Catalysts Ahead For WPX Energy

WPX Energy (WPX) is a natural gas and oil gas exploration and production company in the United States (Piceance Basin, Bakken Shale, Marcellus Shale, Powder River Basin, and San Juan Basin regions). The company was spun-of of Williams Companies (WMB) in December 2011.

I stumbled on it reading the first quarter portfolio manager’s letter for one of my favorite mutual funds Aegis Value Fund (AVALX). WPX was the largest fund purchase and now comprises over 3.9% of the fund’s assets. Here are their comments on the company:

“WPX possesses low-cost natural gas reserves predominantly located in the Piceance Basin of northern Colorado and is currently developing oil reserves on its acreage in the Williston Basin of the Bakken shale play in North Dakota. In WPX, we were attracted to a company with four trillion cubic feet of gas reserves located on held-by-production acreage, giving the company a strong, stable land pipeline for future development. The $3.1 billion market cap company trades at approximately 60 percent of an understated book value. With net debt of only $1.35 billion, the enterprise trades at a modest multiple to our $1.1 billion 2013 EBITDAX estimate. Furthermore, EBITDAX is likely to grow by $150 million as wet gas processing capabilities come online and unfavorable pipeline transportation contracts expire over the next two years. In addition, we believe the company’s valuable Piceance-area acreage is highly prospective for additional unbooked reserves located in the Niobrara/Mancos shale. WPX’s initial Niobrara/Mancos well produced a stunning initial flow rate of 16 million cubic feet per day of dry gas, and one billion cubic feet of gas over its first 100 days. The new Niobrara find has the potential to double the company’s 18 trillion cubic feet of proved, probable and potential (“3P”) gas reserves. We believe WPX, as a low-cost producer, has significant upside exposure to improving natural gas prices, with each $0.25 per mcf increase in the value of its gas reserves enhancing equity value by roughly $5.00 per share. Fundamentals, fortunately, seem to be providing some tailwind, with natural gas prices increasing nearly a dollar to approximately $4.39 over the last three months as a cold spring depleted gas in storage faster than expected.”

When those comments were written at the end of April, WPX was trading around $16. Recently, the stock has shot up to around $19+ as natural gas prices have recovered. However, there are still catalysts ahead that might put the stock higher:

  • Higher natural gas prices has lead the company to increase drilling in the Piceance Basin region. This should boost production and ultimately profits. However, natural gas prices could turn due to weather fluctuations. So, the company is a bit risky in this regard.
  • Taconic Capital, a hedge fund, reported a 6.39%+ stake in late May and will engage with management in order to increase shareholder value.
  • WPX is considering disposing its 69 percent interest in Apco Oil and Gas International, Inc. (APAGF). The company has filed a 13D and management says this disposition could happen in early 2014. It is worth almost $250 million or $1.25/share.
  • “WPX has completed a data room process for its holdings in Wyoming’s Powder River Basin, including the deep rights on its acreage. WPX is evaluating bids submitted by interested third parties and remains engaged with the process to explore the potential monetization of these assets.” On the conference call, management said that a deal could be announce in sometime June.
  • The company is also looking at MLP possibilities in the San Juan or the Piceance regions.

I will initiate a position soon, but am still wary of the fact that the valuation is so greatly affected by natural gas prices.

Disclosure: I do not own WPX.

Dean distributing WhiteWave Shares

Dean Foods (DF) will distribute an “aggregate of 47,686,000 shares of WhiteWave Class A common stock and 67,914,000 shares of WhiteWave Class B (WWAV) common stock on May 23, 2013, the distribution date, as a pro rata dividend on shares of Dean Foods common stock outstanding at the close of business on the record date of May 17, 2013.”

Based on the number of shares outstanding on March 31, “Dean Foods common stock will receive approximately 0.256 shares of WhiteWave Class A common stock and approximately 0.364 shares of WhiteWave Class B common stock in the distribution.”

Based on today’s price of WWAV, that is a distribution of almost $11/share. Dean will keep  34,400,000 shares of WWAV after the distribution, which are worth about $600+ million or $3.2+ based on todays price. However, “Dean Foods expects to dispose of its retained shares of WhiteWave Class A common stock within 18 months of the distribution in one or more debt-for-equity exchanges or other tax-free dispositions.” So, most likely investors are not going to see any dividends from the rest of kept shares.

Invest in WWAV or Dean?

