Seth Klarman Pares PBF Energy Inc.

Refiner pressured by regulatory battle in Washington

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Dec 11, 2017
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Seth Klarman (Trades, Portfolio), head of Boston-based hedge fund Baupost Group, sliced 4.8 million shares from his holding of PBF Energy (PBF, Financial) on Nov. 30, making it his most significant sale since starting the position in the third quarter of 2013.

Klarman’s sale reduces the holding by 30.5% to 10,924,175 shares from 15,724,175 shares. Those shares represent a 9.93% ownership stake.

The investor, author of the cult classic book “Margin of Safety,” sold near a one-year high price. Divesting at $31.70 per share, he made a profit from his average buy price of around $25. Klarman has previously sold shares only when the price averaged around $32, which happened in the first quarter of 2016.

Around 23.7% of Klarman’s long stock portfolio, valued at $7.99 billion, is invested in the hard-hit energy sector, his largest. Down 8.86% year to date and the only losing sector of the year, energy meets his criteria for out-of-favor investments.

“We pursue opportunity largely off the beaten path, sifting through the debris of financial wreckage, out-of-favor securities and asset classes in which there is limited competition,” he said in a 2012 investor letter. “We specialize in the highly complex while mostly avoiding plain vanilla, which is typically more fully priced.”

PFB Energy operates oil refineries that produce unbranded transportation fuels, heating oil, petrochemical feedstocks, lubricants and petroleum products. In the third quarter, the company posted net income of $347.2 million or $2.85 per share, compared to $56 million, or 43 cents per share, in the previous third quarter.

Positive results flowed from record refining system throughput of 850,000 barrels per day as all five of its assets operated for nearly a full quarter for the first time since it acquired two of them.

PBF Energy chairman and CEO Tom Nimbley called the macroeconomic picture “positive for refiners heading into year-end and beyond 2018.”

“We have strong global demand and economic growth, and inventory levels that have come down to more rational historic averages,” he said in a statement.

The company also said it faces headwinds from the Renewable Fuel Standard Program, created by Congress in 2005 to cut greenhouse gas emissions and grow the renewable fuels sector while attenuating reliance on fossil fuels. It requires a certain amount of ethanol to be mixed with fossil fuel, and the rates increase each year through 2022.

Under the rule, refineries must buy and sell a quota of credits for each gallon of biofuel, which some say hurts smaller refiners.

In a third-quarter conference call, Nimbley called the corn lobby’s “high-pressure tactics” in Washington, D.C., “extortion” and “blackmail,” and aimed at “sustaining policies that are harmful toward the American workers and consumers.”

“Importantly, this issue is far from settled,” Nimbley said.

On Dec. 7, nine U.S. senators met with the Trump administration in support of refiners in their districts. After the meeting, the senators released a joint statement saying that they hoped to “find a win-win solution.”

PBF shares have gained 18% year to date, touching $32.90 at close.

See Seth Klarman (Trades, Portfolio)'s portfolio here.