As Greenlight Capital's David Einhorn made headlines for a controversial short call on shale oil exploration firms like
Greenlight's investment in Civeo suffered from a plunge in global oil prices in the second half of 2014, causing the company to first nix a plan to convert into a real estate investment trust (REIT), a move that Einhorn publicly objected to in October and turned his holding into an activist 9.9% stake. As the toll of falling oil prices hit Civeo's lodging businesses through the fourth quarter - Civeo serves high cost oilfields in the Athabasca tar sands and shale basins across North America - the company suspended its dividend and dramatically cut its 2015 financial guidance, causing shares to tumble nearly 50% into the New Year.
In his fourth quarter letter to Greenlight investors, Einhorn conceded he'd misunderstood Civeo's business and how it would react to falling commodity prices. "Civeo shares collapsed from $11.61 to $4.11 [during the fourth quarter]. This was driven by tanking oil prices further reducing expectations for 2015. We did not hedge CVEO’s exposure to oil, because we viewed it as a real estate company and underestimated its sensitivity to commodity prices," Einhorn wrote in the quarterly investor update.
Filings with the Securities and Exchange Commission show Einhorn maintained his Civeo stake through the first quarter, before beginning to sell shares in mid-April, dumping 5.65 million shares, or over 50% of his stake, by May 15. On May 4, Einhorn took the stage at Ira Sohn Investment Conference in front of hundreds of his hedge fund peers to unveil a controversial short thesis on fracking firms. He argued oil-focused frackers like Pioneer don't generate real cash flows and instead rely on capital markets to finance their exploration and production.
Perhaps, Einhorn's Civeo mishap sheds light on his ability judge commodity sensitive businesses.
At the 2013 Ira Sohn Conference, Einhorn presented the idea that wellhead equipment manufacturer Oil States international should spin its then cash-gushing lodging business and convert it to a REIT. He called the lodging business the "Club Med of remote exploration facilities" and an undervalued crown jewel tucked within Oil States. Days earlier, activist hedge fund Jana Partners disclosed a large stake in Oil States and a similar proposal.
In May 2014, Oil States executed on Einhorn and Jana's advice, spinning its lodging business Civeo on the New York Stock Exchange. However, in late September, Civeo surprised Wall Street by nixing the idea of converting to a REIT, claiming a $300 million tax bill would make the move overly risky. That disclosure sent Civeo's shares falling over 40% and created frustration for Einhorn, who boosted his stake to nearly 10% and called for the firing of CEO Bradley Dodson in a public filing.
Civeo quickly brokered a settlement with Jana Partners in late October that put some of its nominees on the company's board, however, a 50% tumble in the price of oil through the fall hammered the company's financials. By the end of the year, it was readily apparent that not only would Civeo be unable to convert to a REIT, it also would need to go into cash preservation mode as North American drillers began pulling out of high cost oil fields, leaving some of its largest lodges shuttered. In December, the company scrapped its dividend and slashed its guidance.
Jana quietly exited its Civeo shares on New Years' Eve and the fund board nominees resigned shortly thereafter. Now Einhorn also appears to be throwing in the towel. Since his sales come in the second quarter and now put Greenlight's holding below 5%, Einhorn can sell his remaining Civeo stock without further disclosure until the end of the quarter.
A Greenlight spokesperson declined to comment.
Einhorn has been toying with an oil short for some time. After listening to PointState Capital's Zachary Schreiber at the 2014 Ira Sohn Conference, he began shorting oil futures, a move that helped stem losses from long stock positions in Anadarko Petroleum, BP, McDermott and National Oilwell Varco that were exited in June 2014. Civeo, however, wasn't hedged to oil prices in Greenlight's portfolio.
The pain Greenlight experienced on Civeo may cast some doubt on Einhorn's 'mother fracker' short. Nonetheless, the famed short seller has often used losses on long stock positions as learning experience for what ultimately amounted to tremendously profitable short trades.
For instance, during the go-go years of the mortgage bubble, Einhorn counted a position in subprime lender New Century Financial as one of his largest holdings, and was even a board member. However, as the business soured, Einhorn resigned from the board and began kicking the tires of the entire mortgage market, ultimately leading to his bet against the worst bonds, mortgage lenders and banks in the marketplace, a trade that ultimately paid off in spades.
