MSD Capital, the firm established by Dell Technologies Inc. (DELL, Financial) founder Michael Dell (Trades, Portfolio), revealed this week that it reduced its Independence Contract Drilling Inc. (ICD, Financial) holding according to GuruFocus Real-Time Picks, a Premium feature.
Dell and his family established the New York-based firm in the 1990s, seeking long-term capital appreciation through investments in companies with sustainable competitive advantages using a disciplined, research-intensive analytic process. Management invests based on the belief that businesses provide shareholder value through generation of cash flow and the emphasis on absolute value instead of relative value.
Transaction details
MSD sold 22,922 shares in multiple trades since Monday, trimming the position 15.78% from the March 17 holding of 145,255 shares. The shares averaged around $3.32 as of Tuesday.
The reduction follows a series of position reductions starting in December 2021; the firm has sold 101,257 shares over the past three months.
Company background and financial strength summary
Houston-based Independence Contract Drilling provides land-based contract drilling services for oil and natural gas producers. The company focuses its operations primarily in the Permian Basin, Haynesville Shale and Eagle Ford Shale regions, although operations previously occurred in the Mid-Continent and Eaglebine regions.
The company discussed in its 2020 annual report that operating rig counts ranged from three rigs to 22 rigs during the year as the coronavirus pandemic interrupted drilling activity. Despite this, Independence Contract Drilling increased its oil rig count to 11 as of year-end as oil and natural gas prices started to stabilize and demand for the company's products rebounded from historic lows.
GuruFocus ranks the company's financial strength 3 out of 10 on several warning signs, which include a low Piotroski F-score of 3 and a cash-to-debt ratio that underperforms over 76% of global competitors. The website also warns that the company has issued nearly $25 million in long-term debt over the past three years, indicating high use of financial leverage.
Company profitability remains low; stock may be a possible value trap
GuruFocus ranks Independence Contract Drilling's profitability 2 out of 10 on the back of profit margins and returns underperforming over 73% of global competitors. Additionally, the company's three-year revenue decline rate of 29.1% fared worse than over 88% of oil and gas companies around the globe.
Shares of Independence Contract Drilling closed on Wednesday at $3.30, down over 90% from the first-quarter 2019 average price of $64.97. The stock is a potential value trap based on its price-to-GF Value ratio of 0.45 coupled with the company's low financial strength and profitability metrics.
Additionally, the company warned that current oil rig performance may or may not be sustainable due to the unpredictable and unknown future impacts of the Covid-19 pandemic and other macroeconomic factors regarding the crude oil market.
See also
MSD Capital's Independence Contract Drilling position occupies just 0.93% of its $54 million equity portfolio. The firm also has holdings in Dine Brands Global Inc. (DIN, Financial) and Townsquare Media Inc. (TSQ, Financial).
Jim Simons (Trades, Portfolio)' Renaissance Technologies also has a holding in Independence Contract Drilling.
Disclosure: The author has no positions in the stocks mentioned. The mention of stocks in this article do not constitute a recommendation to buy or sell the stock. Investors must do their own diligent research before investing in the stock market; the research includes studying the macroeconomic factors that can impact a company's business.
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