Millennium Management's largest positions in 3Q 2013

Part 6

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

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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 sell Dryships (DRYS)?

Dryships reported a net loss of $63.9 million, or a $0.17 basic and diluted loss per share for 3Q 2013. Total revenue was up 17.8% year-over-year, at $404.9 million. The company said the dry bulk market continues its recovery lately in the larger asset classes and as a result, asset prices across the board are rising. It’s cautiously optimistic, expecting a sustainable recovery in 2014 and beyond, and it believes it’s well positioned to take advantage of the ensuing recovery in charter rates in the dry bulk and tanker sectors. As far as the offshore drilling outlook is concerned, its subsidiary Ocean Rig has posted solid results for the quarter. Dryships said it’s positive about the prospects for Ocean Rig, whose contract backlog currently stands at approximately $5.8 billion. Its total operating expenses were $326.5 million, up 6.3% year-over-year. The company has a total debt of $5.2 billion, according to its filing.

Drybulk Carrier segment revenue was down 5.7%, to $44.2 million. Time charter equivalent (or TCE) revenues were $37.4 million, a 9.1% decline from the same quarter last year. The TCE rate was $10,796, having declined 15.2% year-over-year. For the tanker segment, net voyage revenues amounted to $14.5 million for 3Q 2013, compared to $9.0 million for the same period in 2012. For the offshore drilling segment, revenues from drilling contracts increased $42.8 million, to $328.5 million for 3Q 2013, compared to $285.7 million for the same period in 2012.

An oversupply of vessels and low demand led to a reduction in the rates for dry bulk ships that had impacted Dryships as well. However, the sector seems to be witnessing a recovery, with a rise in shipping rates. According to a recent report on our website, dry bulk shipping companies continue to outperform the overall market S&P 500 ETF (SPY) and the Guggenheim Shipping ETF (SEA), which seeks to invest in multiple large shipping companies around the world. Dry bulk shipping companies like Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Navios Maritime Holdings Inc. (NM), Knightsbridge Tankers Ltd. (VLCCF), and Star Bulk Carriers Corp. (SBLK) are rallying on Morgan Stanley’s review claiming that shipping is at the start of a two-year rally. Dryships stock is up more than 100% year-to-date.

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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.

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