What Does Seth Klarman’s Baupost See in This Energy Stock?
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For about a year, oil major BP (NYSE: BP) has been the largest position in the Baupost Group’s portfolio, according to 13Fs filed with the SEC; we track 13Fs as part of our work developing investment strategies. In the first quarter of this year, Baupost, managed by Seth Klarman (whose 1991 investing book Margin of Safety has sold for as much as $1,500), increased its holdings of BP by 57% to a total of over 17 million shares. See more of Klarman's stock picks.
BP’s revenue slipped slightly last quarter compared to the first quarter of 2012, though earnings per share showed substantial improvements and adjusted EPS beat analyst expectations. The company has been selling off some of its assets in order to fortify its balance sheet, though BP has been increasing its quarterly payments over the last couple years as management has become more confident in its cash flows. Currently, investors receive quarterly payments of 54 cents per share, which equates to a dividend yield of 5%. Dividend payments are still well below what they were in early 2010 prior to the Deepwater Horizon disaster, however.
BP certainly looks cheap, at a valuation of 7 times forward earnings estimates (we don’t consider the company’s trailing EPS, which are higher than the consensus figures for 2014, to be that relevant given management’s activity in selling off assets). So there is both a value case for the stock--its earnings multiples are low, and business appears somewhat stable--and a high yield. We’d note that in statistical terms, the stock tends to be highly dependent on the movements of broader market indices given its beta of 2.2, and certainly energy prices would be tied to the macroeconomy. In addition to Baupost’s interest in the company, our database of 13F filings shows that the Bill and Melinda Gates Foundation Trust owned 7.1 million shares as of the end of March (find more stocks the trust owns).
Other oil majors include Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and Total (NYSE: TOT). Of these four companies, ConocoPhillips and Total stand out for offering dividend yields of around 4.4%- still lower than what BP pays, but possibly with less company-related risk. Total also offers a forward earnings multiple competitive with BP’s, but this is based on analyst expectations that the company’s earnings per share will increase over the next year and a half, even though both revenue and net income have actually been down. The trailing P/E is still fairly low at 9, but we aren’t sure it’s that good of a deal compared to BP. Financial performance has also been weak at ConocoPhillips, with earnings down 27% in its most recent quarter compared to the same period in the previous year, and with a forward P/E of 10, we think that we’d avoid it.
Chevron and Exxon Mobil have done somewhat better: while revenue at each of these companies fell in the first quarter of 2013 versus a year earlier, there was little change on the bottom line. However, these two oil majors join their improved performance with reduced income opportunities; their current yields are 3.3% and 2.8%, respectively. Exxon Mobil, often recognized as the industry leader and with a market capitalization of roughly $400 billion, carries a premium to the other companies we’ve discussed in terms of earnings multiples as well: it is priced at 11 times consensus earnings for 2014. Chevron, meanwhile, carries trailing and forward P/Es of 9 and 10 respectively showing that the sell-side is forecasting continued modest declines in EPS next year. That’s still a low valuation in absolute terms, but we can see that oil majors in general are cheap and the stock’s discount relative to Exxon Mobil is quite small.
Given the combination of recent performance and valuation (at least in terms of analyst expectations) BP seems to be one of the more attractive oil majors and certainly should appeal to income investors given its high yield. There are definitely risks for the company, but overall we do think that it is worth further research.
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This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in COP. The Motley Fool recommends Chevron and Total SA. (ADR). 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!