<

Millennium Management's largest positions in 3Q 2013

Part 2
Millennium Management's largest positions in 3Q 2013 (Part 2 of 7)

Millennium Management buys PPL, BHI, AEP, CMS, and SRE and sells DRYS and NYCB—13F Flash B

MillenniumEnlarge Graph

Millennium Management is a global investment management firm with approximately $20.1 billion in assets under management and offices in the United States, Europe, and Asia. Founded in 1989 by Israel Englander, it employs a global multi-strategy investment approach, opportunistically engaging in a broad array of trading and investing strategies. It’s structured to allocate capital globally across a diverse set of strategies involving a variety of predominantly liquid asset classes. It focuses on generating uncorrelated returns by engaging and overseeing over 140 specialized trading teams, each of which pursues specific strategies.

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

Its largest buys in 3Q 2013 were PPL Corp. (PPL), American Electric Power (AEP), CMS Energy (CMS), Baker Hughes Inc. (BHI), and Sempra Energy (SRE). It sold Dryships Inc. (DRYS) and New York Community Bancorp Inc. (NYCB).

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 Baker Hughes Inc. (BHI)?

Baker Hughes said it saw record revenue and strong earnings growth in 3Q 2013 led by strong performance in the Middle East, Asia Pacific, Africa, and Russia Caspian.

Adjusted earnings were up, at $0.81 a share. The company’s adjusted net income excludes a $17 million after-tax severance charge or $0.04 per share related to restructuring in its Latin America operation.  Total revenue increased 8.1%, to $5,787 million from $5,355 million a year ago. Baker Hughes’s revenue increased 20% in its Eastern Hemisphere operations compared to the same quarter last year at higher margins as a result of increased activity and improved mix. North America also delivered higher margins with the seasonal recovery in Canada and improved performance in all of its product lines. Across the region, growth was led by its Drilling Services, Completions Systems, Artificial Lift, and Upstream Chemicals businesses.

The company said in its earnings call that during the quarter, it continued with the restructuring of its Latin American operation to better align with the recent activity declines in Brazil and Mexico, leading to an improved profitability. Its earnings growth, along with a disciplined approach to capital allocation and ongoing initiatives to reduce working capital, generated an increase in free cash flow for 3Q.

In terms of guidance, the company projects average rig and well counts in the U.S to decline approximately 2.5% in 4Q due to typical seasonal slowdowns around the holiday period. It anticipates that 4Q onshore rig count for the U.S. will average 1,660 rigs, comprising 1,320 oil rigs and 340 gas rigs. The forecast for U.S. offshore rigs in 4Q includes 58 active rigs, which remains unchanged from 3Q. Baker Hughes expects 4Q North America revenues and profit margins to improve. It said the slightly higher activity levels in Canada and improved operational efficiencies in its U.S. Pressure Pumping business are expected to more than offset the 2.5% decline in U.S. onshore activity during the quarter.

In its international segment, the rig count is anticipated to resume growth, after recent declines in 3Q, to an average 2013 rig count of about 1,300 rigs, with the largest growth coming from Africa, Europe, and the Middle East. It expects its Europe/Africa/Russia Caspian segment revenue and margins to increase modestly in 4Q, driven by stable activity and an increase in product sales typically experienced late in the quarter. Its Middle East/Asia Pacific segment has already benefited in 3Q from a large product delivery, so the company doesn’t project year-end product sales in this segment to increase sequentially. So Baker Hughes forecasted revenues and margins to be flat to slightly up for 4Q 2013. On the whole, it said its international operations are trending in the right direction and are expected to continue solid profitable growth in 2014 as recent contract wins take hold and the demand for high-end technology products and services continues to grow.

The demand for oilfield services is expected to increase, considering that oil prices are hovering around $100 per barrel in 2013, and oil producers are expected to take advantage of these higher prices. Baker Hughes’s peers include Halliburton (HAL), Schlumberger (SLB), and Weatherford (WFT)—all of which are part of the Oil Services HOLDRs ETF (OIH).

Millennium Management buys PPL, BHI, AEP, CMS, and SRE and sells DRYS and NYCB—13F Flash BEnlarge Graph

BHI3Enlarge Graph
BHi2Enlarge Graph
BHI1Enlarge Graph

Millennium emphasizes diversity in asset classes, industry sectors, and geographic boundaries and it invests in a variety of domestic and foreign equity and debt securities, asset-backed securities, currencies, futures and forward contracts, options, and other financial instruments. Its approach is to prioritize capital preservation. It aims to achieve absolute returns, rather than outperforming a given benchmark or asset class. It capitalizes on opportunities in a diversified portfolio while minimizing risk. An important feature of Millennium’s approach is that it doesn’t make firm-wide, concentrated investments. Each of its trading teams focuses on the specific opportunities and strategies it specializes in, subject to the company’s overall risk management and hedging of aggregate exposures where appropriate.

Millennium founder Israel Englander has over 35 years of experience in securities and derivatives across a broad range of instruments and strategies. A Brooklyn native, Englander earned a B.S. in finance at NYU before dropping out of the university’s MBA program to work full-time on Wall Street as a trader and floor broker at the American Stock Exchange.

The Realist Discussions