October 4, 2024

In today’s note, we discuss the recent developments concerning Barrick Gold (GOLD) and V.F. Corp. (VFC), while taking a nice profit in the latter stock.

We’ll also discuss some catalysts for several oil- and gas-related equities to continue their mid-cycle turnarounds. Those include geopolitical events that should boost the market for crude oil while improving the potential for more turnarounds of the beaten-down stocks within the overall energy sector.

Comments on Portfolio Holdings

On Thursday, we sold our position in TreeHouse Foods (THS). I placed TreeHouse on a sell as the stock continued to face cost-related headwinds that aren’t diminishing as quickly as many analysts had previously forecast. What’s more, the stock has been in the portfolio for three years and hasn’t made any meaningful progress over that time. With this latest move, we exited the stock at slightly above break-even.

Although it hasn’t reached our upside price target, I’m going to go ahead and pull the trigger on V.F. Corp. (VFC) as of Friday and put it on a sell. The stock has given us a tidy little profit of 22% since being recommended in March, but it’s running up against potentially strong resistance at the 20 a share level, a level that has proven vexing for VFC in the last couple of years. A Barclays analyst recently noted that the turnaround at VF’s Van’s business could be more difficult than expected, with management said to be “underestimating the challenges in recapturing brand equity at the core Vans brand,” which is considered to be the largest “pressure point” in the V.F. Corp portfolio over the last few years. What’s more, the North Face brand also faces potential headwinds from increasing competition. The naysayers could be wrong, but let’s not take any chances and walk away with what is by all accounts a respectable profit.

Barrick Gold (GOLD) said earlier this week it has agreed with the government of Mali to find a resolution to existing claims and disputes over two of its gold mines in that country, following a recent arrest of four of its employees. Barrick said it would formally announce the details once terms of the settlement have been finalized.

According to Seeking Alpha, “The two sides have been negotiating a new mining contract that proposes to give Mali’s military-led government greater control over its resources, including a new mining code that allows the government to increase its ownership of gold concessions.”

Notwithstanding the company’s political setbacks in Mali, I recommend that we maintain our long position in Barrick as the secular gold bull market should continue to benefit the company going forward.

RATING CHANGES: TreeHouse Foods (THC) has been moved to a Sell.

V.F. Corp. (VFC) has also been moved to a Sell, as mentioned above.

NEW POSITIONS: None this week.

Friday, October 4, 2024 Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 10 minutes and covers:

• Discussion of the impact China’s recent stimulus measures have had—and are likely to continue having—on the crude oil price.
• How the threat of military retaliation by Israel against Iran is also providing a supportive backdrop for the energy sector.
• A look at three energy stocks with interesting potential within the context of mid-cycle turnarounds already underway.
• Comments on portfolio holdings.
• Final note
  
  • We exited our position in V.F. Corp. (VFC) after a more than 20% gain.

Turnaround Watch List

The month of October is just four days underway and already there have been a dramatic series of “October surprises.” One of them, of course, involves the escalation of military activity in the Middle East between Israel and Iran. On Tuesday night, Iran launched nearly 200 ballistic missiles towards Israel, with most of them being intercepted but a small number striking a part of Israel. This prompted Israel to threaten a future retaliation.

Reuters noted that according to the White House, “The U.S. is discussing strikes on Iran’s oil facilities as retaliation for Tehran’s missile attack on Israel.” An Israeli official, meanwhile, said his country “would show Tehran its strength ‘soon’.”

The likelihood of retaliation was the cause of an 8% jump in the price of crude oil this week, which analysts said would probably have been even higher if not for OPEC+ spare capacity that is said to be keeping energy prices from running away.

Meanwhile, a securities analyst told CNBC, “Geopolitical risks in the Middle East are probably at their highest levels since the Gulf War.” The analyst further noted that a strike by Israel against Iran could cause a disruption in the Strait of Hormuz, adding “a significant price risk premium” to oil.

Then there’s the China factor, which could further pave the way for higher energy prices. The initial impetus for the oil rally was last week’s China stimulus news, which gave crude prices a boost. Since China imported more crude than any other country last year, its latest move to boost its domestic growth rate could increase demand for oil, which is what the market anticipates.

