Baupost Group positions update: 3Q 2013

Baupost Group opens PBF position, raises MU and THRX share, and sells AIG, AUY, and KGC—13F Flash A

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The Baupost Group, LLC, is a hedge fund founded and run by Seth Klarman in 1982. Its investment approach emphasizes risk management. The firm, one of the largest hedge funds in the world, is a value investing manager. It has about $30 billion in assets under management.

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

Baupost started a new position in PBF Energy (PBF), increased positions in Micron Technology Inc. (MU) and Theravance Inc. (THRX), and sold American International Group (AIG) as well as gold miners Yamana Gold Inc. (YRI) and Kinross Gold Corp. (KGC).

Why buy PBF Energy Inc. (PBF)?

PBF Energy reported an operating loss of $55.6 million in 3Q 2013, compared to an operating income of $220.1 million for 3Q 2012. Earnings per share at -$0.48 per share were below analyst estimates, but revenue of $4.86 billion beat analyst estimates. The company said earnings included an approximately $96 million non-cash LIFO charge related to the rising cost of its combined hydrocarbon inventory over the quarter, but based on commodity prices as of October 30, 2013, the majority of the non-cash LIFO charge has been recovered.

PBF added that East Coast market conditions were the big negative during the quarter. Bakken crude traded at less than a $10 discount to Brent, while the WCS discount to Brent moved to less than $20 per barrel during the quarter. The company’s Toledo refinery also suffered high crude oil costs, with Syncrude within a narrow range of WTI during 3Q. However, the fourth quarter to date is showing a positive picture in terms of the WTI-Brent price differentials, and PBF has positioned its refineries to benefit from these conditions.

It said its 3Q results were negatively impacted by approximately $40 million of renewable identification numbers (RINs) expenses. It expects RINs’ cost to drop in the fourth quarter based on the expected publication of the Environmental Protection Agency’s (the EPA’s) adjusted requirements for 2014. Average RINs prices for the fourth quarter are less than half of the third quarter levels. Plus, PBF is using all available venues to minimize the impact of RINs on its refining business.

The company announced it will pay a quarterly dividend of $0.30 per share of Class A common stock on November 21, 2013.

Although PBF expects to continue to see near-term volatility in both the flat price of crude and the differentials as the industry continues to adjust to growth in North American production and infrastructure changes, it believes that over the long term, discounted North American crudes versus waterborne alternatives will provide PBF a cost advantage. Analysts are expecting an increase in EPS for 2014.

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Baupost founder Seth Klarman is also the author of a book on value investing titled Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. In his book, Klarman explains the margin of safety as “buying assets at a significant discount to underlying business value, and giving preference to tangible assets over intangibles.”

Klarman is a graduate of Cornell University and Harvard Business School. Before founding Baupost, Klarman worked for Max Heine and Michael Price of the Mutual Shares fund (now part of Franklin Templeton Investments). Despite his unconventional strategies, Klarman has consistently achieved high returns. He’s a very conservative investor, and he often holds significant amounts of cash in his investment portfolios. He often makes unusual investments, buying unpopular assets while they’re undervalued, using complex derivatives, and buying put options. He’s known to keep a very low profile, but he has considerable influence. He has been called the “Oracle of Boston” and is also sometimes referred to as “the Warren Buffett of his generation.”

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