that was established to manage the assets of Dell Technologies' (NYSE:DELL) founder and CEO. The firm manages an extremely concentrated portfolio that contained three stocks at the end of the third quarter. They use a disciplined, research-intensive analytic process for investing. Businesses must possess sustainable, long-term competitive advantages and be managed by honest management teams.

Regularly over the last few years, the firm has made consistent reductions in holdings before selling out at the end of the year. A few examples include past holdings in PVH Corp. (NYSE:PVH), Asbury Automotive Group Inc. (NYSE:ABG) in both 2017 and 2018, Wesco Aircraft Holdings Inc. (NYSE:WAIR) and WEX Inc. (NYSE:WEX).

On Dec. 9, the firm once again made a reduction in the Independence Contract Drilling holding. This marks the second reduction in less than a week's time. The holding was reduced by 4.55% with the sale of 9,652 shares. On the day of the transaction, the shares traded at an average price of $3.82 per share. Overall, the sale had an impact of -0.08% on the portfolio and GuruFocus estimates the firm has lost 94.81% on the holding.

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Independence Contract Drilling is engaged in providing land-based contract drilling services for oil and natural gas producers. The company constructs and operates its own premium land rig fleet. The company's customers for contract drilling services in the United States include oil and natural gas companies, independent oil and natural gas companies and various small to mid-sized publicly traded and privately held oil and gas companies.

On Dec. 15, the stock was trading at $3.30, down 5.44%, with a market cap of $20.38 million. The GF Value Line shows that the stock is a possible value trap and investors will likely want to dig into the company's financials before investing.

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GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rank of 1 out of 10. There are four severe warning signs issued for new long-term debt, declining revenue per share, an Altman Z-Score of -0.85 placing the company in the distress column and a low Piotroski F-Score of 3. Negative operating and net margin percentages have driven profitability into the ground alongside the struggling financials.

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The firm is the company's second-largest shareholder with 3.27% of shares outstanding. The top shareholder is MSDC Management, L.P. (Trades, Portfolio) with 15.24% of shares outstanding. Other top shareholders include Vanguard Group Inc. (Trades, Portfolio), FMR LLC (Trades, Portfolio), Northwestern Mutual Investment Management Company, LLC (Trades, Portfolio) and Virtu Financial LLC (Trades, Portfolio).

Portfolio overview

At the end of the third quarter, the portfolio contained three stocks with no new holdings. It was valued at $49 million and has seen a turnover rate of zero percent. The three holdings are Dine Brands Global Inc. (NYSE:DIN), Townsquare Media Inc. (NYSE:TSQ) and Independence Contract Drilling.

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By weight, the three sectors represented are consumer cyclical (83.19%), communication services (15.69%) and energy (1.12%).

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Disclosure: Author owns no stocks mentioned.

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