Continuing to curb its position in Independence Contract Drilling Inc. (ICD, Financial), Michael Dell (Trades, Portfolio)'s MSD Capital disclosed another 12.35% reduction last week.
The New York-based private investment firm, which was established in 1995 to manage the assets of Dell Technologies Inc.'s (DELL, Financial) founder and CEO, manages an extremely concentrated portfolio of companies that have sustainable, long-term competitive advantages that are run by honest management teams. The firm follows a disciplined, research-intensive analytic investment process.
According to GuruFocus Real-Time Picks, a Premium feature, MSD sold 24,176 shares of the Houston-based oil and gas company on Dec. 31, impacting the equity portfolio by -0.15%. The stock traded for an average price of $3 per share on the day of the transaction.
MSD Capital now holds 171,543 shares total, which accounts for 1.06% of its equity portfolio. The firm has been trimming the holding over the past month after establishing it in the first quarter of 2019. GuruFocus estimates it has lost 95.22% on the investment since the first quarter of 2019.
The onshore drilling services provider has an $18.34 million market cap; its shares were trading around $2.97 on Monday with a price-book ratio of 0.06 and a price-sales ratio of 0.1.
Due to the volatility present in the energy sector and severe drop in share price over the past couple of years, the GF Value Line suggests the stock is currently a potential value trap.
Independence Contract Drilling reported its third-quarter results on Nov. 3. It posted an adjusted loss of $2.73 per share on $10.2 million in revenue, which were down from a loss of $2.80 per share on $45.1 million in sales a year ago. In a statement, CEO Anthony Gallegos said the company's performance "reflected the full effects of the unprecedented destruction in oil and gas demand caused by the Covid-19 pandemic."
"However, ICD also began to reassemble the pieces during the third quarter," he said. "We are a leader in the Haynesville and East Texas natural gas plays, and this is paying dividends as improving natural gas commodity pricing drove incremental demand and rig reactivations for us late in the quarter. As a result, we exceeded expectations with respect to drilling rig contracting activity and overall cost control during the quarter."
Gallegos also announced that in addition to the six rigs that are currently in operation, two more were reactivated.
"Looking forward, based upon improving natural gas prices and stabilized to improving oil prices, as well as our current identified opportunity set, we expect to reactivate additional rigs during the remainder of the year and into the first half of 2021," he said.
GuruFocus rated Independence Contract Drilling's financial strength 3 out of 10. As a result of issuing approximately $27.2 million in new long-term debt over the past three years, the company has poor interest coverage. In addition, the Altman Z-Score of -0.87 warns the company is in distress and could potentially be in danger of bankruptcy if it does not improve its liquidity position.
The company's profitability did not fare well either, scoring a 2 out of 10 rating on the back of negative margins and returns that underperform a majority of competitors. Independence Contract Drilling also has a low Piotroski F-Score of 3, which indicates operating conditions are in poor shape. It has also recorded a loss in operating income and declining revenue per share over the past several years.
MSD Capital now holds 2.78% of Independence Contract Drilling's outstanding shares.
Portfolio composition
MSD Capital's $49 million equity portfolio was composed of three stocks as of the end of the third quarter. The firm's other two holdings are Dine Brands Global Inc. (DIN, Financial) and Townsquare Media Inc. (TSQ, Financial).
By weight, the three sectors represented are consumer cyclical (83.19%), communication services (15.69% and energy (1.12%).
Disclosure: No positions.
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