Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always (or even usually) follow what the big money does, we can often glean an idea or two by tracing their footsteps.
Over the past decade, few hedge funds can come close to matching what David Tepper has done at Appaloosa Management: Tepper managed to avoid most of the catastrophic downturn in 2008 and 2009 and has averaged 40% annualized returns since then. He has also managed to more than double his own net worth in the past few years; he's now estimated to be worth more than $10 billion after netting more than $3 billion in 2013.
In the previous quarter's 13F, it was revealed that Appaloosa Management sold off a large part of its holding in offshore driller Transocean (NYSE: RIG ) and started a position in oil services giant Halliburton (NYSE: HAL ) . Well, the latest 13F is out, and it looks like Tepper's transition from Transocean to Halliburton is complete.
Bear in mind that trying to duplicate the moves of someone like Tepper is a fool's (with a lowercase "F") errand. The transactions on a 13F can be four months old when the filing is submitted, and it's possible that they don't reflect the fund's current holdings. But perhaps you can learn to get more Tepper-like returns by better understanding a larger trend that may have motivated Tepper's move.
Softness in offshore demand already affecting Transocean stock
Tepper's decision to sell out of Transocean and invest heavily in Halliburton looks to be at least partly driven by expectations that oil and gas producers will be investing more heavily in land-based exploration and production over the next several years, while demand for offshore drillers softens. Transocean is the largest offshore driller in the world, and it also owns a relatively old fleet of drill ships, semi-submersibles, and jack-up rigs that can't operate in the areas where many offshore oil and gas reserves are being found now. While there will still be strong demand for ships that can operate in deeper water and drill deeper underground, a large part of Transocean's fleet is old and can't operate in these areas. This could lead to even more short-term impact on Transocean's bottom line and stock price.
Since last November, Transocean stock is down some 25%, and during the first quarter (the period that Appaloosa sold its stake) the stock fell 15%, while shares of Halliburton gained 17%:
But looking at Transocean outside of what David Tepper is doing for Appaloosa's portfolio, you have a company that has largely recovered from the Macondo well disaster in the Gulf of Mexico, pays a solid dividend that's yielding almost 5% at recent share prices, and plays a substantial role in offshore oil and gas production globally. With that said, Transocean will definitely be challenged by a number of competitors with newer, more capable fleets in coming years, and it may not be the best investment in offshore drilling right now.
Halliburton well-positioned in three key areas
Halliburton has three focuses for its business: deepwater, unconventionals (onshore shale production), and mature fields. Halliburton is one of the top players in onshore oil-field services, so the shift of spending onshore will be good for the company's bottom line.
But what makes Halliburton a really interesting play right now is the company's expertise in unconventional shale production and its technical know-how in deepwater oil and gas development. Halliburton has expertise in just about every area of deepwater production, including well drilling and completion, analysis of core and fluids, software for seismic analysis -- you name it. And when it comes to deepwater, Halliburton claims it can help its customers do it better.
Simply put, this diversity of exposure offers a nice mix of opportunity for Halliburton, no matter where big oil invests.
Final thoughts: Looking at the long term
Demand for cheap energy won't let up anytime soon, with the global middle class expected to grow by 1 billion people over the next couple of decades. Even as renewables become a bigger part of the mix, oil and gas aren't going away anytime soon, and oilfield services companies like Transocean and Halliburton will be right in the middle of this activity.
Do they make sense for your portfolio? Tepper's actions, much like this article, shouldn't be the basis of your decision, but understanding where oil and gas company investment in production will happen -- largely onshore and in deepwater offshore -- for the next couple of years can help you make a more informed choice. And that could mean that neither of these companies is best for your portfolio.
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