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David Einhorn’s Greenlight Takes Stakes in BP, Anadarko

Greenlight Capital President David Einhorn
David Einhorn, president of Greenlight Capital Inc., speaks during a Bloomberg Television interview in Atlantic City, New Jersey, on July 22, 2013. Photographer: Scott Eells/Bloomberg

Hedge-fund manager David Einhorn is joining billionaire investors including Warren Buffett and Carl Icahn to wager on the long-term prospects of traditional energy, buying stakes in two global oil explorers.

Einhorn’s investment company Greenlight Capital Inc. bought shares in London-based BP Plc and Anadarko Petroleum Corp., based in The Woodlands, Texas, according to a letter to its investors dated yesterday. Both companies are caught up in litigation that has prevented many investors from recognizing the full value of their assets, Greenlight wrote in the letter.

Einhorn, who gained renown by betting on a decline in Lehman Brothers Holdings Inc. shares before they collapsed in 2008, is adding oil to his portfolio amid forecasts of higher crude demand and a three-year streak of global oil prices topping $100 a barrel, according to data compiled by Bloomberg.

“With an improving world economy, oil and gas are going to be increasingly necessary, and smart investors are seeing that,” said Ed Hirs, a professor of energy economics at the University of Houston who also runs a small production company in Texas. “In this case, they see the value of the underlying assets and realize that it so swamps the specter of loss from litigation that there will be plenty of upside left for investors after the lawsuits are gone.”

‘Medium’ Stake

Investors have been too distracted by a chain of lawsuits related to BP’s 2010 Gulf of Mexico oil spill to see the company’s “improved return on capital in its core business,” according to the letter. Anadarko is undervalued because of uncertainty over the costs of a lawsuit stemming from a 2006 acquisition. Greenlight didn’t disclose the size of its stake in either company, saying only that each was “medium-sized.”

Buffett’s Berkshire Hathaway Inc. reported a stake in Exxon Mobil Corp. valued at more than $3.7 billion in November, and hedge-fund investors including Icahn and Barry Rosenstein have seen double-digit returns by investing in energy companies such as Chesapeake Energy Corp. and Marathon Petroleum Corp., then pressuring management for asset sales and restructuring.

BP’s American depositary receipts rose 1 percent to $49.04 at 1:11 p.m. in New York, and Anadarko shares were up 2.8 percent to $83.49, the highest in more than a month. Spokesmen for BP and Anadarko declined to comment. Jonathan Gasthalter, a spokesman for New York-based Greenlight at Sard Verbinnen & Co., declined to comment.

Creating Value

Greenlight said it bought BP American depositary receipts at an average price of $47.39. The oil company’s assets are worth nearly $70 a share even with more negative legal outcomes than the company is anticipating, the letter said. BP has sold more than $50 billion in assets since the 2010 Macondo disaster, the worst offshore oil spill in U.S. history.

BP can create “substantial” value by continuing to sell assets and by repurchasing its stock at a discount, Greenlight wrote in the letter obtained by Bloomberg News.

“He’s missed a good run already,” said Jason Kenney, an analyst at Banco Santander SA. “BP still needs some clarity on their medium-term strategy, but I guess Einhorn sees opportunity in the current valuation.”

BP has gained 9 percent in London since Oct. 29, when it announced third-quarter results that beat analyst expectations, unexpectedly raised the dividend and expanded its program of asset sales.

Legal Impact

Greenlight purchased Anadarko shares at an average of $78.55 in mid-December after investors “dumped” the stock when a federal judge ruled that the company may have to pay $5 billion to $14 billion in a lawsuit, according to the letter.

U.S. Bankruptcy Judge Allan Gropper in Manhattan has yet to decide the amount Anadarko must pay for environmental and health claims related to the 2005 spinoff of Tronox Inc. by Anadarko’s Kerr-McGee unit.

“Our legal analysis suggests that the ultimate payment is likely to be the lesser of the two amounts and will be partly tax deductible,” Greenlight wrote.

Out of 28 analysts who have updated their recommendations since the Dec. 12 court ruling, 24 recommend investors buy the stock, according to data compiled by Bloomberg.

“Einhorn obviously sees some value in these two stocks that have lagged peers with legal issues,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis. “He must believe the market has overreacted and that the ultimate liability cost will be less than generally expected.”

Greenlight added a “large position” in Micron Technology Inc. and last quarter sold its stakes in Airbus Group NV and ThyssenKrupp AG, according to the letter. Greenlight’s largest disclosed long positions at the end of the fourth quarter were Apple Inc., General Motors Co., Marvell Technology Group Ltd., Micron and Vodafone Group Plc. Longs are bets that stocks will rise.

Greenlight Capital funds rose 19 percent last year, the firm said in the letter.

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