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Has Seth Klarman Sold Cheniere Energy Entirely?

- By Rupert Hargreaves

Seth Klarman (Trades, Portfolio) is one of the world's most followed investors and is also one of the world's most respected value investors. Whenever he makes an investment, you can be sure that hours of research have gone into the opportunity, and at the time of acquisition, the stock will be trading at a deep discount to its estimated intrinsic value as calculated by Klarman and his team at Baupost.

With this being the case when it became clear that Baupost had built a significant position in Cheniere (LNG) several years ago, it came as a surprise to many Klarman followers. Indeed, at the beginning of 2015, nearly a year after the investment became public, value blog value and opportunity proclaimed:

"We can clearly see that Seth Klarman's days as Graham style 'net-net' investor seem to be over. Cheniere has currently around $7.5 billion net debt and $2.3 billion equity. Based on a market cap of around $17 billion, this is a price-book (P/B) of roughly 7 times so hardly a bargain investment based on this metric.

"On top of that, the company never made a profit in its life."

The Klarman-Cheniere story

Even though Cheniere may never have looked like a traditional value investment, looking at the business with a long-term perspective as Klarman would have done, it's clear there is some value to be found. Specifically, the company has signed long-term offtake agreements for its hydrocarbon projects, which to some degree de-risks the business.

But rather than waiting for these contracts to play out, Klarman has already started winding down his Cheniere position. This move in itself is extremely unusual. Klarman is a vocal proponent of long-term investing and has written hundreds of pages of text on the topic over his career.

However, the Cheniere holding is relatively new - Baupost only stopped buying during the first quarter of 2016. In the fourth quarter of 2016, the fund reduced its Cheniere holding by 22% and the position is now close to being Baupost's second-largest equity position (if Klarman continued to sell it's likely the position has already fallen from the top spot). By the end of 2016 Cheniere accounted for 11.9% of Baupost's equity portfolio and was the second-largest holding; Viasat (VSAT) came in at 11.5%.

And it seems Klarman is happy to dump the position at a loss. Baupost started buying Cheniere during 2014 when shares in the company were trading between $70 and $80. During the fourth quarter of 2016 when the selling began, shares in Cheniere changed hands for around $40 each, a decline of approximately 50%.

The question that now needs to be answered is whether Klarman has continued to wind down the Cheniere position during the first quarter.

Stopped selling?

As oil and gas market fundamentals have strengthened, it's reasonable to believe that Klarman may have slowed his selling. That being said, as we don't know Klarman's initial investment thesis, it's difficult to second guess what his actions may be going forward.

Still, while I don't want to second guess what one of the world's most respected value investors is up to, I'm inclined to believe that rather than winding down the Cheniere position, Klarman was, in fact, doing a spot of portfolio housecleaning during the last four months of 2016.

Portfolio management

Klarman has always been an advocate of portfolio management, and he has said many times that if a better opportunity presents itself, investors should not hesitate to dump an existing holding that may offer a less attractive risk-return profile.

As Klarman was selling his Cheniere position during fourth-quarter 2016, he also increased positions in Viasat, Synchrony Financial (SYF), Allergan (AGN) and Twenty-First Century Fox (FOXA) significantly. He almost doubled his Allergan position to 3.4 million shares at the cost of more than $200 million. I estimate the Twenty-First Century Fox addition would have cost a similar amount. All in all, these new portfolio additions would have cost Baupost more than $500 million, and that cash had to have come from somewhere. Granted, it is well-known that Klarman likes to keep a hefty cash balance at all times, sometimes around 40% of assets under management. This is also his favorite form of market hedge, so if he's worried about the level of the market, Klarman won't dig into Baupost's cash position to buy equities.

Put simply, the evidence indicates that Klarman was doing some portfolio management during the fourth quarter, and it is likely will make further Cheniere sales in the months ahead. Of course, this is just a suggestion and Klarman may have already reduced his Cheniere position further.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.