Has a special situation presented itself?
I went into some detail on Polarcus three weeks ago (https://hammerinvesting.wordpress.com/2014/11/18/polarcus-a-short-analysis/) when the price was NOK 0,99. Now, following the OPEC meeting on November 26th, it is at NOK 0,64. A loss of 35%, while competitors Dolphin (0%), PGS (-5%), TGS (+8%), EMGS (+20%) and CGG (+1%) have pretty much stayed put. Has Polarcus become that much more risky in comparison with their competitors in that short time period or can the reason be found elsewhere? I believe the latter to be the case.
This post is not about the longterm value of Polarcus. Instead it is born out of what seems to me a special situation that has developed. The newest major shareholder list, http://imgur.com/xrF3q9p, reveals an interesting fact: Since Nov. 14th there has been heavy selling, possibly forced selling, by two Finnish Pension funds, Elo Pension and Varma Pension. None of the other major shareholders have reduced their holdings in the same period. Pareto Securites has sold 19 million shares since November 14th and so it seems to me the only possibility is that they are selling on behalf of Varma Mutual Pension fund and that they now have fewer than 7 million shares left.
For an investor this is significant for two reasons. One, they are soon out of shares, most likely within a few days (Pareto sold 2,8 million shares on Friday) – and there have been no other heavy sellers at these price levels, which makes a near term upwards rise in the share price quite likely in my opinion. Two, if a fund sells large amounts of shares without regards to valuation and estimates of risk/reward, great opportunities can arise.
Why would a fund sell at large discounts?
– Risk profile. Being pension funds their risk profile may be such that they are forced to avoid companies where risk is seen to have increased without regards to price and an overall judgment of risk/reward.
– Market cap considerations. Some funds are known to have internal rules that require them to sell stocks in companies when the market cap of the company falls below a certain threshold.
– Tax/window dressing. At the end of the year some funds are known to sell their loser stocks for tax or for window dressing reasons. Some managers don’t want to be seen investing in stocks that underperform significantly for job security reasons or fear of customers withdrawing funds, so they erase the loser stocks from their listed investments before the end of the year.
There is of course the possibility that the two Finnish pension funds have found a hole in the case that other investors, such as JP Morgan, Goldman Sachs, BlackRock and Erik Henriksen, have not. Personally, I view that as highly unlikely. Pension funds are typically not considered to be the sharpest knives in the industry.
While it is not at all certain that Polarcus will make it through the current turmoil in the oil business without new infusion of capital when the USD 104 million bond expires in April 2016, I question if this as catastrophic as the current market price indicates.
Market cap NOK 428 million, equity NOK 4 billion!
Suppose the expired bond cannot be refinancied with a new bond at an attractive interest rate and the company needs to issue new equity that will see a 50% dilution, the Price-to-Book will still be in the neighborhood of the 0,20-0,25 range (currently 0,11) – in other words, still very cheap. Consider also that the largest shareholder, One Equity Partner, owned by JP Morgan, is financially strong and has put up NOK 78 million only two months ago along with NOK 26 million by other insiders.
The current price also makes a takeover bid for the company by a capital strong competitor or a private equity fond a very real possibility, especially considering the recent bid on CGG by Technip and the merger between Halliburton and Baker Hughes. Curiously, CGG is traded at P/B 0,54, while Polarcus is traded at P/B 0,11, even though Polarcus’ EBIT-margins are much healthier. CGG’s equity ratio is slightly better than Polarcus’ at 45% vs. 42%.
I believe the market has made a serious probability misjudgment based on irrational fear in relation to upside potential. However, it is never wise in these above normal risk/high reward situations to put too much of one’s capital at risk. Staying in the game should always have the highest priority.
As for the oil price, with a sharp downward move like we have seen in the past few months, I am betting on mean reversion in the not too distant future rather than a prolonged downturn – even though it may decline further in the near term. China and India are still growing rapidly and the low oil price ought to raise demand.