Barry Rosenstein Takes 9% Stake in This Energy Play
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Oil States International (NYSE: OIS) rose over 15% on April 30 following the news that activist investor Barry Rosenstein’s JANA Partners owns 5 million shares of the stock (or 9.1% of the total shares outstanding) and will push to split up the now $4.9 billion oil and gas equipment and services company.
We track JANA’s quarterly 13F filings alongside those of other hedge funds as part of our work developing investing strategies (we have found, for example, that the most popular small-cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and can see that the fund did not own any shares of Oil States at the beginning of this year (see which stocks JANA owned).
A breakup of Oil States has some potential to increase shareholder value. For example, one of the company’s business units provides temporary housing to workers in extraction industries (including mining and oil and gas) and could be eligible to convert to a real estate investment trust (which would then enable it to receive preferential tax treatment as long as it distributed sufficient cash to shareholders).
In addition, management of the new companies is often able to better manage operations without having to concern themselves with the needs of the larger organization (read more about spinouts). It’s also possible that at least one of the smaller business units would be acquired at a premium valuation.
Currently, Oil States International trades at 12 times its trailing earnings. While Wall Street analysts have been optimistic in their outlook with forecasts for the next several years implying a five-year PEG ratio of 0.6, recent performance has not been particularly strong. Specifically, in the first quarter of 2013, Oil States reported a small decline in revenue versus a year earlier with earnings dropping by 24%. As such, we’d hesitate to consider the stock a good value based on its current makeup.
Chuck Royce’s Royce & Associates was one major shareholders at the end of December, reporting a position of more than 3 million shares. Atlantic Investment Management, which is managed by Alexander Roepers, was a heavy buyer of Oil States in the fourth quarter of 2012 and closed the year with a total of 1.3 million shares in its portfolio.
Other oil and gas equipment and services companies include Superior Energy Services (NYSE: SPN)), Weatherford International (NYSE: WFT), Baker Hughes (NYSE: BHI), and National Oilwell Varco (NYSE: NOV)).
Superior and National Oilwell Varco are in a similar situation to Oil States in terms of their valuations: each carries a trailing P/E of 12, with the sell side bullish on each of these companies as well, and as a result their five-year PEG ratios are below 1.
Revenue growth was quite strong at each in their most recent quarters compared to the same period in the previous year, although National Oilwell Varco’s earnings were down by 17%.
Baker Hughes trades at a fairly small premium to these companies, and with that business also struggling recently we think that we would avoid it for now. That leaves Weatherford, whose adjusted earnings numbers have failed to meet expectations each of the last three quarters and earned almost no profits in Q4 2012. The sell side expects the company to improve, and it trades at 9 times forward earnings estimates.
Still, we’re not particularly excited about Weatherford given its recent performance, and certainly think it’s probably best to wait before considering a purchase. Out of the peers we’ve mentioned, Superior looks somewhat interesting from a value perspective as the stock is moderately cheap and the company appears to be doing alright.
The JANA effect
As for Oil States, we can see some potential sources of upside from JANA’s activism but would probably want more details as to management’s reaction before relying on the breakup as the core of an investment thesis.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!