, Canada's most eminent investor through his insurance company
Fairfax Financial (
), rearranged his portfolio somewhat in the fourth quarter. The
prescient market reader cut back on his bets in financial
services and healthcare and boosted his energy weighting to 11.2%
of his portfolio, from 2% the previous quarter. It was his
biggest plunge into the sector in over five years. Watsa touched
on his outlook for oil in his 2012 investor letter, saying "While
commodity prices have yet to collapse (i.e., complete the down
cycle), almost all the major mining company CEOs have retired,
including at Vale, Rio Tinto, BHP Billiton and Anglo-American,
reflecting the sin of making acquisitions at the top of the
market. Rio Tinto's purchase of Alcan is a great case in point.
Purchased for $38 billion in 2007 at the height of the commodity
boom, Rio Tinto has already written off $20 billion or half of
the purchase price!"
He also noted that oil prices spiked from $91 per barrel in 2010
to $99 per barrel in 2011, and flattened out at $92 per barrel in
2012. The price of crude oil per barrel has declined almost 8%
over the past year to $97 per barrel on Monday.
Watsa's fourth quarter energy stake increase was timed well, as
the Energy Select Sector SPDR (
) rallied almost 9% year to date.
The stocks holdings he increased the most during the fourth
quarter were EXCO Resources (
) and SandRidge Energy (
After holding 659,000 shares of
since the latter quarter of 2010, Watsa increased the size of the
position by 1,519% in the fourth quarter of 2012. The price
averaged $8 per share that quarter. EXCO, now a holder of 4.93%
of the company, has given EXCO a 2.9% weighting in Fairfax's
EXCO's share price has bounced between $5.65 and $9.08 in the
past 52 weeks. Shares are trading at $6.95 each on Monday after a
slight 3% lift since the year began.
EXCO engages in the exploration and production of natural gas and
oil properties in East Texas, North Louisiana, Appalachia and the
Permian, with 50% interest in midstream joint operations in East
Texas/North Louisiana and Appalachia.
The company's fourth quarter loss, reported Feb. 20, narrowed to
$269 million, or $1.25 per diluted share, from $346 million, or
$1.62 per diluted share, for the previous quarter. Both quarters,
the losses included steep write downs and for oil and natural gas
properties. In 2012, it reduced its operating rig count to five
from 24 in 2011.
Due to weak natural gas prices, EXCO has had to reduce operating
expenses. Actions it took in 2012 included closing down marginal
producing wells, reducing compressor rentals, renegotiating
disposal arrangements and modifying chemical treatment programs.
In February, EXCO formed a partnership with Harbinger Group Inc.
) wherein its Permian Basis assets in West Texas to the
partnership for $573 million in cash consideration, a 24.5%
limited partner interest and a 50% interest in the general
partner of the partnership. It used proceeds from the deal to
reduce its debt. It will also use its interest in the partnership
to acquire more assets in the future.
In his second largest energy move in the fourth quarter, Watsa
increased his stake in
SandRidge Energy (
by 645%. He thereby stretched the position to 8.2% of his stock
portfolio and his ownership to 6.62% of the company's outstanding
shares. The total share count ended the quarter at 32,463,200.
SandRidge is a horizontal driller focused on high-return
operations in the Mississippi Oil Play of Northern Oklahoma and
western Kansas. The company's shares last traded for $5.20 on
Monday after declining 18% year to date and 87% over the past
five years. Watsa noted in his 2012 letter than his firm
sustained "$36 million in unrealized losses, mainly on Sandridge
convertible preferred stock" in 2012, offsetting its $649 million
in unrealized net gains.
The company has been the center of a fight with TPG-Axon Capital,
6.7% owner of its outstanding shares, in recent months. TPG-Axon
has accused the company of making it more difficult for
shareholders to vote on replacing its board of directors, issuing
$37 million in additional shares to senior management, putting a
poison pill in place, and shortening the amount of time
shareholders had to vote.
In addition, TPG-Axon accused SandRidge CEO Tom Ward and his son
Trent of front running the company, among other unethical
behaviors, in a vigorous letter-writing campaign.
After fighting the allegations for months and calling TPG-Axon's
offensive as a false and misleading campaign in an attempt to
replace your experienced board," the company in March announced
it would add four of TPG-Axon's nominees to its board of
directors. In addition, it agreed to hire an independent firm to
review related-party transactions TPG-Axon outlined, make a
decision on whether to terminate Ward's employment and conduct a
comprehensive review of the company's strategy and costs. As part
of its emphasis on optimizing capital expenditures and reducing
overhead, it slashed compensation for directors from $375,000 to
$250,000 per year.
The board has over the past several years been focusing on
transitioning the company from a natural gas production, whose
price has declined significantly, to more oil-based production.
The company drilled 296 wells in 2012 and expects to drill 581
more in 2013, and increase rig count from 32 to 41 in 2013. This
position in the Mississippian would support development for the
next 18 years.
Regarding financials, SandRidge reported a widened net loss of
$294.5 million in the fourth quarter, from $159.8 million in the
third quarter. Total revenue reached $1.34 billion, from $532.8
billion. Improved revenue came on the strength of its record oil
and total production growth in 2012.
SandRidge's year-end estimated consolidated proved reserved
increased 37% from the same time in 2011, as it increased
drilling in the Mississippian Play and the Permian Basin, and
acquired new reserves in the Gulf of Mexico. The increase was
offset by downward revisions primarily of its PInon Field due to
lower natural gas prices.
At year end, SandRidge carried $1.01 billion in cash on its
balance sheet, an increase from $414 million at the same time in
2011. Its long-term liabilities and debt totals $6.25 billion, an
increase from $3.89 billion, over the same periods.
Expressing confidence in the company in a November 2012 interview
with Bloomberg, Watsa said, "We believe Tom Ward is one of the
best operators in the business and that the company he has built,
SandRidge Energy, is poised to do well in the long term."
See more of
's trades in his portfolio here. Also check out the
Top Growth Companies
, and High Yield stocks of Prem Watsa.About GuruFocus:
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