AkerBP vs Var Energy Trade – Why is AkerBP Down and What Does it Mean for Var?

I bought AkerBP last week. It is down almost 10% in last two weeks. There are specific reasons why the stock is down. And I believe those reasons should revert shortly.

What drove AkerBP share price down:

In my view it is the Var Energy IPO. It drove the AkerBP share price in two ways – rotation from AkerBP to Var Energy and speculations on valuation differential between the two. Details below.

Rotation from AkerBP to Var Energy

Institutional investors often have fixed sector allocations. If they want to subscribe to Var, they have to sell AkerBP. This has been happening and might continue to happen until the Var Energy allocations are out. Notifications and start of trading of Var is 16/2. By that time the pressure on AkerBP should disappear. If there is a time to buy AkerBP, it is before 16/2.

Speculations on AkerBP vs Var Energy valuation differential

When you listen to Var IPO analysts presentations they all compare Var Energi to AkerBP. They argue, that the Var Energy IPO is placed at a discount to AkerBP. As a result speculators shorted AkerBP shares and subscribed to Var Energi – they are long the valuation differential, but have neutral oil exposure. I understand from my brokers the increase in short interest in AkerBP has been substantial.

After Wednesday when Var starts trading speculators may start closing both positions – they close the AkerBP short by buying the AkerBP shares and sell Var Energi. The bigger the upside of Var Energi on its first day of trading will be, the faster the rotation might be. If Var Energi would open 20% on the first day, they could quickly sell Var and buy back AkerBP to close the shorts. The re-rating could be fast. Var down AkerBP up.

In my experience the simple trades often do not work as people think. I understand the Var Energi deal is oversubscribed, which may result in investors getting lower allocations then they expected. In such situation they would need to re-balance the trade quickly – buy back AkerBP shares to balance the short against their allocations. That could help AkerBP.

The Var Energi term sheet talks about possibility of up-sizing the deal. There is a good chance that this could happen. In such situation, Var Energi may not go up so strongly as people think. Some people would close the positions, some may hold it and wait for rerating later, which would make the AkerBP shorts closing more gradual.

I have no crystal ball. Anybody can make their own assumptions how this will play out. For the moment I am long AkerBP and not subscribing to Var.

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The goal of the blog is to provide investment ideas for further research. I/we have a beneficial position in the shares discussed above either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. The article does not represent investment advice. Please do your own research before making any investment action.

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