I would continue to stay away from both Dean and WWAV. When I originally wrote Dean being undervalued, I was mistaken about 2 things:

  • Dean was going to distribute all of WWAV shares. If they had distributed all the shares, the stub (what was left over would’ve been pretty cheap).
  • Some of the Morningstar sale proceeds would be distributed to shareholders.

I would assume that WWAV shares would go down initially after the distribution as the new shares flood the market. However, there are two events that might make the shares go higher:

  • Earnings report on May 9th.
  • Rumors about takeover speculation.

Here is the news release on the distribution.

Disclosure: I do not own shares of DF or WWAV

Harvard Bioscience spinoff of HART

Harvard Bioscience (HBIO), “a global developer, manufacturer and marketer of a broad range of tools to advance life science research and regenerative medicine”, is spinning off its subsidiary, Harvard Apparatus Regenerative Technology, Inc. (HART). HART, a regenerative medicine company, has no revenue and will use to proceeds to general corporate expenses. 

Here are the details of the spinoff:

  • Selling 1.7 million share at a range of $10-$12. Underwriters also have the option of exercising an additional 255,000 shares at the IPO price.
  • HBIO will own over 80% or 8 million shares after the IPO.
  • HBIO plans to distribute the shares to shareholders 4 months after the IPO.

Financials

HBIO is a $168 million dollar company. In 2012:

  • Its net income, if you exclude discontinued operations, was $1.5 million.
  • Amortization of intangible assets amounted to $2.7 million
  • Expenses for HART were around $6.7 million. HBIO will earn around $4.6 million at the current tax rate after HART expenses are wiped off the books.  

After the HART IPO, HBIO looks to have about $9 million in FCF. If we value it at 10 times FCF, HBIO will have a value of $90 million. The 8 million shares HBIO will own after the IPO will be valued at $88 million if HART IPOs at $11/share. 

So, the total sum of parts value of HART is around $178 million. It is not that undervalued. However, a lot of it depends on the price of HART. I will keep an eye on both of these stocks after the IPO to see if there ever a huge value discrepancy.  

Disclosure: I do not own any of the stocks mentioned.

Avoiding Crimson Wine Spinoff

Leucadia National Corporation (LUK) is spinning off its wine business, Crimson Wine Group. 

Here are the spinoff details:

  • For every 10 shares of LUK, investors will receive one share of Crimson.
  • The distribution date is expected to be February 25th. The shareholders of record or record date of distribution is February 11th.
  • Crimson will trade OTC and will not be listed on any exchanges.

Although, it might be tempting to buy the unloved, discarded, and small spinoff Crimson, I am avoiding it.

  • Wine industry is very competitive.
  • Crimson has not been profitable for years and is barely profitable this year.

Crimson is a very small part of Leucadia. So, it should not have much of an effect on Leucadia’s stock price either.

Here is the form 10 for Crimson Wine Group.

Disclosure: I do not own Leucadia. 

Liberty Media Spinoff Details

Here are the details of the Liberty Media (LMCA) spinoff of Starz:

  • The spinoff is actually all of Liberty’s assets except Starz.
  • January 14th is the ex-dividend date.
  • The spinco will trade temporarily under the symbols LMCAD and LMCBD on January 14th. It will trade under permanent symbols LMCA and LMCB on January 22.
  • Prior to the spinoff, Liberty will change its name to Starz. The spinco will change its name to Liberty Media Corporation.
  • Starz will trade under the symbol STRZA and STRZB on January 14th.
  • Starz will be interesting after the spinoff because it has put itself on the block for sale.

    Year end review

    Happy new year! I took some time to disconnect over the last two weeks and enjoy the holidays. For the first post of 2013, I thought it might be a good to review all the picks from the last 3 months to see how I fared.

    AIG (AIG)

    AIG is still one of my top picks. It is up about only $2 from the price I paid for the stock. However, I feel it still has significant upside. Mainly all the arguments I made previously still apply:

    • It trades at half of book value.
    • The government completely sold AIG shares at the end of 2012. It now only holds warrants in the company.
    • AIG sold its stake in AIA. It also has agreed to sell a majority of its stake in ILFC.
    • The company can now focus on its core insurance operations and improve its return on assets.

    Dean Foods (DF)

    I sold Dean at a little bit of a loss. I still think Fresh Diary Direct segment is undervalued. However, the volatility of Whitewave was too much for me to take. I think the best way to play Dean is to wait for them to distribute the Whitewave shares and buy it before the distribution date if the current prices remain as they are.

