What Does Seth Klarman See in Vista Oil & Gas?

A look at one of Klarman's smaller positions

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Dec 06, 2019
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Something I like to keep an eye on the smaller investment holdings in

Seth Klarman (Trades, Portfolio)'s investment portfolio. Baupost's most substantial investments get a lot of attention, but the more minor positions, which make up 1% of his portfolio or less, are hardly covered.

That doesn't mean that these investments are any less critical to Klarman's overall investment strategy. I do not believe he would take a position in any stock if he did not have a 100% conviction that it was undervalued. Thus, these positions are just as exciting to me as his more significant holdings.

Small position

One small position that Klarman added to Baupost's $9 billion equity portfolio in the third quarter of 2019 was Mexican oil and gas company Vista Oil & Gas, SAB de CV (

VIST, Financial).

According to the hedge fund's third-quarter 13F filing with the SEC, Klarman spent $32 million acquiring 6.2 million shares in the hydrocarbon business, giving it a 0.4% portfolio weight.

It is always interesting to see oil and gas companies, especially small oil and gas companies, in the portfolios of value investors because these are not traditional value investments. To determine a company's intrinsic value accurately, you have to be able to value its cash flows and be sure that those cash flows are here to stay. That is never the case with cyclical commodity businesses.

Growing business

This company is, according to its own estimates, the fifth-largest oil producer in Argentina, having acquired a "fully operational platform with certain conventional and unconventional assets, with interests in certain exploitation concessions, assessment blocks and exploration permits in Argentina" back in April 2018. Before this acquisition, Vista operated as a Special Purpose Acquisition Company (SPAC).

According to the company's most recent investor presentation, the business produced revenues of $424 million and adjusted earnings before interest tax depreciation and amortization of $176 million over the past 12 months.

The first thing that stands out here is the company's valuation. On a historical basis, the stock looks dirt cheap. Vista has a market capitalization of $630 million as of Dec. 6, 2019. With net debt of $207 million at the end of its most recent financial period, the stock is trading at an EV/EBITDA ratio of 5.

The company is planning to increase its production over the next few years. 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, implying a compound annual growth rate of production of 28%.

Over the past two years, Vista has also made tremendous progress in reducing production costs. The company was initially guiding for operating expenses of $17.3 per barrel for 2018, but it beat this target by nearly 20%. Costs are on track to fall further in 2019. Management has laid out a target range for operating expenses of $10.50 to $11.50 per barrel.

These figures suggest that management knows what it's doing, which makes sense because Vista is managed by some of the most experienced oil and gas executives in South America. CEO Miguel Galuccio was the CEO of YPF, Argentina's largest oil company, from May 2012 to March 2016. The company's other executives all have experience working at YPF, which, under Galuccio's tenure, became the largest producer of hydrocarbons from shale formations globally outside North America.

This is only a brief look at Vista and its operations, but I think that even from this limited information, it is clear why Klarman likes the business. A cheap stock that's lead by an extremely experienced management team with ambitious growth targets over the next few years, it is no wonder Klarman sees Vista as a hidden gem.

Disclosure: The author owns no share mentioned.

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