Hemen Holding Ltd. is a private company based in Limassol, Cyprus. This company is ultimately controlled by trusts that have been established for the benefit of billionaire Norwegian-born Cypriot shipping tycoon John Fredriksen and his family.
At the beginning of this year, Hemen Holding owned 28% of the total outstanding shares of SeaDrill Ltd. (SDRL) This holding made up approximately 63% of the value of Fredriksen’s entire portfolio at the time. At the end of February, Hemen Holding sold off sufficient shares to reduce its ownership stake to 23% of SeaDrill. The main purpose of this sale was to enable the Fredriksen Group to have a slightly more diversified investment portfolio. The company also wanted to free up cash to aggressively pursue investment opportunities in the commodity shipping sector. This sale reduced SeaDrill’s proportion of Fredriksen’s total portfolio from 63% to 58%.
As part of this deal, Hemen Holding sold put options against the shares that it sold. Thus, Hemen’s exposure to SeaDrill remained the same for the 90-day average duration of the put options. Hemen’s exposure to SeaDrill had the potential to change depending on whether or not the sold put options were ultimately exercised.
The put options that were sold by Hemen have now begun to be exercised. On June 14, 2012, SeaDrill announced that at least some of the options have been exercised and that Hemen has elected to take possession of physical shares of stock in lieu of cash. The company will be increasing its position in SeaDrill by 600,000 shares per day on every trading day between June 14 and June 27, 2012. Over that period, Hemen will increase its position in SeaDrill by a total of 6 million shares. This will give the company a total ownership stake of 24.6% of SeaDrill’s total outstanding shares.
Could this create upward pressure on the stock?
Prior to Hemen’s stock sale at the end of February, SeaDrill shares were trading hands at prices around their all-time high of $42.34. The shares were climbing in value throughout the entire month of February and hit the all-time high on February 29, 2012.
SDRL February 2012 Chart
Source: Fidelity Investments
On February 29, Hemen announced its sale of 24 million SeaDrill shares. The stock price fell immediately following that announcement and has not returned to those levels since. This has naturally caused many investors to believe that Hemen’s stock sale was the major cause of the share price decline. The idea does make some sense.
Although the reason for Hemen’s sale was diversification, the news of a major shareholder and insider (Fredriksen is the chairman of SeaDrill) selling off a large number of shares could have introduced some uncertainty into the market. Investors may have wondered if there was more to the story or if the sale could have been due to an internal problem at SeaDrill. The sale was due solely to the aforementioned desire for liquidity and diversification and there was no internal problem that the markets were not already aware of but the fear was still very present and very real.
If Hemen could generate a large decline in the share price by selling stock then could it also do the opposite? On the surface, the idea would seem to make sense. After all, if reducing the major holder’s stake would reduce the stock price then naturally that same major holder increasing that stake would increase the stock price. But there are other factors to consider that may not make this true.
First, Hemen Holding sold off many more shares than what it is reacquiring through the exercise of the put option. Hemen sold 24 million shares and will only be buying back six million shares through the announced transaction or only a third of what was sold. Hemen sold put options for a total of 24 million shares though so it is possible that the remaining 2/3 of the total 24 million shares sold will be reacquired when those options expire.
Secondly, these shares are not necessarily being acquired through the open market so there is not necessarily going to be the buying pressure that might be expected. Hemen Holding is not acquiring its shares via purchases in the open market. Instead, Hemen will be obtaining its shares through the exercise of put option contracts with Goldman Sachs (GS) that Hemen has elected to be settled by physical delivery. The question then becomes where Goldman will get the shares that are delivered to Hemen. The bank could conceivably purchase the shares in the open market and then turn around and sell them to Hemen. This would indeed result in the expected buying pressure on the stock. There is no reason why this should be expected though. There are several ways that the bank could obtain these shares that do not involve the open market. For example, Goldman could purchase the shares through any one of several dark pools.
Investopedia defines the term dark pool as,
The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is represented by block trades facilitated away from central exchanges.
Also referred to as the ‘upstairs market,’ ‘dark liquidity,’ or ‘dark pool.’
The dark pool gets its name because details of these trades are concealed from the public, clouding the transactions like murky water. Some traders that use a strategy based on liquidity feel that dark pool liquidity should be publicized, in order to make trading more ‘fair’ for all parties involved.
Dark pools allow institutions to avoid publicizing their trades and thus avoiding market impact. Therefore, if Goldman uses dark pools to obtain the shares that it sells to Hemen then there will not be the buying power that would be expected. There are other ways that Goldman could acquire the shares without using the open market. So, there is no guarantee that Hemen’s acquisition of SeaDrill’s shares will create buying pressure in the market.
On the other hand, Hemen’s purchase may restore some of the confidence that the market may have lost due to the company’s February stock sale. If indeed this is the case, then SeaDrill may see some gains in the coming week as the confidence returns and investors begin buying shares of SeaDrill due to their newfound confidence. This could create the buying pressure on the stock that Hemen’s purchase itself may not. In this case, the stock is likely to be pushed up by the buying pressure from the newly confident investors.
So you criticize me for posting SA article info and then proceed to do it yourself.
Check the CC transcript as I vaguely remember reading something to the effect that business could remain weak until end of 2015.
The key words in your post are ( some signs ) and ( asking about ) doesn't mean much, and is not substantially different from what SA said in my post.
Copied from latest SA article.
The current bidding activity for the rigs that will drive this growth is lower than the levels set in 2012, however. This could jeopardize the growth potential of this market, should this trend not reverse itself. This is one reason why Seadrill expects that the market will strengthen after a lull that lasts until the end of 2015 at the latest.
JF says this weakness in this business might last until the end of 2015.
That should be enough to tell you that shares will probably remain on the weak side and could even weaken further. That's a bad sign.
That should tell people that this weakness will last a while.
The big money knew this was coming and has been unloading shares for quite a while.
Like most of you I'm content to hold my shares, collect the dividends and buy more on occasion.
I have a feeling, for what it's worth , that analysts are under estimating AB and that we will be closer to 2.00 this year, maybe even over that.
Repost my Titanic post from a couple months ago.
Remember I warned you to wait until after earnings to do any buying.
OK now give me ten thumbs down.
O and I did add some today, so you see I am not a short.
Just the internets top psychic with 90% accuracy.
I'm in also but I wish people would stop worshiping JF
He built his empire on debt. Everyone of his companies is loaded to the hilt with debt.
So he may be a billionaire controlling other peoples money and scooping things up on the cheap when parts of the empire collapse.
He will most likely be a billionaire long after most of us go bust.
That's the way I had it figured to, except that analyst's were so far off on this past qtr that anything seems to be possible.
Do you or anyone else have an explanation for the analyst missing last qtr by so much??
The last .60 div. is the highest payout in 4 years and suggests a possible return to a higher payout level as was the case before the financial crisis.
When the market crashed allot of money was pulled out of the funds that manage assets, and a few even collapsed as I remember it.
With the markets steady climb, I am suggesting a possible return to more bullish and long term normal conditions, and therefore a higher level of dividend payouts and pps.
Last qtr. could be just the start.
Of course div. payouts are variable and stock price seems to correlate pretty closely from what I can see.
In looking at the past 4 years div. history I see no fourth qtr. increase in div.