Seth Klarman Doubled Down On This Energy Stock While He Dumped Another

Source: Cheniere January 2016 presentation.

Cheniere purchases its natural gas based on the Henry Hub spot price. That Henry Hub price will fluctuate, but Cheniere's contracts to sell LNG are locked in at Henry Hub plus 15%. That means it doesn't matter if natural gas prices rise or fall. Cheniere will make the same amount either way.

On top of the 15% markup is a fixed fee of roughly $3 per MMBtu. At today's prices, that would mean Cheniere is buying natural gas for $1.91 and selling it for $5.19.

While he was buying Cheniere, he was dumping Pioneer Natural Resources

At the end of March 2015, shale oil producer Pioneer Natural Resources (NYSE: PXD) wasn't in the Baupost portfolio. By the end of June the Baupost portfolio had over 4 million Pioneer shares worth more than $560 million. That position was unchanged as of last September.

By the end of December, the Baupost portfolio held no Pioneer shares.

PXD data by YCharts

Why might that be?

While we can't know for certain, since he didn't refer to the sale publicly, it seems quite possible that Klarman became less bullish on the price of oil. Given that few people could have imagined that we'd be looking at $30 WTI in February 2016, the length and depth of this collapse may have caught Klarman by surprise.

Perhaps with Saudi Arabia, Iraq and now Iran (with sanctions removed) willing to continue to increase production into an oversupplied market Klarman believes his assumptions on where oil might go have changed. There were more than a few of us who believed that OPEC at the very least would not intentionally increase production to keep oil down for longer.

It would make sense that Klarman would sell if he now believes that OPEC could keep oil prices much lower for much longer than expected.

Alternatively Klarman may have changed is mind on Pioneer specifically. Pioneer has been one of the most aggressive drillers of wells into these low oil prices. While companies like EOG Resources (NYSE: EOG) have adopted the policy of not growing production into low oil prices Pioneer has been quite vocal (until very recently) about continuing to grow.

While Pioneer is very well hedged against low prices, it isn't fully hedged so these incremental growth barrels would be sold at very low prices. It is quite possible that Klarman does not approve of this strategy which could be viewed as drilling marginally economic (at best) or money losing wells.

Either way, Klarman is out of Pioneer.

Implications for investors

If you believe that Klarman's 30-year track record of significant investing outperformance is due to something other than luck, then you might want to take a hard look at Cheniere Energy. Following a great investor into one stock doesn't guarantee success, but taking a hard look at what a great investor is buying makes a lot of sense.

The next billion-dollar iSecret

The world's biggest tech company forgot to show you something at its recent event, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here .

The article Seth Klarman Doubled Down On This Energy Stock While He Dumped Another originally appeared on

TMFWolfpack has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More