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Special Situation Investing News - 7/30/2012



July 30, 2012 – Comments (9) | RELATED TICKERS: PSX , PDH.DL , CI

1) Lately I have been extolling the virtues of Philips 66 (PSX).  essentially the special thesis here is that the company has so many hidden and undervalued assets in chemicals, pipelines, etc that when buying the stock one is getting its refining operations practically for free.  As someone who traditionally has not been a big fan of the refining sector, this is music to my ears and I currently own PSX. 

Lately it seems that more people are becoming bullish on refiners.  Any value that can be wrung out of PSX's refining operations is icing on the cake for this thesis.   Check out this blurb from Barclays that came out the other day:  

Analyst, Paul Y. Cheng, said, "We believe the U.S. refining sector has been undergoing a major three-phase multi-year structural improvement, the return of a new golden age, which has not been fully reflected in the market. We think this new golden age will be more sustainable than the industry's last strong cycle from 2003 to 2007. In our opinion, the previous "golden age" was cyclical in nature, while this cycle is driven by structurally lower North American natural gas/oil prices compared to the international benchmarks."  

Barclays on U.S. Independent Refiners: New Golden Age Emerging,+VLO,+MPC+%26+PSX/7614258.html 

2) Speaking of upgrades by analysts, a stock that I mentioned in this blog just yesterday, PetroLogistics (PDH), soared nearly 10% this afternoon on the back of an upgrade by Citigroup.  Here's what Citi had to say:

“We upgrade Petrologistics to Buy based on our thesis that: 1) market propylene prices, which currently trade at a discount to Brent crude oil, will correct higher in the near term; 2) propane supplies remain ample due to shale gas fracking and higher propane prices have not yet affected the propylene market; and 3) we expect the propane-to-propylene spread to rise back above 30c/lb in 2013 on higher anticipated propylene prices.”

Upgrades PetroLogistics LP to Buy (PDH) 

As I mentioned yesterday, any improvement in propylene would be excellent for this high yielder.

3) Here's what a super investor that I follow, Davie Einhorn, has to say about one of his recent purchases, Cigna (CI) (courtesy of gurufocus):

CI is a managed care company with three primary divisions: Cigna HealthCare, Cigna Group Disability and Life, and Cigna International. Cigna HealthCare, which comprises about 70% of CI's profits, offers medium and large companies traditional risk-based insurance, in addition to administering plans for those that prefer to self-insure. Cigna HealthCare recently bought HealthSpring to enter the fast-growing Medicare Advantage market. Cigna Group Disability and Life is a low-growth, stable business. Cigna International, which provides insurance policies for individuals, as well as insurance and administrative services for multinational companies and governments, is growing at more than 20% per year. We believe that CI deserves a higher multiple because the plan administration business is a service business that doesn't take risk, and the other divisions do not warrant discounted values. Our purchase price of $45.42 per share valued CI at less than 8x estimated 2012 EPS and approximately 6x our forecast of post Obamacare 2014 EPS. CI shares closed the quarter at $44.00 each.

David Einhorn On Cigna (CI) 

Thanks for reading everyone.  Have a great evening!


9 Comments – Post Your Own

#1) On July 31, 2012 at 2:29 PM, constructive (99.97) wrote:

The Korean government has been trying to sell its 57% stake in Woori Financial for several years. This situation has kept the Korean financial sector including WF and KB depressed and trading at a low valuation. Once the political issues are cleared the shares could have upside. (Similar to GM here in the US?)

Once the Xstrata merger is finished, Eurasian Natural Resources would be a natural target for Glencore in the next few years.

Special situation investing too much work for you? Maybe you should invest in ABC Arbitrage instead. Their specialization in riskless arbitrage (for example, arbitraging options and across markets) and low leverage helps them stay profitable even in uncertain environments like 2008. Currently trading at 10x earnings with an 8.5% dividend yield, this appears to be an attractive alternative to "quant" hedge funds.

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#2) On July 31, 2012 at 2:33 PM, constructive (99.97) wrote:

I still own shares of VQ and continue to believe the buyout at $12.50 will be successful, and due to recent improvements in the business there is limited downside if it does not go through.

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#3) On July 31, 2012 at 4:58 PM, TMFDeej (97.65) wrote:

Great stuff.  Thanks for sharing, Mega.  Hopefully we can get a bunch of people contributing here and we'll have one-stop-shopping for special situations news.

I'm absolutely swamped today and tomorrow, so I may not get to post any for a day or two.


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#4) On August 02, 2012 at 10:04 PM, XMFConnor (97.13) wrote:


ABC Arbitrage looks interesting. I took a quick look on their site and through their financials but had trouble finding a few key data points and was wondering if you knew:

Do equity investors generate profits through both their trading profits of their various funds and asset management fees? I was not quite sure what the relationship between their asset mgt firm and their equity funds were, what kind of fees they charged, etc. 

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#5) On August 02, 2012 at 10:06 PM, XMFConnor (97.13) wrote:

^Also, why do you think VQ will go through (and what is your estimated prob.) and what do you think downside is if it doesn't?

Briefly looked at that before but didn't know how to get any unique insight and assumed it was pretty efficiently priced. Would love to hear your take as the proposed takeout is quite a nice premium 

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#6) On August 03, 2012 at 1:23 PM, constructive (99.97) wrote:

Around 95% of ABCA's profits come from trading for their own account, with the rest coming from asset management. They manage about €300M in assets, compared to shareholders equity of €160M.  Currently using 7.3x leverage (more than I thought). Management and employees have sizable stakes in the company.

They have 5 funds with various arbitrage strategies, all listed in Ireland. I don't know what the fees are, but they performed very well in 2011. There is definitely room for growth in asset management, especially if they expand beyond the Irish listings.

The annual report has won awards for its graphic design:

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#7) On August 03, 2012 at 2:53 PM, constructive (99.97) wrote:

Venoco has made significant progress towards going private. They got 91% shareholder approval of the deal. Marquez agreed on terms and got a letter of intent for part of the financing (bank debt?). If Marquez can line up the rest of the financing (sale of some assets?), completion should be straightforward.

There are no regulatory issues. Shareholder lawsuits against M&A transactions are unlikely to succeed - in this case, extremely unlikely since the board seems to have acted reasonably.  Marquez is of course the most natural buyer for the company.

I can't find any statistics, but it appears rare for friendly M&A transactions to fail. VQ appears riskier than average because of the amount of debt, however there are tons of examples where similar deals have gone through. The equity and debt markets are currently doing OK (including MLPs), which is a positive sign for financing.

Their recent results help mitigate the potential downside. After investing heavily in cap ex the past few years, VQ is now generating substantial cash flow. They have beat earnings estimates the last two quarters and received analyst upgrades over the last 2 months (which I think is uncommon in merger situations - most of the time analysts stop coverage, not upgrade to 'buy').

It's not my most quantitative analysis, but I estimate there is a 75% chance of the deal going through at $12.50, with a 25% chance of the deal failing and dropping to $6.50 (12x estimated 2013 earnings). VQ has not touched $6.50 in the last 3 years so that seems pretty conservative.  That adds up to a value of $11.

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#8) On August 03, 2012 at 2:59 PM, constructive (99.97) wrote:

Even if you assign just a 50% probability to success, that is still a blended value of $9.50 a share.

I think I have convinced myself to buy some more shares at $9.

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#9) On August 03, 2012 at 8:20 PM, XMFConnor (97.13) wrote:


Great stuff. I have some weekend work to do :)

Why do you think the market is not respecting the deal? 

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