David Einhorn Keeps Buying This Controversial Energy Giant
After underperforming the broad market at the beginning of the year, energy companies have drawn a significant amount of attention recently. Many members of the sector trade at attractive valuations and offer impressive dividend yields that can be difficult to match in today’s low-interest-rate environment. With that in mind, one well-known hedge fund titan continues to invest in a controversial energy giant.
David Einhorn, founder of Greenlight Capital, added to his position in BP (NYSE:BP) during the first quarter. According to the latest 13-F filing, a quarterly report of equity positions, Greenlight Capital held 1.48 million shares of BP at the end of March, up 51 percent from only 980,000 shares in the prior quarter. Einhorn first started to build a position in BP during the fourth quarter at an average price of $47.39 per share. He believes investors are ignoring the company’s core business and value, and estimates that BP’s net asset value is worth more than 35 percent higher than today’s market price.
“The Deepwater Horizon oil spill was nearly four years ago. Since then, investors have focused on the ensuing legal cases regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in its core businesses,” said Einhorn in one of his quarterly investment letters. “Allowing for more negative legal outcomes than BP has currently provisioned, we believe the company’s net asset value is nearly $70 per share.”
Einhorn added: “It can therefore create substantial value by selling assets at or above NAV and using the income to repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP has restricted capital expenditures and increased dividends – all evidence of a more shareholder-friendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio value and its improved capital allocation. In the meantime, we own an industry leader at 9x earnings with a 5 percent dividend yield.”
Shares of BP are up nearly 6 percent this year, so its dividend yield is currently about 4.4 percent, but the company remains focused on returning value to shareholders. In April, BP announced a quarterly dividend of 9.75 cents per share, up 8.3 percent from a year earlier. The board will also keep reviewing its dividend policy with the first- and third-quarter results each year. Furthermore, BP has recently spent almost $8 billion on share repurchases.
BP’s Gulf of Mexico disaster was the worst offshore spill in U.S. history. It began on April 20, 2010, when an undersea well exploded 50 miles off the Louisiana coast, killing 11 workers and spewing millions of barrels of crude oil into the ocean. Marshes, fisheries, and beaches stretching from Louisiana to Florida were polluted, harming local tourism and fishing. The oil producer has acknowledged responsibility for the oil spill, spending more than $25 billion on cleaning up the marshes, fisheries, and beaches along the coast and compensating victims.
More From Wall St. Cheat Sheet:
- Warren Buffett’s 10 Most Valuable Stock Positions
- Estate Planning 101: Don’t Forget Your Digital Assets
- Will Mortgage Debt Cripple Your Retirement?
Follow Eric on Twitter @Mr_Eric_WSCS