Vale SA (ADR) (VALE), Diamond Offshore Drilling Inc (DO): What This Highly Bearish Fund Is Betting On?

The seven largest holdings in Horseman’s 13F amass nearly 40% of the total value of the equity portfolio. Among these holdings, there are only two companies that are US-headquartered and two mining stocks, Vale SA (ADR) (NYSE:VALE) and Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), both of which are based in South America. In addition to Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), which produces fertilizers, Horseman also has two other fertilizer manufacturers among its largest holdings, Potash Corporation of Saskatchewan (USA) (NYSE:POT) and CF Industries Holdings, Inc. (NYSE:CF).

Moreover, during the third quarter, Horseman Capital added 11 new positions to its equity portfolio, the largest of which include several offshore oil & gas drillers. As stated earlier, Clark is betting against US shale drillers, because he believes that these companies are overvalued and might be in trouble soon. In a market commentary posted on Horseman’s website, Clark pointed out that because shale drillers managed to improve extraction technology in order to reduce the breakdown costs, companies still have to own land on which to drill wells. In this way shale drillers are facing their biggest costs in form of land, as the US land market is efficient and land values have increased in line with the demand from drillers.

“Higher land values, means that profitability of the shale industry need to increase too, to cover the higher depreciation. Unfortunately, shale drilling wells tend to last only 10 years or so, with half of all production extracted in the first 18 months. That means the driller needs to fully depreciate capital expenditure over a relatively short period of time. High land values mean that after depreciation almost all profits are wiped out. This explains why despite improving technologies, shale producers have a continual need to issue equity,” Clark said.

Nevertheless, Clark seems to be bullish on the oil sector and betting on offshore drillers is a way to benefit from a growth in oil prices. During the third quarter, Horseman initiated a stake in Diamond Offshore Drilling Inc (NYSE:DO) and held 2.13 million shares worth $30.94 million at the end of September; the stake was the second-largest in terms of value and amassed around 6.90% of the fund’s equity portfolio. Diamond Offshore Drilling Inc (NYSE:DO)’s stock is over 12% in the red year-to-date, but it has been advancing lately and is up by 43% since the beginning of July. At the end of July, Diamond Offshore Drilling Inc (NYSE:DO) posted its financial results for the second quarter, which included EPS of $0.45 and revenue of $399.29 million. Both EPS and revenue beat the expectations, but what should also be highlighted is that the company posted the first quarterly revenue growth since 2014, as revenue appreciated by an annual 2.7%.

Another energy stock that Horseman added during the third quarter is Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR), in which the fund disclosed a $25 million stake containing 2.49 million shares. Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)’s stock is also up by more than 29% since the beginning of the third quarter, aided by growing oil prices, a surge in gasoline prices registered in the US after hurricane Harvey and the company’s decision to list its fuel distribution arm on the stock exchange. Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) plans to conduct the IPO of Petrobras Distribuidora next month.

Transocean LTD (NYSE:RIG) and ENSCO PLC (NYSE:ESV) represent two other holdings that Horseman acquired during the third quarter. In its latest 13F, the fund reported ownership of 1.81 million shares of Transocean LTD (NYSE:RIG), worth $19.46 million; the position was the seventh-largest in terms of value at the end of September. In ENSCO PLC (NYSE:ESV), Horseman disclosed a $11.34 million stake containing 1.90 million shares. Both Transocean LTD (NYSE:RIG) and ENSCO PLC (NYSE:ESV) provide offshore contract drilling services. However, while Transocean LTD (NYSE:RIG)’s stock has surged by nearly 23% since the beginning of the third quarter, ENSCO PLC (NYSE:ESV)’s shares have inched down by around 1.30%.

On the last page of this article, we are going to take a closer look at Horseman Capital’s largest position at the end of September.