By Alex Oleinic
New York-based value investor, Yield Capital Management, is a relatively young player in the hedge fund universe. After being founded by former Partner and Senior Portfolio Manager at Leon Cooperman's Omega Advisors Richard Haydon in 2009, Y/Cap is focused on gaining returns through investing mainly in debt and equity securities. Since we are at the beginning of third quarter 13F season, let's take a look at this fund's five largest stock holdings from its latest filing.
The largest holding in Y/Cap's equity portfolio in terms of value is Seadrill Ltd (SDRL), with a value over $15.4 million; it holds 342,000 shares. Seadrill had a strong second quarter surging its net income by fourfold to about $1.8 billion, from $440 million in the first quarter, with almost flat revenues over the quarter. The company generated an EPS of $3.68 and also raised its quarterly cash dividend to $0.91. The increase in net income was mainly caused by an improvement in financial items related to a gain on derivative financial instruments in the second quarter versus a loss in the first quarter, according to the latest conference call.
Penn West Petroleum (PWE) is the next on the list, with Y/Cap raising its position by over 100,000 shares to 875,000 shares, worth around $9.7 million. Penn West reported a net loss of $40 million in the second quarter, after reporting an income worth $235 million, with revenue also remaining almost flat on the year. The company also reduced the number of its employees by 25% since the beginning of the year, in order to increase its competitive performance.
In June the company hired David Roberts, former COO of Marathon Oil Corporation (MRO), to serve as the new CEO of Penn West. Amid the management changes, the company plans to implement a series of steps, like adjusting its businesses in order to manage them according to the position in their so-called 'life cycles.' The company also plans to focus on the Cardium formation as a key asset, and wants to switch $40 million of capital on this development, which will allow Penn West to drill 14 additional wells.
The number of shares in Frontier Communications (FTR) remained unchanged over the quarter, with Y/Cap owning 2.291 million of them. The value of the position, however, advanced to $9.6 million, versus $9.3 million. The revenue of the company declined slightly to $1.19 billion in the second quarter of the year, from $1.26 billion in the April-June period of 2012. Amid the revenue decline, the company also reported a net loss of $38.5 million, or $0.04 per share, versus an income of $18 million a year ago (The non-GAAP net income of $0.06 per share was in line with the analysts expectations).
The company is dealing well with the declines and it has a plan to reduce costs by $100 million this year. Frontier already took some measures in this direction like reducing the amount of contractors, and simplifying business processes.
The last two picks of Y/Cap's largest holdings represent companies from the airlines industry. In Republic Airways Holdings (RJET), the investor owns 678,732 shares, with an aggregate value of around $8.1 million. Recently, Republic Airways Holdings disclosed it is entering into a definitive agreement to sell Frontier Airlines to Indigo Partners LLC's affiliate for $145 million. Frontier Airlines Holdings' equity is priced around $36 million, with the rest of the amount representing debt that will be retained by Frontier, Republic said in a statement. In the second quarter, Republic Airways reported a net income of $24.6 million, up by 23% on the year.
Last but not the least is US Airways Group (LCC), in which Y/Cap slightly increased its position, now owning around $7.9 million. U.S. Airways is currently on the minds of many investors, mainly due to its plans to merge with American Airlines parent AMR Corp (AAMRQ.PK). While European regulators approved the merger, the U.S. Department of Justice put a spoke in the wheel, and is trying to block the move. The companies filed a motion to the court to set the trial date for November 12. Amid these actions, U.S. Airways and American Airlines prolonged the outside date at which one of the companies can terminate the proposed merger.