Tag Archives: services

OIH: What’s Next For The ETF After Schlumberger, Cameron Intl. Merger?

Market Vectors Oil Services ETF is the largest fund in the oilfield services space with nearly $1.1 billion of assets under management. The fund has outperformed its rivals this year, posted one of its biggest weekly gains last week, and could rise again in the future as M&A activity picks up. Focus now shifts to the fund’s fifth largest holding National Oilwell Varco which could move to acquire FMC Technologies. The slump in oil prices has dragged the oilfield services stocks, but last week, the Market Vectors Oil Services ETF (NYSEARCA: OIH ), posted one of its biggest gains this year as Schlumberger (NYSE: SLB ), the fund’s top holding, announced its decision to acquire Cameron International (NYSE: CAM ), its fourth largest holding. Market Vectors Oil Services ETF is the largest fund in this space with nearly $1.1 billion of assets under management. The fund concentrates on investing in 25 of the largest U.S. listed oil services companies ranging from Schlumberger, to land driller Helmerich & Payne (NYSE: HP ), offshore driller Transocean (NYSE: RIG ), oilfield equipment maker McDermott International (NYSE: MDR ) and fracking sand provider U.S. Silica (NYSE: SLCA ). The fund’s primary strength is its focus on few but well established companies that have significant economic moats. Most of the fund’s underlying holdings have seen several downturns before and are well positioned to face the current one. By comparison, other funds, such as the iShares U.S. Oil Equipment & Services ETF (NYSEARCA: IEZ ) and the SPDR S&P Oil & Gas Equip & Service ETF (NYSEARCA: XES ), have exposure to nearly twice as many companies, but this includes a number of medium to small cap players that have bore the brunt of the oil price collapse. As a result, these funds have underperformed this year when compared against Market Vectors Oil Services. OIH Top Ten Holdings Schlumberger 22.43% Halliburton (NYSE: HAL ) 13.76% Baker Hughes (NYSE: BHI ) 8.57% Cameron International 5.78% National Oilwell Varco (NYSE: NOV ) 5.31% Helmerich & Payne 4.29% Weatherford International plc (NYSE: WFT ) 4.15% Tenaris S.A. (NYSE: TS ) 3.98% FMC Technologies, Inc (NYSE: FMC ) 3.71% Transocean Ltd. 3.12% On a year-to-date basis, Market Vectors Oil Services has fallen by 14.4% while iShares U.S. Oil Equipment & Services and SPDR S&P Oil & Gas Equip & Service have declined by 17.3% and 25.3% respectively. But last week, Market Vectors Oil Services climbed by nearly 13.5% when two of its biggest holdings announced a merger agreement which has been unanimously approved by the boards of the two companies. As I have mentioned in my previous articles ( here and here ), the deal is positive for Schlumberger as well as the offshore drilling industry. But the merger can also open doors to further consolidation in the oilfield services space. And that could push Market Vectors Oil Services higher. The subdued pricing environment, with crude hovering near the low $40s, will force the exit of marginal producers and lead towards industry consolidation with bigger, well established companies buying the weaker ones, just as we’ve seen in every oil cycle over the last three decades. Schlumberger’s purchase should give confidence to other oil service companies who’ve been patently waiting for acquisition opportunities. The four largest stocks of Market Vectors Oil Services, namely Schlumberger, Halliburton, Baker Hughes and Cameron International, are already working towards mega mergers. But investors should watch out for National Oilwell Varco , which provides equipment and components to exploration and production companies. National Oilwell Varco has been struggling in the downturn, but it is one of the oldest and well established companies in the energy sector that has a wide economic moat. Furthermore, the company comes with a solid track record of making bolt-on acquisitions during downturns. In fact, historically, these acquisitions have played a crucial role in fueling the company’s growth. And currently, the company has been actively looking for acquisition opportunities. During the most recent conference call , National Oilwell Varco’s management said that they have already raised the size of their credit facility to $4.5 billion “in preparation for potential [acquisition] opportunities.” There are a number of companies that could be on National Oilwell Varco’s radar such as Dril-Quip (NYSE: DRQ ) and Forum Energy Technologies (NYSE: FET ). But if National Oilwell Varco follows in Schlumberger’s footsteps by buying a company with highly advanced technological capabilities and significant offshore exposure, then there is no bigger name than FMC Technologies which dominates the global subsea equipment market. A potential tie-up would not only give birth to one of the world’s biggest equipment maker in the energy industry, but could also lift Market Vectors Oil Services higher as National Oilwell Varco is the fifth largest and FMC Technologies is the ninth largest holding of the fund. Although Market Vectors Oil Services has struggled this year and could continue to remain under pressure in the near term, at least until we get a clear idea of where the oil price and the 2016 exploration and production budgets are heading, it can prove to be an interesting speculative play on an uptake in mergers and acquisition activity, especially since its underlying companies are actively seeking acquisition opportunities and a merger between National Oilwell Varco and FMC Technologies – two of its ten largest holdings, is very much possible. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How I Dodged A -69.3% Bullet With A Checklist And 3 Important Lessons To Take Away