    General Motors (GM)

    GM is one of my biggest winners. It is up nearly 50% for me. The government sold off 200 million shares of its stake in the company to GM recently. This should have a positive impact on EPS. If the economy improves in US and Europe and vehicle sales return to a normalized state, earnings could easily be over $5 over the coming years. Also, it is slowly removing the overhang of the pension liabilities. This could also be a big boon.

    With the stock to almost $30, I might cut my position in half and book some profit. The auto industry is very capital-intensive and very competitive.

    Orchard Supply Hardware (OSH) & Sears Hometown & Outlet (SHOS)

    I have written a lot about these two Sears spin offs and I am short both. As I mentioned in my previous articles, I am convinced Orchard will go under. So far, it has been a very profitable short for me. I am not 100% convinced on Sears Hometown, so I only have a small short position there. Both of these plays are a bit risky, since they are cheap on a revenue multiple basis. Sears Outlet is a wild card for SHOS. If it can grow that successfully, the stock may have upside. I have no faith in the Sears Hometown business as it has had negative same store sale numbers for years. I know a lot fellow financial bloggers are long SHOS and I am open on seeing their analysis. So far, I have been wrong as SHOS. It has bounced nicely from $30 to $35 recently.

    Xerox (XRX)

    I bought Xerox around $6.50. The stock is around $7.20 today. Nothing fundamentally has changed about the company since I wrote the bullish case. It still trades at a significant discount to FCF and has increased its dividend. I still think there is significant upside.

    Genie Energy (GNE)

    Genie was a quick arbitrage trade on its offer to exchange common shares for prefered shares. I booked little less than a 10% profit on the trade. I still think there may be an opportunity on this type of trade in Genie in the future. Nobody will exchange the common for the preferred as the common is trading higher than the preferred.

    Pandora (P)

    I have a small short position in Pandora. So far, it has not been a good trade as the stock has shot up from $8 to $10. I continue to believe that this company will not exist in the future. It really has no barriers to entry, no competitive advantage, and is not profitable. Obviously, a lot of Pandoras profitability depends on the outcome of the Internet Radio Fairness Act. However, there is no doubt that there will be more competitors in this space in the future. I will keep this short position.

    Susser Holdings (SUSS)

    Susser is up about a $1 from what I bought it at. It may take some time for this stock to go up. However, it should be able to expand a lot faster after the spin-off of SUSP. I have a small position and will keep that position.

    Others

    I also missed out in some of my other bullish calls such as Facebook, Lumos Networks, Nacco Industries and Einsteins. I wrote a bearish case on Western Union, but the stock has been up since then. I still believe in the bearish case. I believe that Western Unions biggest competitor Moneygram will have a tough 2013 due to Western Unions price cuts. I will be looking to short in 2013.

    DIsclosure: I own or am short most of the positions

    Revisiting Sears Spin-offs

    I have written a couple of articles on the two Sears (SHLD) spin-offs, Orchard Supply Hardware (OSH) and Sears Hometown and Outlet (SHOS). I have received a lot of inquiry on what I thought of both of these companies after third quarter results came out. So, here is my analysis.

    Orchard Supply Hardware

    I am still short OSH. It has been one of my profitable investments this year. I shorted a little below $14 and covered around $8.50 before the third quarter results came out. Then I shorted again after the results at $7.30.

    My original thesis still remains intact:

    • Small fish in a very competitive marketplace.
    • Still struggling to maintain financial covenants.
    • Unprofitable.

    Third quarter results were horrible. Same store sales were essentially flat. However, margins were horrible even if you excluded the $72 million impairment charge. The company is not in compliance with its financial convenants and will not be in February, the next measurement date. 

    The company is trying to turn it around by remodeling existing stores. However, this process is slow and a majority of the stores are still old.

    The only thing that can save this company is the life in the housing economy. But as the third quarter results showed, this help has not been enough.

    I plan to keep this short because I don’t believe this company has a future.

    Sears Hometown and Outlet

    I have a small short position in SHOS, but I am not as confident about this short as OSH. There are some good things about this company.

    • It is profitable.
    • It trades at a decent valuation. Around 10 times this years earnings.

    The main reason for my short is that I still have not seen top line growth. As I mentioned in my previous article, the profitability improvement is due to margin improvements by cutting costs and converting to franchise stores. That can only last for so long.  

