David Einhorn‘s Greenlight Capital has recently issued its third quarter letter to investors, outlining some of the highlights from the last quarter. We have covered some of the largest stakes, which significantly and negatively affected the fund’s net returns, such as Micron Technology, Inc. (NASDAQ:MU) and Sunedison Inc (NYSE:SUNE), as well as some of the fund’s tech picks in the first part of the series (see article here). In the second part we discussed the new positions from its equity portfolio, as well as his bullish bet on General Motors Company (NYSE:GM) and two stocks that Greenlight is shorting (see article). Finally, in the third part we will cover Einhorn’s exposure to the energy sector, as well as some of his other long and short bets.
We will start with CONSOL Energy Inc. (NYSE:CNX), in which Greenlight reported a stake of 20.58 million shares, up by 55% on the quarter. The $574.06 million position represented the fund’s largest stake from the energy sector, which overall amassed less than 10% of its total 13F portfolio value. Amid a slump in coal prices caused by lower demand in China, which represents one of the main consumers of coal in the world, the stock of CONSOL has dropped by 71% since the beginning of the year. The company also encountered a number of other problems which sent the stock lower, such as the weak performance of its coal assets unit, CNX Coal Resources LP (NYSE:CNXC), which has lost over 16% since its IPO.
“However, CNX has had plenty of overlooked good news. The company went through a significant cost-cutting effort and cut its capital spending budget aggressively. In July it reported fantastic drilling results and a significant success at a test well in the Utica Shale. Ordinarily, the market responds favorably to positive drilling news. In the current environment, it has responded more like a child receiving socks as a birthday present […],” Greenlight added.
In addition, the investor believes that the market has been overreacting to concerns regarding the short-term prospects of Appalachian coal and natural gas, which sent the company’s long-term value much lower than expected. CONSOL Energy Inc. (NYSE:CNX)’s transition to being a natural gas company should also be taken into account, since many investors don’t analyze the coal and natural gas businesses separately and fail to see the upside by looking at the combined operations as reported in CONSOL’s financial statements.
The company should also reach a break-even point in its cash flows or even better, since it employs a capital discipline, cuts costs and has efficient drilling economics, which help it offset the impact of low commodity prices. This could represent a better-than-previously-expected cash flow position, compared to the $1.0 billion of “cash burn” anticipated through 2017. Greenlight expects CONSOL Energy Inc. (NYSE:CNX) to become cash flow positive next year and keep growing its production.
“There are very few midsize energy companies achieving similar success. And yet, CNX trades as if it is at the cusp of financial distress. Of course, we wish we were entering the position now rather than at the higher prices we paid,” Greenlight said.
On the other hand, Greenlight’s short bet on Pioneer Natural Resources (NYSE:PXD) proved profitable, as the stock slid by over 12% during the third quarter. Despite this fact, the investor was still somehow disappointed, because with the decline of oil prices, Pioneer Natural Resources (NYSE:PXD)’s stock should have been dragged down even more. “The “Mother-Fracker” fell with the price of oil, but nowhere near what it should have with long-term oil now below $60,” the investor stated. Overall, Pioneer Natural Resources (NYSE:PXD)’s shares are down by 8% year-to-date.
On the following page, we are going to discuss some of Greenlight’s smaller long positions, in AerCap Holdings N.V. (NYSE:AER), and Chicago Bridge & Iron Company N.V. (NYSE:CBI), as well as its short bet on Mallinckrodt PLC (NYSE:MNK).
AerCap Holdings N.V. (NYSE:AER) represents one of Greenlight’s long bets, and it fell by over 16% between July and September. The decline was mainly caused by concerns over the growth of emerging markets, but the company still managed to post solid financial results for the latest reported quarter and provided “sharply rising estimates.” In its most recent 13F filing, Greenlight reported ownership of 5.58 million shares of AerCap Holdings N.V. (NYSE:AER) held as of the end of June, up by 48% over the second quarter.
Then there is Chicago Bridge & Iron Company N.V. (NYSE:CBI), in which Greenlight disclosed a stake containing 6.75 million shares. Due to Chicago Bridge & Iron Company N.V. (NYSE:CBI)’s large exposure to the energy sector, its stock was also negatively affected by the slump in prices. Similar to his other bets, Einhorn keeps a long-term focus on Chicago Bridge & Iron Company N.V. (NYSE:CBI) and is bullish on the stock because the company forecasted an increase in earnings for the current year and the next one.
Einhorn managed to strike big with his short positions, as we have outlined his short bets on Intel Corporation (NASDAQ:INTC) and Keurig Green Mountain Inc (NASDAQ:GMCR) in the first two articles covering the letter. Mallinckrodt PLC (NYSE:MNK) was no exception, since its stock has lost 41% since the beginning of 2015 and slid by 45% in the third quarter alone. However, despite this success, Einhorn did not cover his position in Mallinckrodt PLC (NYSE:MNK) because the company has lowered its guidance for most of its key products and it’s levered. In addition, the company is under risk due to the government’s concerns over drug pricing policies at many companies as confirmed by the recent slump of Valeant’s stock (see details).