SAC Capital Advisors, which is managed by billionaire Steve Cohen, has filed a 13G with the SEC to declare that, as of October 2nd, its family of funds owned a total of 7.9 million shares of Superior Energy Services, Inc. (NYSE:SPN). This comes out to 5% of the company’s shares outstanding, thus triggering the public filing. Our database of 13F filings shows that SAC owned 1.1 million shares of the company at the beginning of the third quarter of the year, so the fund’s position represents a significant increase over the last three months (see more stock picks from billionaire Steve Cohen). Superior Energy Services, Inc. is a specialized equipment company serving oil and gas customers in areas such as drilling products and well enhancement, with most of its revenue coming from onshore operations.
Superior’s business has grown substantially from a year ago, but much of these gains have come from the acquisition and integration of Complete Production Services, a transaction which closed in the first quarter of 2012. Over the next five years, analyst estimates are for a 20% annual growth rate in EPS. This growth rate is impressive when considering that Superior trades at a trailing P/E of 8. Taking analyst expectations into account, the forward P/E is 7 and the five-year PEG ratio is 7. At a $3 billion market cap, the stock may be a bit under the radar for many investors to notice, but it will have to substantially disappoint the street- and see a drop in earnings- to even prove fairly valued. Given the level of drilling activity in North America, we would at least expect it to hold its business steady; this would imply that the stock could be a good value.
Other hedge funds have reported positions in Superior Energy Services, Inc. as well. At the end of the second quarter, Glenn Dubin’s Highbridge Capital Management owned 4.9 million shares of the company, giving it a stake worth about $100 million. Highbridge has a total of about $29 billion under management and the fund is majority owned by JPMorgan Chase (find more stocks that Highbridge has $100 million invested in). Nierenberg Investment Management increased the size of its position by 62% between April and June to a total of 1.2 million shares; Nierenberg is a small fund and only owns a few stocks, so its Superior holding was about 10% of its 13F portfolio (research other stocks Nierenberg liked).
We avoided companies focused on drilling in favor of companies which provide equipment (and, in some cases, services) to drillers and came up with a peer group consisting of Baker Hughes Incorporated (NYSE:BHI), RPC, Inc. (NYSE:RES), Oil States International, Inc. (NYSE:OIS), and Forum Energy Technologies Inc (NYSE:FET) to include at least one company which concentrates on offshore. These peers tend to trade higher than Superior on an earnings basis: RPC has the lowest trailing P/E of the lot at 9, with the rest clustering between 10 and 11. RPC’s future prospects don’t look particularly strong, with its earnings about flat last quarter compared to a year ago and a forward P/E multiple of 12. We think that we’d rather own Superior.
However, the other three peers all saw strong earnings growth in their most recent quarter versus the same period in the previous year, as would be expected given the boom in drilling activity in the U.S. Still, Baker Hughes and Forum trade at 11 times forward earnings estimates, meaning that their degree of outperformance would have to substantially trump Superior’s in order for those companies to be good values. It’s hard for us to see them as better values as well. Finally, Oil States International carries trailing and forward P/Es of 10 and 9, respectively, in addition to its strong recent growth. The company, which has a notable temporary accommodations business that is responsible for about half of its gross margin, could be another interesting way to play a continued high level of drilling activity.
We think SAC has made a good choice here. Superior looks cheap, including relative to its peers, and is in a good business. Oil States International also looks strong, and investors should pick through their mix of segments to determine which is more attractive.