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Assessing ValueAct Capital Management's fourth quarter positions

Part 2
Assessing ValueAct Capital Management's fourth quarter positions (Part 2 of 8)

Why ValueAct Capital increased its stake in Dresser-Rand Group

ValueAct Capital and Dresser-Rand Group

ValueAct initiated a new position in Dresser-Rand Group, Inc. (DRC). It sold its stakes in CF Industries (CF), The Mosaic Company (MOS), and Valero Energy Corporation (VLO). The fund increased positions in Allison Transmission Holding (ALSN) and MSCI Inc. (MSCI). It reduced its stake in Adobe Systems Incorporated (ADBE).

ValueAct Capital initiated a new position in Dresser-Rand Group, Inc. (DRC) that accounts for 0.32% of the fund’s fourth quarter portfolio. Earlier this month, ValueAct disclosed in a 13D filing that it has increased its position in Dresser-Rand. The firm currently owns over 5 million shares, accounting for a 6.6% stake, up from 658,222 shares last quarter.

DRCEnlarge GraphDresser-Rand Group is among the largest global suppliers of custom-engineered rotating equipment solutions for long-life, critical applications in the oil, gas, chemical, petrochemical, process, power generation, military, and other industries worldwide. Its equipment and service solutions are also used in energy infrastructure, including oil and gas, environmental solutions, and power generation. In 2013, approximately 98% of Dresser-Rand’s revenues were generated from energy infrastructure (oil, gas, and environmental solutions). Plus, 50% of the company’s total combined revenues were generated by its new units segment and 50% by its aftermarket parts and services segment.

Dresser-Rand estimated that in 2013, the worldwide aggregate annual value of new unit sales of the classes of equipment it manufactured was approximately $18 billion for critical applications in the oil, gas, chemical, petrochemical, process, power, military, and other industries worldwide, as well as the environmental market space within energy infrastructure. The aftermarket parts and services needs of the installed base of turbo products, reciprocating compressors, and steam turbines (both in-house and outsourced) were estimated at approximately $11 billion. Plus, the company has an aftermarket repair capability for gas turbines, an estimated market size of approximately $4 billion.

The company missed street estimates for its earnings and revenue in 4Q 2013. The global supplier of rotating equipment and aftermarket parts and services reported a net income of $32.8 million, or $0.43 per diluted share, down from net income of $80.2 million, or $1.05 per diluted share, for the fourth quarter 2012. Total revenues of $827.0 million decreased 2.1%, compared with $844.4 million for the fourth quarter 2012. The fall in earnings and revenue was due to the suspension of Spanish operations as a result of the potential implementation of a new Spanish regulation. Shares declined after the company made the suspension announcement last month and lowered its guidance.

Dresser-Rand owns and operates six pig manure treatment facilities in Spain, which operated under the Electrical Special Regime tariffs. The Spanish government published a draft regulation that reflects a reduction in the tariffs of approximately 37%, which, if enacted, would be retroactive to July 2013. In view of the pending change in the tariffs, the company said it has decided to suspend the operations at its six facilities, although discussions with the Spanish government were ongoing. This was because the draft Spanish regulation has not yet been adopted, and there is a possibility that plant operations may resume.

DRC hedgeEnlarge GraphDresser-Rand’s new unit segment revenues for the fourth quarter 2013 of $387.8 million decreased $11.2 million, or 2.8%, compared with $399.0 million for the fourth quarter 2012. Aftermarket parts and services revenues for the fourth quarter 2013 of $439.2 million decreased $6.2 million, or 1.4%, compared with $445.4 million for the fourth quarter 2012 due to impact of the draft Spanish regulation.

As a result of the suspension of Dresser-Rand’s energy assets, the company has reduced its 2014 revenue and operating income guidance by $125 million and $15 million to revenues of $2.9 billion to $3.1 billion and operating income of $377 million to $396 million.

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