With the oil market starting to perk up, it’s time to take a look at some potential turnarounds in the energy sector. Even before the latest series of geopolitical scares began this month, insider buying activity has been conspicuously high in oil- and gas-related equities, while call-buying activity in blue-chip oil stocks has also been well above average in the last few days.

Let’s start with Baker Hughes (BKR). It’s one of the world’s largest providers of service and equipment for onshore and offshore oilfield operations across the lifecycle of a well. It’s one of the world’s largest providers of service and equipment for onshore and offshore oilfield operations across the lifecycle of a well, with product offerings across four major segments: Well Construction, Completions, Intervention, and Measurements, Production Solutions and Subsea & Surface Pressure Systems.

The company provides an array of technologies and services for industrial and energy customers, as well as subsea explorers. Although domestic onshore drilling activity has been tepid, international and offshore activity has been particularly strong this year, reflecting an overall tightening in the global rig market. This has benefited Baker since around 70% of its oilfield services and equipment (OFSE) business is international, with about 40% exposed to offshore.

Beyond the OFSE segment, Baker Hughes is a key supplier of gas turbines and related equipment, which are essential to driving the natural gas and liquified natural gas (LNG) aspects of the ongoing worldwide transition to renewable energy.

In the second quarter, the company reported $1.4 billion in gas tech equipment orders, driven by around $500 million of LNG-related awards, underscoring the size of the opportunity in this space. Baker Hughes expects gas tech equipment orders outside of LNG to exceed $3 billion for the full year, which is almost double last year’s level.

The stock is in the middle stages of its longer-term turnaround and should be able to benefit in the coming months with rising oil prices. Management sees an additional catalyst for growth heading into next year with increased subsea systems orders. The firm also set an EBITDA margin target of 20% for its Oilfield Services Equipment and Industrial and Energy Tech segments for 2025 and 2026. A 2.2% dividend yield is an added attraction.

Another mid-cycle turnaround that should benefit from additional energy sector strength is Oceaneering International (OII), which provides engineered services and products, as well as robotic solutions, to the offshore energy, aerospace and manufacturing industries.

Remotely operated vehicles (ROVs) are the big story here with this company; they’re used to explore ocean depths for oil and gas and are also used in other subsea applications (such as repairing underwater equipment), allowing companies to reach depths not possible with divers. Oceaneering offers what are regarded as some of the world’s most advanced ROVs, manipulator arms and exploration submarines

Activity levels in Oceaneering’s energy business in Q2 was led by increased sales in the Subsea Robotics (SSR) segment, which the firm said outperformed its expectations and was 16% higher than a year ago. It further anticipates high levels of activity in its offshore markets throughout the remainder of the year and into 2025.

Going forward, Oceaneering has garnered a number of high-dollar awards from some major players in the oil industry, with a big runway ahead of it as energy prices recover. Analysts see earnings growing 34% next year, which is likely too conservative.

A final consideration is Houston-based Genesis Energy (GEL), which provides critical pipeline infrastructure supporting world-class developments in the Gulf of Mexico. It also owns approximately 450 miles of pipeline located in Texas, Louisiana, Alabama, Florida and Mississippi.

Genesis is a small, but growing, outfit compared to other pipeline companies, having recently laid a new deepwater 105-mile pipeline in the Gulf, while extending another key pipeline along the Outer Continental Shelf to deliver crude oil from deepwater oil fields to markets on the Texas Gulf Coast. Collectively, these two contracted developments, and their combined almost 200,000 barrels of oil per day of incremental production handling capacity, are expected to expand the company’s throughput volumes.

Significantly for investors, Genesis believes the projects will begin paying off in a big way next year and anticipates harvesting increasing amounts of free cash flow driven by both earnings growth and materially reduced growth capital expenditures. It’s more of a longshot turnaround than the other two stocks I mentioned, but I think it’s well worth keeping an eye on.

Please know that while I don’t yet personally own shares of all Cabot Turnaround Letter recommended stocks, this will materially change in the coming weeks as I become fully integrated as your new Chief Analyst.

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at cdroke@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Portfolio

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