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Ontario Teachers' Bets on Gulf Spill Driller
Karen Mazurkewich of the National Post reports, Teachers bets on Gulf spill driller:
Ontario Teachers’ Pension Fund has shown it is not squeamish when it comes to risky investing.
The
pension fund has purchased a significant chunk of Transocean Ltd. the
oil rig contractor involved in the explosion that led to the massive
oil spill in the Gulf of Mexico, considered one of the worst
environmental disasters in the history of the U.S.
Transocean’s
shares have collapsed more than 40% from its US$92.3 high prior to the
April 20 accident, and although the well has now been capped and its
shares rose 6.3% Wednesday, the company is facing an uncertain future
as it winds its way through numerous lawsuits and new restrictions on
offshore drilling.
The negative outlook has not deterred the
pension fund, which obviously sees blue skies in the future for the
company stock. Sometime during the last quarter, Teachers bought 5.56
million shares of Transocean stock, giving it a 1.7% equity stake in
the now notorious oil rig firm. At Wednesday’s closing price, Teachers
equity stake in the company is estimated to be worth worth
US$280-million.
Consensus among
industry players is that Teachers concluded that while the Transocean
will accrue hefty legal fees over the next few years, the company will
be well insured for liabilities, according to Halifax-based Maritime
law expert Wylie Spicer of McInnes Cooper.
As for the investment
opportunity, “it’s an interesting buy,” said Andrew Parkinson,
portfolio manager at Van Arbor Asset Management Ltd. in Vancouver. But
a buy that comes with a “cloud hanging over it,” he adds.
If
Teachers wanted to get into the oil services sector, which is
currently down about 33%, then Transocean, which is down even more, is a
cheap buy. But there is a catch. “It’s cheap because there is some
potential for serious liabilities there,” said Mr. Parkinson.
At
the best of times, this is a volatile sector within the energy sector.
In making the purchase Teachers must believe that oil is a good buy at
US$80 a barrel, and that the market will go up. In addition to
betting on rising oil prices, the pension plan has probably calculated
that Transocean is big enough to weather the storm, and dodge some of
the liabilities, said Mr. Parkinson.
His view is echoed by John
Tasdemir, energy analyst with Canaccord Genuity in Houston, who said
many people now think that BP will assume the lion’s share of
responsibility [for the oil spill], and there will be some contract
protection for service providers.
Even if Teachers bet goes sour,
the buy is “not too big” if you look at the overall
assets-under-management the pension plan currently handles, added Mr.
Parkinson. Teachers has already shown that it has a hefty appetite for
offshore oil plays. In 2007, Teachers backed Brazil-based iron ore
magnate Eike Batista in his bid to become the second-largest oil and gas
company in Brazil, by fronting roughly $425-million in Batista’s
company OGX Petroleo e Gas Participacoes SA, which won the right at
auction to develop 21 offshore oil areas.
They
are long-term holders so they can wait for the market to swing back,
said Mr. Parkinson. “It may work out very well for them,” he added.
Teachers would not comment on the Transocean deal.
With
a fleet of 139 mobile offshore drilling units and three
ultra-deepwater units under construction, Transocean, Ltd. is the
world’s largest offshore drilling contractor . The company’s market cap
is US$17-billion, and its share price rallied 8% Wednesday on the news
that BP has announced that it made a “significant milestone” in
efforts to plug the leaking well.
Transocean also announced its
second quarter results and reported a net income of US$715-million on
revenues of US$2.5-billion, compared with US$806-million in income on
revenues of US$2.9-billion for the quarter ending June 30, 2009. The
quarter saw increased expenses associated with the oil spill of
$82-million for the quarter due to increased insurance, legal costs,
and investigation costs.
It's funny because today I commented on Zero Hedge that big hedge funds are also scooping up shares of Transocean (RIG). I was looking at the holdings of Tudor Investment on Tickerspy and noticed they hold Transocean shares (click image to enlarge):
So
what? Who cares if some big hedge fund owns Transocean? Well, this
isn't just any big hedge fund -- Tudor Investment Corp., run by
legendary investor Paul Tudor Jones,
is one of the best hedge funds in the world and if they're betting on
Transocean shares, I can guarantee you they did their homework.
Looking at the chart of Transocean (RIG),
you see a double-bottom recently formed and the price of shares has
started moving back up over the 50-day moving average (click on image to
enlarge):
And while Q2 profit came in lower than expected on Wednesday, the WSJ reports that its contract with oil giant BP PLC for use of the Deepwater Horizon drilling rig leaves it largely protected from lawsuits and claims for damage stemming from a deadly April explosion.
Does
this mean Teachers made the right bet? Only time will tell, but what it
shows me is that Teachers isn't scared of taking a significant
opportunistic bet on a company that most US public pension funds
wouldn't dare go overweight on, fearing "PR risk".
That's the
problem with pension funds run by consultants or politicians with no
money management experience (very common in the US). In order to make
money in these markets, you have to be sharp, opportunistic and not be
afraid of "PR risk". Your job is to make money taking calculated risks,
not to worry about what the press will write about you for investing in a
company involved with the Gulf oil disaster.
Sure there are
risks, but Teachers and Tudor Investment aren't stupid. They figured
that the reward outweighs the risk and decided to make the call. And
Teachers can sit and wait out any short-term volatility. I
predict they're going to make a killing on this investment.