    I don’t have much hope for Sears Hometown, but Sears Outlet is the wild card. It has seen strong same store sales growth over the last couple of years and has a unique business model. However, in the third quarter it was Sears Hometown with strong same store sales numbers and Sears Outlet with negative same store sales numbers.

    I am curious to see how the numbers compare in the first quarter of 2013 before I decided to close my short or increase it.

    I will keep you guys updated.

    Disclosure: I am short OSH and SHOS

    Upcoming Interesting Spin-offs

    There are some big and interesting spin-offs coming up within the next couple of months.

    Liberty Media

    Liberty Media (LMCA) is spinning-off Starz, the premium cable channel in mid-January. After the spin-off, Starz is looking to sell itself. In fact, Liberty is already sending feelers out to potential interested parties such as CBS, Fox, Viacom and Univision.

    Barron’s had an interesting sum-of-parts valuation of Liberty couple weeks back. It valued Starz at $125, about $15 above the Friday closing price of $110. I personally have not valued each of the businesses, but there are two potential big risks here:

    • The majority of Liberty’s valuation is based on Sirius. 
    • Netflix outbid Starz to carry Disney content after 2016. This could have an effect on Starz valuation going forward. Starz is trying to develop more original content to offset this loss.

    There are a lot of believers in Liberty such as Warren Buffett and David Einhorn. However, both those investors were holding Liberty before the recent run up of the stock price.

    Pfizer

    Pfizer (PFE) is spinning-off its Animal Health Unit, Zoetis. It plans to launch a $4 billion IPO in January or February, valuing the Zoetis at around $20 billion. After the IPO, it plans to distribute the remaining 80% to shareholders.

     Check out the latest S1 here

    I am avoiding holding Pfizer because

    • I am not a big fan of big pharmaceutical companies. They have to keep coming up with new drugs to maintain and grow revenue.
    • Zoetis valuation, even at $20 billion, will be around 10% of Pfizer’s market capitalization.

    Although, Zoetis has been growing, it looks expensive from a brief reading of the S1.

    News Corporation

    News Corp (NWSA) is spinning-off its publishing unit early next year. There has not been much new information on this spin-off except it named Robert Thomson the CEO of the company.

    Disclosure: I do not own NWSA, PFE, or LMCA

    AbbVie Trading at $35

    AbbVie (ABBV) began when-issued trading (ABBV-WI) today at $35+. This is well below my estimate of $45. The market must really not like the fact it is dependent on one drug, Humira. At this price, AbbVie will be trading at 10 times 2012 FCF with a nearly 5% dividend. 

    This means that new Abbott will trade around $30. This will be over 20 times FCF and 12 times operating cash flow. It seems a bit expensive.

    Disclosure: I do not own Abbott

    Abbott Spinoff Analyzed

    I spent some time this weekend taking a deeper look at the spin-off of Abbott’s (ABT) pharmaceutical unit, AbbVie Inc. (ABBV). For every share of Abbott at the close of business on December 12, 2012, investors will receive one share of AbbVie common stock. Abbott expects that AbbVie stock will be distributed on Jan. 1, 2013. AbbVie will trade on a “when issued” basis this Monday, December 10, 2012 under the symbol ABBV.WI.

    AbbVie

    AbbVie generates most of Abbott’s profit. For 2012, it will have between $5 – $6 billion in FCF or around $3.50/share. Earnings and revenue are growing. However, they are highly dependent on one drug, Humira. The patent for Humira expires in late 2016. As a result, AbbVie is a bit risky. Future growth, after Humiras patent expires, will depend on it finding new drugs.

    The company expects to pay an annual dividend of $1.60/share. I expect the stock to trade around 12 to 13 times earnings or around $45. At this price, it should give a nice dividend of 3.5%. I personally would not want to own this stock because of the dependent on Humira.

    Abbott

    Abbott looks interesting post spin-off. The company expects operating cash flow of $4 billion after spin-off. If you factor in depreciation, interest expense, taxes and other expenses, Abbott’s FCF should be around $2 billion.

    Abbott has market leading products across their different segments. It expects to grow revenue in mid-to-high-single-digits in 2013. Earnings could grow faster due to margin improvements. I expect it to trade around 15 times earnings or $20/share+.

    Conclusion

    Once AbbVie trades on a “when issued” basis this Monday, we should find out what the market thinks of the value of AbbVie. I think new Abbott will be a steal at any significant discount to my $20 fair value.

    Disclosure: I do not own Abbott.