Why Einhorn increased Greenlight Capital’s position in WPX Energy
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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 WPX Energy Inc. (WPX)?
The position was increased to 1.60% in 3Q 2013. WPX Energy saw its shares slightly decline recently after hedge fund shareholder Taconic Capital Advisors LP was nominated to its board, a day after the departure of CEO Ralph Hill was announced. It said it has initiated the search for a new CEO.
In 3Q 2013, it reported a net loss of $114 million (or $0.57 per share on a diluted basis), compared to a net loss of $66 million (or a loss of $0.33 per share) in the same period a year ago. It said its results were negatively impacted by overall lower price realization (including hedges) for natural gas, a $19 million impairment charge related to the company’s costs of acquired unproved reserves, a $9 million tax provision related to the increase in a valuation allowance on certain state deferred tax assets, a $7 million litigation accrual, and a $6 million impact from changes to Argentine tax law affecting WPXs investment in Apco Oil and Gas International. Its consolidated oil revenues increased 55% quarter-over-quarter, while natural gas revenues decreased 24%, and natural gas liquids (NGLs) revenues decreased 12%.
The company said that its oil production is at an all-time high, and it saw growth in its natural gas production. It continues to achieve lower costs in the Bakken Shale in North Dakota. Bakken oil volumes are on track to grow 25% to 30%, with an exit rate of 15,000 barrels per day at the end of the year. It has advanced its Niobrara Shale in Western Colorado and San Juan Gallup Sandstone discoveries, providing additional long-term growth potential. The Piceance production decline has been arrested and volumes are beginning to grow again. The Bakken and Gallup oil plays, as well as the liquids-rich Piceance position, currently generate the most attractive returns. The company is also advancing the delineation of its significant Piceance Niobrara discovery. In light of the persisting infrastructure constraints, its 2014 capital budget will allocate minimal capital to its Marcellus position, where it saw lower-than-expected production owing to delays associated with third-party infrastructure.
WPX expects 2013 capital spending to come in at the $1.2 billion guidance level. Due to the Marcellus infrastructure problems, production volumes are expected to come in at the lower end of the 2013 forecast range.
The company announced in November that in 1H 2014, it intends to form a master limited partnership (MLP), which will hold working interests in mature producing natural gas properties located in the Piceance Basin in Colorado. The MLP, called WPX Energy Partners, LP, will register for an initial public offering in early 2014.
According to news reports, energy equities have been lagging behind most sectors in the S&P 500 Index this year. WPX has seen back-to-back losses in the last few quarters, but analysts expect the trend to reverse in 2014.
WPX Energy is an exploration and production company focused on developing its significant oil and gas reserves, particularly in the Piceance, Williston, and Appalachian basins. WPX also has domestic operations in the San Juan and Powder River basins, as well as a 69% interest in Apco Oil and Gas International.
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.