By H.D. Carver
Sometimes we find ourselves struggling to understand the mindset of an investor we are following, be it a guru or a fund manager. I recall reading one such article in which the author could find nothing in the fundamental analysis of a guru stock buy that supported the decision. As I read through the numbers, I began to wonder myself! Now I’m the very last guy you’ll find kneeling at the altar of Warren Buffett, Bill Ackman and others, but I do respect them and those of their ilk that have made millions, if not billions for themselves and their investors.
These are neither careless people nor are they gamblers, in the Las Vegas sense of the word. So, when I see an acquisition that, on the surface, makes no sense, I dig deeper. Turns out, the stock in question belonged to a company about to spin off its stake in a subsidiary. Sometimes, this affords the shrewd investor great opportunities, as in the aforementioned “mystery buy” of the guru in the article.
I feel compelled to share this with our readers because, too often, we are so wrapped-up in our analysis of numbers that we fail to look at peripheral events that may have a positive or negative impact on the value of the investment, as was the case here.
Today, we’ll look at that company, Forest Oil Company (NYSE:FST) from this paradigm. Forest Oil concluded the spin off of its holdings in Lone Pine Resources (LPR), on September 16th, 2011. We want to examine Forest’s financials at the close of business, June 30th, 2011 and compare them to present day. We also want to look at the financial impact on Forest’s shareholders, Steve Cohen of SAC Capital in particular.
Before we begin, I’d like to define the term spin off. In the simplest terms, it is the sale of one or more of a company’s subsidiaries, divisions, or holdings or of its stock in those holdings.
Here is the timeline of events. September 6th, 2011, Forest Oil Company announces the spin-off of Lone Pine. At some point subsequent to the announcement, SAC Capital increases its existing stake in Forest Oil by 1,829,850 shares. SAC Capital already owned 3,628,001 shares of Forest Oil as of close of business June 30th, 2011. I am going to assume that SAC purchased those additional shares on the day of the spin off announcement at $17.82 which was the closing price that day. On September 19th, 2011, Forest Oil announces the distribution of the special stock dividend, of 0.621 shares of Lone Pine for each share of Forest Oil to Forest Oil shareholders of record on September 16th, 2011. September 30th, 2011, the distribution was finalized.
Now, we’ll revisit Steve Cohen and SAC. As you will recall, there is a total of 5,457,851 shares of Forest Oil Company in SAC Capital’s portfolio, each share eligible to receive about 0.621 shares of Lone Pine Resources. Doing the math, we find that SAC Capital now owns 3,389,325 shares of Lone Pine Resources which on September 30th, 2011, is valued at $6.60 per share. That is a paper windfall of $22,369,548! However, we need to examine what happened to the value of Forest Oil’s shares before we get too excited.
Forest Oil closed at $14.40 on September 30th, a loss in value of $3.42 per share. That’s not the end of it! This loss in value is applicable to 5,457,851 shares, which translates to a loss of $18,665,850. As a result, Cohen’s paper gains were a mere $3,703,698. To the best of my knowledge, Lone Pine was not previously in SAC Capital’s portfolio.
I have no information on Cohen’s actions after that. Did he sell off Lone Pine or retain it? Ditto with Forest Oil. I just don’t know… yet. But assuming he held it, Forest Oil is now trading at $15.36 and Lone Pine at $7.70. That means a paper gain, over and above the dividend stock, of $5,239,537 on Forest Oil Company and $3,728,258 on Lone Pine Resources, for a total of $8,967,794. If we add in the net value of the stock dividend, that is a total of $12,671,492 made on the deal to date.
Now you have an understanding with regard to this seemingly inexplicable acquisition.
There are other spin offs in the pipeline. One of the more interesting is the planned ConocoPhillips (NYSE:COP) spin-off announced July 14th, 2011. This one has received a great deal of press in comparison to that of Forest Oil. I’m sure the sheer size of ConocoPhillips has a lot to do with that. ConocoPhillips is a large cap ($95.2B) currently trading at $71.70. It was trading at $74.22 at the time of the announcement.
The plan, as outlined by Chairman and CEO Jim Mulva, is to have a one company dedicated to refining and marketing and the other to exploration and production. Present day ConocoPhillips will be the exploration and production company and the refining and marketing company will be named Phillips 66, based in Houston, Texas as per ConocoPhillips’ November 10th anouncement. Clearly, this is a much different spin off than Forest Oil’s and the opportunities to profit are poles apart to be sure, but it is going to be interesting to watch.
Three recent corporate spin offs are also worth a retrospective. I would encourage you to review the ITT Corporation (NYSE:ITT), Marathon Oil Corporation (NYSE:MRO) and Sunoco Inc. (NYSE:SUN) spin offs. ITT Corporation spun off two new companies, Xylem, Inc (NYSE:XYL) and Exelis, Inc. (NYSE:XLS), Marathon Oil Company (MRO) spun off Marathon Petroleum Corporation (NYSE:MPC) and Sunoco Inc. (SUN) spun off SunCoke Energy, Inc. (NYSE:SXC). There is much to learn.
The take-away is this: Thorough research is more than a review of the balance sheet, income statement, price earnings ratio, price to book and other metrics in which we so easily become entrenched. Take off the blinkers and look at the bigger picture.