Icahn Wagered $1 Billion on Energy Stocks During BP Oil Spill

Date: Monday, August 9, 2010
Author: Miles Weiss, Bloomberg

Financier Carl Icahn disclosed that his hedge funds invested almost $1 billion in energy stocks during the second quarter as they were pummeled by declining crude prices and the worst oil spill in U.S. history.

Icahn plowed about $929 million into energy stocks in the period, bringing the total to 18 percent of the hedge-fund group’s stock investments, according to a regulatory filing last week. The energy bet helped the funds record an 8 percent gain July, when oil stocks rebounded, Icahn’s holding company said in an Aug. 4 statement.

Icahn, who has a 30-year history of investing in energy companies when they trade at a discount to the value of their oil and gas reserves, bought the stakes as the April 20 explosion of BP Plc’s Macondo well pushed prices lower. The Standard & Poor’s index of major oil and gas exploration companies declined 12 percent during the second quarter. It has since rebounded 10 percent.

“Carl has often said he could buy oil cheaper on Wall Street than at the wellhead,” said Russell Glass, who served as president of Icahn Associates during the 1990s, when the billionaire was acquiring stakes in small exploration and production companies. “He has a very keen sense for intrinsic value in the energy space,” said Glass, who now runs RDG Capital LLC, a New York-based hedge-fund group.

Genzyme

Icahn declined to identify the energy investments when reached at his New York office, and none of the stocks were named in the quarterly report that his holding company, Icahn Enterprises LP, filed with the U.S. Securities and Exchange Commission. The companies may be listed in the quarterly Form 13F that money managers such as Icahn must file with the SEC by Aug. 15 if they oversee $100 million or more of equities traded on U.S. exchanges.

Icahn also benefited from his investment in Genzyme Corp., whose shares have gained 36 percent since the end of the second quarter because of speculation the world’s largest maker of medicines for genetic diseases may be acquired by Sanofi-Aventis SA. Sanofi, based in Paris, has outlined an offer of $67 to $70 a share in a letter to Genzyme’s board, according to a person with knowledge of the matter who declined to be identified because the discussions are private.

The gains in July offset a 3.1 percent loss in the second quarter as “core” equity positions declined in value, according to the SEC filing. On average, hedge funds fell 2.5 percent in the three months ended June 30, according to Hedge Fund Research Inc. in Chicago.

Energy Investments

The filing also showed that Icahn fund group entered into option contracts tied to the performance of the S&P 500 earlier this year as part of its “market hedging strategy.” Under these contracts, Icahn would have received as much as $1.6 billion if the S&P 500 fell to zero and $188 million if the benchmark rose above 1,220.

As of June 30, Icahn’s hedge funds had a $110 million paper gain on the contracts tied to the S&P 500, which fell 12 percent during the quarter. The benchmark has gained 8.8 percent since then.

Icahn’s energy portfolio, valued at $923 million as of June 30, may include securities other than publicly traded stocks. Only $608 million of the securities had price quotes available in “active markets,” according to the SEC filing, with the other $315 million valued through techniques used for convertible bonds, illiquid stocks, and custom derivatives sold by investment banks.

BP

Icahn previously has fought battles for control of energy companies such as Texaco Inc. and Phillips Petroleum Co. during the 1980s. In 2005, he pushed for board seats at Kerr-McGee Corp., an Oklahoma City energy producer that was acquired by Anadarko Petroleum Corp. the following year.

Two years ago, Icahn’s hedge fund group quadrupled its stake in Williams Cos. to 17.5 million shares during the second half of 2008, when the Tulsa, Oklahoma, natural gas company lost more than 64 percent of its stock market value, and bought a 3.3 percent stake in The Woodlands, Texas-based Anadarko during 2007 and 2008. He sold most of these oil and gas holdings in early 2009.

BP, which is based in London, had lost more than half its market value after the oil spill occurred, falling as low as $26.75 a share by June 28. During the second quarter, 6 of the 12 companies included in the Standard & Poor’s 500 Integrated Oil & Gas Index hit their 52-week lows and crude oil prices suffered their first quarterly decline since 2008 on signs that the economic recovery in developed countries was slowing.

“The whole second quarter was difficult for energy” stocks, said Kurt Wulff, an independent oil and gas analyst at McDep LLC in Needham, Massachusetts. “I’d say they got oversold.”

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net