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Cobalt International Energy, Inc. (CIE): Why John Paulson Keeps Trimming His Large Stake?

John Paulson‘s hedge fund Paulson & Co. has reported further selling some shares of Cobalt International Energy, Inc. (NYSE:CIE). A new filing with the US Securities and Exchange Commission shows that Paulson sold 103,500 shares of the company, at an average price of $10.79 apiece. Following two open-market transactions, Paulson owns some 41.75 million shares of Cobalt International Energy, the stake representing 10.12% of the company.


Paulson reported selling some shares of Cobalt International Energy, Inc. (NYSE:CIE) back in September. The fund sold 9,400 shares at $13.90 per unit on September 25. The stock lost over 20% since then. Overall, Cobalt dropped by around 50% over the last year, on the back of the company’s weak financial results and on the back of the declining oil prices.

With the oil prices still declining and expected to fall further, many investors trimmed their exposure to oil stocks they own. Over the last several days, we have seen Fir Tree Partners reducing its exposure to Noble Corp plc (NYSE:NE), while Barry Rosenstein‘s JANA Partners closed its entire position in QEP Resources Inc (NYSE:QEP), which previously represented over 7% of the company.

The decline of oil prices has been a major concern over the last several months. Brent has picked up slightly today, gaining around 1.6% to $86.10 per barrel. Only a week ago, Brent touched it lowest point in the last 52 weeks, falling down to slightly above $82. Overall, the commodity lost over 15% over the last year, and the future still looks uncertain. The fall is attributed mainly to a significant increase in demand. Experts expect the demand to pick up slightly but still below the previous forecasts.

Earlier this year, Zach Schreiber, the co-founder of PointState Capital, predicted that the oil price are going to fall by a significant margin. Schreiber, who was previously employed at Stan Druckenmiller‘s Duquesne and currently manages around half of Druckenmiller’s assets, said that the production of oil will not slow down until the price for crude oil falls below $80-$85 a barrel. With the breakeven point standing at around $75 a barrel, what we are about to see is many oil companies reducing their spending to retain more profits. Especially the decline will affect the top 10 biggest oil companies in the world, which on their hand will drag smaller producers and companies from other oil and gas-related industries.

However, Paulson still owns a significant amount of Cobalt International Energy, Inc. (NYSE:CIE). The fund initiated a stake in the company back in the first quarter of 2013, holding initially 760,500 shares. Over the next quarters, the investor raised the exposure to the company, while the stock lost over 53% of its value. Moreover, Paulson owns around $286 million worth of Cobalt’s bonds.

Among other investors, Israel Englander‘s Millennium Management and Ken Griffin‘s Citadel Investment Group also raised their stakes in Cobalt International Energy, Inc. (NYSE:CIE) during the second quarter. Millennium increased its position by 68% to 4.46 million shares, while Citadel upped its holding by a fourfold to 2.33 million shares.

However, taking into account that these are behemot investors with multi-billion equity portfolios, they have commited a tiny percentage of their equity portfolios to Cobalt International Energy, Inc. (NYSE:CIE).

John Paulson manages one of the largest hedge funds in the world, having around $32 billion in Assets Under Management and an equity portfolio worth over $23 billion. After several poor performance years after the financial crisis, Paulson managed to post impressive returns last year, gaining around 14%. However, the recently volatility on the markets and the sell-offs had a negative impact. As Bloomberg News reported a couple of weeks ago, Paulson’s $22 billion Advantage fund lost 8% last month and currently is down by 13%.

Paulson was also one of the passive investors that put money into Allergan Inc. (NYSE:AGN), betting on the company being acquired by Bill Ackman‘s Pershing Square and Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Even though so far this story has not seen an end (and  probably won’t see it any time soon),  the stock has become attractive to many passive investors and has added around 10% since the second quarter.

Overall, despite Paulson trimming its position in Cobalt International Energy, Inc. (NYSE:CIE), the investor still bets a lot of money on the company. His optimism might be paid off, though, as analysts on average are also considering the company as an attractive investment, the majority recommending buying the stock, the consensus target price reaching around $26 per share, which is a significant upside. However, amid growing concerns around the oil prices, analysts might restate their opinions, and we might see Paulson further reducing his position in the company.

Disclosure: none

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