Zach Schreiber Long Refiners Valero & Marathon: Sohn Conference Presentation

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Zach Schreiber of PointState Capital and talked about how he expects crude oil prices to fall.  He thinks the refiners benefit and pitched Valero (VLO) and Marathon Petroleum (MPC).


Zach Schreiber's Sohn Conference Presentation

Stanley Druckenmiller gave him over half of his capital after he retired from Duquesne Capital.

IDEA: Short WTI/Long US Refiners.

Valero (VLO), Marathon Petroleum (MPC). They believe WTI crude will drop.  US oil production is growing very fast- same shale as the NG guys did.  US production will grow 1M bpd per year in 2014, 2015. 

Most everyone thinks WTI goes a lot higher, $33T long. Swelling inventories of Cushing crude.   There is a crude export ban, so they have to refine it.

Gulf coast refineries are maxed out at 96% utilization.  Can't import less, because of politics. Cash on cash IRRs are still high at these prices.  Long VLO, MPC.  10-11% FCF yields.  0.4x Debt to EBITDA.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

Best Ideas Panel From Alpha Hedge West Conference: Billick, Gibson & Twitchell

Next up in our series of notes from the Alpha Hedge West Conference is the best ideas panel featuring Kurt Billick (Bocage Capital, Peter Lupoff (Grayco Alternative Investments, Worth Gibson (Forest Hill Capital), and Paul Twitchell (Whitebox Advisors).


Best Ideas Panel at the Alpha Hedge West Conference

Kurt Billick: Best idea is companies owning US Refining assets.  Advantage over peers.  US growing production significantly.  By Mid 2014 more gas at gulf than refining capacity.  Input cost will go down.  Also, natgas used to refine oil provides another cost advantage.  Finally, refiners can use MLP's to reduce cost.  Likes Marathon, Holly, Tesoro and Northern Tier.

Peter Lupoff:  Seismic Shift Towards A New Social Contract, Quantitative Strategy.  Div paying stocks outperform in down market.  Divs add fixed income component to equities.  Social contract is trend now.  Social contract looks at ROIC and FCF.  Shareholder friendly behaviors and events, dividends and increases, special dividends, buybacks, spinoffs, etc.  Social contract not altruistic.  Done for survival.  Div rate not good enough.  Key is sustainability of div vs debt financed divs.  Governance is key.

Worth Gibson: Long/Short Equity.  Over $700M in AUM.  Based in Little Rock, Arkansas.  Focused on community and regional banks.  Best idea is CenterState Banks (CSFL).  Like good geographic economies, seasoned management, strong capital, strong shareholder value enhancement strategy, expanding market share profits and tangible BV, heavily discounted valuation.  Center State Banks:  Assets up 125% vs 4.1% for index from 12/31/08 to present.  Will grow earnings.  Sees stock up 90% over next 2 years with 20% growth in BV each year and BV multiple growing to 2 to 1.

Paul Twitchell:  View biggest risk to investors is rapid increase in rates.  Originally was just short on rates.  Now with some rise in rates, they've found complicated sub prime investment with positive carry of 7% to 9% with no rate change.  With shock from higher rates investment still does well.  Investment basically has coupon payment but no return of principle.

How concerned is everyone about the interest rate environment?

WG> When they've run sensitivity analysis to rates, their banks perform favorably.

PL> Companies that have opposite of social contract are good potential shorts.

KB> Lots of companies will get hurt by taking advantage of low rates... i.e. unsustained large dividends.

 

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Passport Capital's Top 10 Holdings & Saudi Equity Theses: Q1 Letter

Today we're highlighting commentary from Passport Capital's Q1 letter to investors.  We've already highlighted how Passport is net short and so now we want to shift focus to John Burbank's top longs.

Passport's Top 10 Holdings (at end of Q1)

1. Vivus (VVUS US): 5% of NAV
2. Cytec Industries (CYT US): 4%
3. Marathon Petroleum (MPC US): 4%
4. Yanbu National Petroleum (YANSAB AB): 4%
5. Etihad Etisalat (EEC AB): 4%
6. Google (GOOG US): 3%
7. Liberty Interactive (LINTA US): 3%
8. Apple (AAPL US): 3%
9. Saudi Basic Industries (SABIC AB): 2%
10. Wynn Resorts (WYNN US): 2%

Comparing the above longs to their list at the end of 2011, there are a few noticeable changes.  Their stake in Vivus has climbed from 7th largest holding to their top position.  We had previously detailed how Passport was bullish on Saudi equities and you see that reflected now in their latest portfolio. 

US tech giants Apple (AAPL) and Google (GOOG) weren't included in their 2011 year-end top 10 but both make the list now.  As of March 31st, their top 10 equity holdings accounted for 34% of the fund's net asset value.


