Highbridge Capital Management 3Q 2013

Part 2
Highbridge Capital Management 3Q 2013 (Part 2 of 7)

Why did Highbridge Capital buy Schlumberger?

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Highbridge Capital Management, LLC is a multi-strategy alternative investment management firm founded by Glenn Russell Dubin and Henry Swieca in 1992. In late 2004, J.P. Morgan Asset Management purchased a majority interest in Highbridge, creating one of the first and most significant strategic alliances in the hedge fund industry. In July 2009, J.P. Morgan Asset Management completed its purchase of substantially all remaining shares of the firm. Highbridge and its affiliates manage approximately $29 billion in capital for many of the world’s most prominent institutional investors, public and corporate pension funds, endowments, foundations, family offices and high net worth individuals. The firm is based in New York with offices in Hong Kong and London.

The fund bought new positions in Lowe’s Cos Inc (LOW), Schlumberger Ltd (SLB), Groupon Inc (GRPN), and Tempur Sealy International Inc (TPX) in 3Q 2013. It sold its positions in Cosan Ltd (CZZ), Cummins Inc (CMI), and Tractor Supply Company (TSCO).

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 Schlumberger Ltd (SLB)?
Schlumberger is a 0.59% position in Highbridge’s portfolio.

In 3Q 2013, the company reported total revenue of $11.61 billion, an increase of 11% from $10.50 billion in 3Q 2012. Its International Area revenue of $7.91 billion grew $209 million, or 3% sequentially, while North America Area revenue of $3.60 billion increased $245 million, or 7% sequentially.  Diluted earnings-per-share was $1.29 versus $1.04 in the third quarter of 2012. All of its three business segments namely Reservoir Characterization Group, Drilling Group and Production Group saw growth. It said the international business grew further, with leading margins expanding in spite of some operational delays. The performance in North America was particularly strong despite continued pricing weakness in the land market. Moreover, new technology sales coupled with further market share gains contributed strongly to the quarter’s results.

Its results were led by North America with a new high in overall revenue, supported by solid offshore activity and the seasonal rebound of activity in Western Canada. US land operations showed impressive resilience through improved efficiency, new technology penetration and market share gains in a highly competitive market with largely constant rig count. International results were led by the Middle East & Asia with growth in key markets in Saudi Arabia and Iraq. Offshore activity strengthened in Asia, and land drilling and stimulation activity improved in China. Europe/CIS/Africa saw strong summer activity in Russia and Central Asia and a seasonal increase in WesternGeco marine activity in the Area. Latin America activity was driven by Integrated Project Management and Schlumberger Production Management operations. These increases, however, were partially offset by a decrease in Brazil due to lower rig count, both on land and in deepwater.

According to news reports, Patrick Schorn, Schlumberger’s president of operations and integration, recently said at an investor conference that the company expects the temporary shutdown of its operations in southern Iraq last month in a security incident to reduce 4Q profits by approximately 2%. He added that the company expects spending growth in 2014, especially in the Gulf of Mexico, sub-Saharan Africa, Russia, the Middle East and China.

During the quarter, Schlumberger repurchased 10.1 million shares of its common stock at an average price of $82.61 for a total purchase price of $833.3 million.

It said in its earnings release that the global economic outlook remains largely unchanged as relatively encouraging news among OECD countries and in China has offset lower growth expectations in some of the major emerging economies. In the U.S., the underlying trends are positive and the level of macroeconomic uncertainty was reduced in the near term following the temporary resolution of the fiscal debate. Demand for oil in 2013 has again been revised upward and current estimates for 2014 point to even stronger growth in demand. Overall, the market continues to support Brent prices at current levels while international natural gas prices remain steady. The upward E&P spend revision made in June continues to be confirmed by rig count improvement and increased customer activity.  It said it is optimistic on deepwater drilling growth as there are a number of new rigs coming into the market in 4Q and also going forward in 2014, and that will drive the deepwater spend in 2014. Within this landscape, the company remains positive on the outlook for the industry. Its peers include Halliburton (HAL), National Oilwell Varco (NOV) and Baker Hughes (BHI).

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The fund started in 1992 with $35 million in capital and is named after the 19th century aqueduct that connects Washington Heights and the Bronx. It seeks to attain consistent capital appreciation primarily through arbitrage and absolute return investment strategies in the global financial markets.  The firm has evolved over the past nineteen years and developed a diversified multi-strategy investment platform comprising more than six distinct investment strategies which serve as “alpha engines”.  Some of Highbridge’s core absolute return investment strategies include Convertible Bond Arbitrage, Credit, Global Macro, Long/Short Equity and Statistical Arbitrage.

Founder Glenn Russell Dubin was born in 1957 in the Washington Heights section of upper Manhattan. He graduated in 1978 with a degree in economics from Stony Brook University and began his career in finance as a retail stock broker at E. F. Hutton & Co. in 1978.  In 2010, Dubin was instrumental in broadening the Highbridge investment platform by partnering with J.P. Morgan Asset Management to lead the acquisition of a majority interest in Gávea Investimentos, one of Brazil’s most prominent alternative investment managers. Dubin stepped down from the CEO position at Highbridge in July 2013 and continues to remain as the chairman at the firm.

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