Summary SFX Entertainment has terminated their going private bid. The warnings signs that made me stay away. An updated checklist to avoid these types of situations. Phew. By learning from past mistakes, sticking with experience and following solid advice from books and gurus, it all helped me dodge a -69.3% bullet. Here’s what I mean. At the end of June, I wrote about a special situation involving SFX Entertainment (NASDAQ: SFXE ) where the founder was aiming to take his company private. And here’s what happened. (It was just announced that the deal has now been terminated dropping a further 20% making it -74.6% as of today.) The spread when I first looked at it was at 14%. A spread greater than 10% shows that the market doesn’t fully trust the deal. I know from a few painful experiences where I focused too much on the upside and bit off a big position, only to see the deal get canceled at the last moment. The deal for SFX Entertainment hasn’t been canceled. However, the go shop period has been extended, the buyout offer is to likely to be lowered and the company doesn’t provide enough information to investors. The special committee and its advisors will entertain offers for the entire Company as well as assets not central to the Company’s core business through at least October 2, 2015. Sillerman has agreed to cooperate with the special committee to obtain the best available offer for the Company’s shareholders. The October 2 date was chosen to allow potential bidders and their financing sources to have visibility into the Company’s performance during its peak festival season, thus providing a full and accurate picture of the Company’s results and prospects. To facilitate potential offers during this period, all “no-shop” restrictions and the related breakup fees provisions applicable to the Company under the merger agreement will no longer apply, enabling potential bidders to freely evaluate the Company in light of the recent substantial decline in its share price. Any new transaction will be evidenced by a new definitive agreement as the existing merger agreement is no longer effective. – Source No wonder it’s down so much in a little more than a month. They don’t all end up like this though. There have been plenty of going private acquisitions with a wide spread that went through successfully. Buffett has said that missing out on opportunities was been one of his biggest mistakes. If that’s the case, then dodging blowups like this is a huge success. But how? Simple. Using a checklist like this saved my bacon. Make sure both parties have done their due diligence – Pass Financing and regulator approval is complete – Pass (now a Fail) Get preliminary shareholder sentiment or controlling shareholder approval – Uncertain Obtain regulator (SEC, FCC, any and all) approval – N/A Get final shareholder approval at a meeting called for that purpose – TBD Check to see that insiders are continually vesting or buying shares – Pass On the surface, there are more passes than fails for SFXE, but because the importance increases as I move down the checklist. Number 6 was the big hold up. Without a clear green light by all shareholders, management and the special committee, it’s risky to put money down. Additional Criteria to be Added to the Checklist Based on the events that took place, I’m adding a couple of new checks to my checklist. Is management trustworthy? Is the upside and downside risk asymmetric? Is Management Trustworthy? There are plenty of managers that execute like a surgeon. But with SFXE, there are warning flags visible in the way the company is managed and how it communicates to investors. Plus, when a CEO publicly flips the bird and grabs his crotch , I tend to lose trust in their actions and judgment. Management should also have a history of doing what they say. There are a lot of managers who are showman types. After all, they are the face of the company and it is their job to sell, sell, sell. A method to check this is by comparing a few annual letters. Go through and highlight what they say they will do, and check the following letters to see whether it was accomplished, or whether it shows up in the numbers. The numbers won’t lie. Is the Upside Downside Risk Asymmetric? Special situations operate on a timeline, usually within a year. Due to a short time frame, the tradeoff is that your profit potential is small. So it makes it even more important to go after the high certainty opportunities and ignore the ones with bad odds. It’s a lot safer and easier to go after a very highly certain 1-2% return in a month using a large amount of money, compared to using a small amount of money for the 10% uncertain ones. When Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) announced in 2912 that it was buying Motorola Mobility, the spread was a little under 2% at the time. I put down a large amount of cash to maximize my returns over a very short period in order to make up for the small profit potential. Keep doing this with the good ones and you’ll build up your returns. Buffett didn’t achieve 30% annually during his prime by simply assigning a massive portion of this portfolio to Coca Cola (NYSE: KO ) and American Express (NYSE: AXP ) and then sitting on it. No. He spent a lot of his time on special situations and other active areas to increase his returns one brick at a time. The Updated Special Situations Checklist OK. Adding the two new checks, here’s the updated checklist I’ll be using for special situations going forward. Make sure both parties have done their due diligence Check management of both parties are trustworthy (NEW) Financing and regulator approval is complete Get preliminary shareholder sentiment or controlling shareholder approval Obtain regulator (SEC, FCC, any and all) approval Get final shareholder approval at a meeting called for that purpose Check to see that insiders are continually vesting or buying shares Verify upside and downside risk is asymmetric by assigning potential upside to downside returns (NEW) 3 Important Lessons to Take Away This year, it seems like I’m parroting the same thing, but the lessons I got from SFXE is clear. 1. It’s more important to focus on protecting the downside I didn’t like the 14% upside versus 24% downside. Seeing the stock price now, you can see how the downside turned out to be larger. 2. Don’t get greedy Even if you did go long SFXE, if you kept it to a small position, less than 1% of your portfolio, it didn’t damage your returns or portfolio compoundability. Losing money is bad because it makes it harder for your money to work because you’re chopping it off at its knees. I said earlier that I put a large amount into the Motorola merger, but that was because it was a highly certain transaction with very little possibility of failure. But I didn’t sell my other positions to free up cash to go all in. I used what was available and didn’t put in more than what made sense. 3. Manage risk The best investors and traders have one thing in common. They are obsessed with minimizing risk by going after asymmetric bets and taking advantage of inefficiencies. This may sound similar to points 1 and 2, but managing risk involves position sizing, seeing how things fit in your portfolio, being emotionless, not falling for obvious behavioral fallacies, being able to cut losses, admitting faults and more. But for the purpose of this article, adjust your sizing based on the odds and don’t overdo it. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.