Passport's Investment Theses on Saudi Equity Plays

Given that many of their top holdings are now plays in Saudi equities, we thought it prudent to highlight some of their rationale for owning them.

Yanbu National Petrochemical:  John Burbank writes, "Our rationale for investing in YANSAB is predicated on the company’s strong cash-generating capability.  The company has a highly advantaged feedstock position in Saudi Arabia, allowing it to generate  EBITDA  margins  in  excess  of  45%  and  FCF  yield  of  over  10%.    YANSAB  is  a  single  petrochemical  plant commissioned in 2010 with no plans for further expansion and we believe is likely to pay out all its  cash once its debt covenants are fulfilled.  Over FY2011, the company decreased its long-term debt by  over 30% with Net Debt/EBITDA now at 2.7x.  We think YANSAB’s 51% shareholder SABIC could  start paying out dividends in the 2H of 2012, which should significantly re-rate the stock."


Etihad Etisalat: Passport's founder notes that, "Etihad Etisalat operates under the brand name Mobily, is the second largest mobile operator in Saudi,  and is a key beneficiary of the deregulation of the Saudi telecom sector.  Earnings have grown at around  48.7% CAGR in the last five years.  Mobily is capturing the growing data market (currently 22% of  revenue) due to what we believe are superior data services infrastructure compared to the competition.   In addition, Mobily is currently the leader in mobile broadband.  This segment is growing at an  exponential rate due to increased use of mobile tablets and 3G-enabled phones by the affluent Saudi  population (~60% of whom are below the age of 30).  Due to very high mobile penetration rates in the  Kingdom, Mobily is transforming from a high-growth company to a dividend opportunity given its SAR  4.25 FCF/share."


Saudi Basic Industries Corp:  The hedge fund's thesis on this name is that, "SABIC is the largest petrochemical company in the world by market cap and among the top five in terms  of production capacity.  SABIC has the key structural advantage of  very low-cost feedstock for its  petrochemical complexes in Saudi Arabia that helps the company maintain a healthy EBITDA margin of  approximately 32%.  The company increased its revenues by 25% and net income by 36% YoY. SABIC  represents approximately 11% of the market cap  of the Tadawul index, and while the stock has  underperformed the general market, we believe it will be a key beneficiary of foreign flows once the Saudi  market opens up to foreign investors."


Don't miss our other post from the hedge fund's Q1 letter on why Passport is net short.

Why Passport Capital Likes Marathon Petroleum (MPC) & Top Equity Positions

John Burbank's hedge fund firm Passport Capital talked about their rationale for owning Marathon Petroleum (MPC) in their year-end letter.

Marathon Petroleum (MPC)

Passport writes, "Marathon has an $11.8 billion market capitalization and an enterprise value of $12.2 billion. We expect the company to generate $3.9 billion in EBITDA in 2012 and free cash flow (FCF) of $1.5 billion, for roughly a 14% FCF yield.

During the quarter, the company raised their quarterly dividend from $0.20/share to $0.25/share, resulting in approximately a 3% dividend yield at year end. During its first analyst day in December, the company emphasized its highly experienced management team, cycle-tested business model, unique integrated asset base, and sound financial position. MPC also emphasized organic projects in 2012 that could increase access to discounted crudes and increase yield of higher margin products like distillates. Their Detroit refinery upgrade (expected by the end of 2012) was reported to be on schedule and budget.

While the fourth quarter was weaker than originally expected given the decline in the Brent/WTI spread, it is typically the weakest quarter of the year. Importantly, the decline in the Brent/WTI spread does not impact our free cash flow estimate for 2012, which provides a yield of 14% and remains unchanged despite the decline in the spread."

So what other funds own Marathon Petroleum? Barry Rosenstein's JANA Partners is the second largest owner of MPC shares after assembling a massive new position in the fourth quarter.


As of December 31st, here were Passport's Top Ten Equity Positions:

1. Marathon Petroleum (MPC): 5% of NAV
2. Liberty Interactive (LINTA): 4%
3. Cytec Industries (CYT): 3%
4. Thoratec (THOR): 3%
5. Tarpon Investimentos (TRPN3.BZ): 2%
6. Cie Financiere Richemont SA (CFR.VX): 2%
7. Vivus (VVUS): 2%
8. C&J Energy Services (CJES): 2%
9. Priceline.com (PCLN): 2%
10. WebMD (WBMD): 1%

You can view an equity analysis of Priceline.com in the brand new issue of our Hedge Fund Wisdom newsletter.

Also, we recently highlighted why Carl Icahn likes WebMD as well. Lastly, you can watch John Burbank's interview with Bloomberg where he talks about why he likes VVUS and why he thinks 2012 is a stockpicker's market.

For more of the hedge fund's commentary, we've also posted up why Passport Capital likes Liberty Interactive (LINTA).