Hungarian-American fund manager George Soros (Trades, Portfolio) established the prestigious Quantum Fund, one of the top-performing funds in the world over its 26-year history. Soros invests in companies with the theory that prices of equities and fixed-income securities depend on the actions of traders, who usually act out on highly emotional reactions. Investors can find good opportunities by studying the market value of assets. The fund manager also focuses on the theory of “reflexivity,” which is based on the premise that investor biases can affect market transactions.
During fourth-quarter 2016, George Soros (Trades, Portfolio) gained a position in Key Energy Services Inc. (KEG, Financial), an energy company that has a positive 2017 outlook despite weak financial strength and profitability. Soros invested in 1,850,790 shares of Key Energy Services for an average price of $15.64 per share. As the energy company currently trades near $33.84 per share, Soros has a potential gain of approximately 116% on the stock.
Even though the company currently has a poor financial strength rank of 2 and a profitability rank of 3, Key Energy Services had historically strong financial strength and profitability over the past 11 years, especially from 2007 to 2009. Figure 1 illustrates the company’s historical financial strength and profitability since 2006.
Like all energy companies, Key Energy Services is directly affected by crude oil prices. A previous article discussed Halliburton Co. (HAL, Financial), a company Stanley Druckenmiller (Trades, Portfolio) invested in as the oil equipment and services company gave a positive outlook for 2017 after suffering a challenging 2016.
Unlike Halliburton, whose share price seldom exceed $70, Key Energy Services traded at nearly $4,000 per share in 2011 before crashing down to nearly $10 per share during the 2016 oil crisis.
The management at Key Energy Services gave a thorough detail of the company’s financial restructuring plan in its Feb. 13 current report filing with the Securities and Exchange Commission. The new company, which was relisted on the New York Stock Exchange in January 2017, expects to deliver significant value to its shareholders through several restructuring reforms, including just $250 million in long-term debt, U.S. focused and geomarket organizational structure and an improved support cost structure. These structural changes expect to generate an adjusted EBITDA margin of 17.8% on a pro-forma basis.
The company’s management also enhanced its capital structure, including a $694 million long-term debt reduction through renegotiations and strong financial support from controlling shareholder Platinum Equity. The company also expects to exploit multiple growth drivers in 2017 as oil rig counts are expected to increase throughout 2017. The increase in oil prices allows Key Energy to generate conventional vertical well services opportunities throughout the U.S., increasing potential for high profitability in 2017 and beyond.
As the company gave a positive outlook for 2017, the share price increased nearly $20 from Soros’ transaction price. Soros currently has the largest stake in the company with 1,850,790 shares. Steven Cohen (Trades, Portfolio) and Richard Snow (Trades, Portfolio) also gained a stake in KEG, with the former purchasing 16,110 shares and the latter purchasing 63,583 shares.
Disclosure: No positions.
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