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If they're buying it for the purposes of a mid to long term hold (which many pension funds still employ this strat), and you were looking to make the risk play from this, I'm not understanding why you don't go for BP over RIG.
Then again, I don't understand why pension funds don't just act as a buying pool to get good annuity deals. They clearly don't know what the fuck they're doing with people's retirement money.
I just posted this on another thread, and it seems appropriate here, if not everywhere:
Irresponsibility will be rewarded. Remember this maxim for future decisions.
They will get burned
Really? Looks like a great week so far:
This is the same pension fund who over paid for Arclin Chemicals and watched them implode on themselves. Stupid people will always do stupid things.....
RIG's a pretty good buy. No one can really match their capabilities in ultra-deepwater. Focusing solely on the GoM would be a mistake if you were evaluating them.
Recs
4 Follow Share ReportAugust 04, 2010 – Comments (5) | RELATED TICKERS: APC , SGY , RIG
NEW YORK (MarketWatch) -- The federal government may lift a ban on drilling in the deep waters of the Gulf of Mexico ahead of a Nov. 30 deadline, the nation's top regulator of the oil and gas industry said Tuesday.
Michael Bromwich, director of the Bureau of Ocean Energy Management, Regulation and Enforcement, said regulators are studying whether to scrap the ban or revise it. His comments came as BP PLC /quotes/comstock/13*!bp/quotes/nls/bp (BP 39.50, -0.51, -1.26%) managed to cap the well that caused the worst environmental accident in U.S. history.
The ban has drawn a lawsuit from industry players and criticism from political leaders in the region. It has been blamed for job losses biting into earnings from Baker Hughes /quotes/comstock/13*!bhi/quotes/nls/bhi (BHI 42.56, -1.10, -2.52%) and oil-industry service companies.
The ban was also struck down by a federal judge, but then the Interior Department issued a new order.
A total of 33 drilling rigs have been shut down in recent weeks as a result of the ban, enforced after the April 20 explosion on the Deepwater Horizon rig caused the worst oil spill of all time in U.S. waters.
"I think it is everybody's hope that we will feel comfortable enough that the moratorium can be lifted significantly in advance of Nov. 30," Bromwich said Tuesday, according to reports. "But I can't say when."
His comment came as industry leaders, environmentalists, and academic experts gathered in New Orleans for a series of public forums on the spill.
On July 22, Exxon Mobil /quotes/comstock/13*!xom/quotes/nls/xom (XOM 62.42, -0.30, -0.48%) , Royal Dutch Shell /quotes/comstock/13*!rds.a/quotes/nls/rds.a (RDS.A 57.59, -0.97, -1.66%) , Chevron /quotes/comstock/13*!cvx/quotes/nls/cvx (CVX 78.71, +0.05, +0.06%) and ConocoPhillips /quotes/comstock/13*!cop/quotes/nls/cop (COP 57.16, -0.40, -0.70%) set plans to invest $1 billion to form a nonprofit company called Marine Well Containment Co. aimed at beefing up spill response in the Gulf of Mexico. See full story.
Bromwich took the job two months ago as director of the Bureau of Ocean Energy Management. The agency formerly was known as the Minerals Management Service before President Obama changed its name and ordered a reorganization the wake of scandals and of the BP leak.
The House of Representatives also voted to end the drilling ban in a measure passed last week, along with measures to tighten controls. See full story.
Steve Gelsi is a reporter for MarketWatch in New York.
The Ontario Teachers plan is an Ontario version of Too Big To Fail because their payouts to retired teachers (royalty) are 100% guaranteed by the taxpayers of Ontario. If they piss away all of the speculated money it doesn't matter. Ontario now has one of the largest structural deficits (20 billion +) in North America and is doing nothing to address it other than waiting for things to get back to normal.
To Teachers' credit, they are upfront on reporting the pension plan's shortfall and have worked with stakeholders to resolve this issue, which will require tough compromises from all parties. Their job is not to address the shortfall through investments -- which is mathematically impossible -- but to invest wisely, trying to minimize the impact of this shortfall.
On this latest investment, a senior pension officer shared this with me:
"A few years ago OTPP bought $1 billion of contracts which paid out if oil was above $100 in ten years time.The news is how these things work out, not just placing a bet. The follow through in the media is non-existent. It's not brave or clever to make a bet, it's the job."
...and encouraging pension managers to swing for the fences apparently.
Teacher's has $96 billion in assets (approx. $350k per active and retired beneficiary). A $250 million investment seems pretty small beer, and don't you make money by buying when everyone else is running away? I'm not saying this investment is good or bad; I have no idea. But I don't see why this particular investment is automatically bad.
Kevin - 350K per member isn't much when they get 50K per year in pension and will live another 20-years. It's just one of many (most) underfunded plans that will end up in the lap of the taxpayer. I don't dislike pension fund managers - I can't blame them for finding suckers to loot - the point of being a manager is managing for your betterment and that's human nature.
Well it may not be but the point is: how many other positions do they have at this risk level (or higher) and how appropriate is that given that taxpayers will function as daddy's credit card if TSHTF (again)?
I realize the pooch may have already been screwed in this regard but that's not a rationale to say "well, what the hell, let's roll the dice one more time..." and risk making things that much worse.
A 1/4 billion dollar bet for the teachers. I hope it works for them. Amazing the big numbers that get thrown around.
Wasn't this the fund that bought the Yellow Pages business in New Zealand for 2 billion NZD? That bet didn't turn out too well...