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Greenlight Capital starts new positions in 3Q 2013

Part 4
Greenlight Capital starts new positions in 3Q 2013 (Part 4 of 7)

Why Einhorn bought more stake in Oil States International

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Greenlight Capital is a hedge fund founded by David Einhorn and former co-President Jeffrey A. Keswin. Greenlight invests primarily in publicly traded North American corporate debt offerings and equities. Founded in 1996, the $5.6 billion Greenlight Capital also manages a fund of funds and a private equity fund through its affiliates, Greenlight Masters and Greenlight Private Equity Partners. It also operates Greenlight Capital Re, a property and casualty reinsurer.

In this seven-part series, we’ll go through some of the main positions Greenlight Capital LP traded this past quarter.

The fund bought new positions in Intrexon Corp. (XON) and Tempur Sealy International (TPX) in 3Q 2013. It added to its positions in WPX Energy Inc. (WPX), Oil States International Inc. (OIS), and Spirit Aerosystems (SPR). It sold its positions in Oaktree Capital Group LLC (OAK) and State Bank Financial Corp. (STBZ).

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).

Why buy Oil States International Inc. (OIS)?

Einhorn increased Greenlight Capital’s position in Oil States International to 5.1% in 3Q 2013. The fund had initiated a long position in OIS in 1Q 2013 at an average price of $77.16 per share.

Oil States International reported a net income of $77.1 million (or $1.38 per diluted share in 3Q 2013), down from the  $97.0 million (or $1.75 per diluted share) reported in 3Q 2012. It generated revenues of $684.5 million and EBITDA of $195.8 million during the third quarter of 2013, compared to revenues of $644.5 million and EBITDA of $204.8 million reported in 3Q 2012. EBITDA was down year-over-year primarily due to weakening of the Canadian and Australian currencies, which negatively impacted the translation of revenues and profits from the Accommodations segment in Canada and Australia, coupled with lower occupancy levels in its Australian villages. These EBITDA impacts were partially offset by record quarterly EBITDA generated from the company’s offshore products and completion services businesses.

Well site services generated revenues of $195.9 million and EBITDA of $64.1 million for 3Q 2013. Revenues and EBITDA for well site services increased 8% and 5% year-over-year, respectively. Despite the 7% year-over-year decrease in U.S. drilling activity, results for this segment improved, as U.S. completion activity continues to decouple from drilling activity due to drilling rig efficiencies, multi-well pad drilling locations, and longer more complex lateral or horizontal wells in the U.S. shale plays. This segment’s results also benefited from contributions from the Tempress acquisition that closed in December 2012, partially offset by lower utilization within the drilling business, particularly in the Permian basin.

Offshore products generated revenues and EBITDA of $242.3 million and $45.7 million, respectively. Revenues and EBITDA increased 28% and 44% year-over-year, respectively, primarily due to higher revenue from its subsea equipment and drilling products which also improved cost absorption at certain manufacturing locations, partially offset by lower production equipment revenues. The offshore products segment primarily focuses on the deepwater capital equipment market.

During 3Q 2013, the company sold its tubular services segment for $600 million in cash.

It said it continued to make progress toward the planned spin-off of its Accommodations business into an independent publicly traded company. It had said the Accommodations business, as a standalone entity, will focus on continued growth through contracted room expansions in its existing Canadian oil sands, Australian mining, and U.S. shale play markets and on expanding into new regions within Canada and Australia and around the world. It will initially spin off as a C-Corporation and then will continue to assess the feasibility and advisability of a potential future conversion into a real estate investment trust (REIT). The company announced the spinoff in July 2013 and said it aimed to deliver value to shareholders. News reports stated that activist investor JANA Partners, which owns approximately 9.8% of OIS, had been pushing for the spinoff of the business.

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Greenlight has generated about a 20% annualized return for investors. According to HedgeFundLetters.com, Greenlight Capital is a long/short value-oriented fund. The firm’s investment approach is to analyze the economic value of a company and determine the alignment of interest between management and investors. It employs a bottom-up approach, emphasizing fundamental analysis, aiming to achieve high absolute rates of return while minimizing the risk of capital loss.

David Einhorn graduated summa cum laude from Cornell University with a BA in Government from the College of Arts and Sciences in 1991. Einhorn is a major contributor and board member of The Michael J. Fox Foundation. He is also on the board of the Robin Hood Foundation and a contributor to numerous charities in the New York area. He has authored the book Fooling Some of the People All of the Time.

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