In the early hours of Saturday, Jan. 3 U.S. forces captured Nicolas Maduro. When President Donald Trump held a news conference later that day, he said: “We’re going to have our very large United States oil companies – the biggest anywhere in the world – go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure.”
For major oil producers, like ExxonMobil XOM-N or ConocoPhillips COP-N, the calculus on whether to re-enter Venezuela is fraught with risks. What the market was quick to grasp, though, was that oilfield services companies such as Halliburton HAL-N faced a different calculus. As they don’t need to own reserves or navigate ownership disputes, the business case is more straightforward. The market determined that, like the entrepreneurs who sold the picks and shovels to the prospectors during the gold rush, Halliburton was going to win regardless of who struck gold, or, in this case, operated the oilfields.
Halliburton also has a unique history that makes its Venezuela opportunity particularly appealing among oilfield services companies: it has a deep history in Venezuela, with operations dating back to the 1940s, and experience capitalizing on the opportunities that come after a U.S. invasion. After the 2003 invasion of Iraq, its then-CEO Dick Cheney, who would go on to become vice-president, secured lucrative contracts to administer Iraq’s energy production.
After a furious weekend news cycle immediately following the capture of Mr. Maduro, Halliburton stock opened on the Monday more than 8 per cent higher than its Friday close. It peaked another 3 per cent higher, before closing the day slightly below where it opened. In the context of a US$110-billion (according to Mr. Trump), decade-long infrastructure opportunity, this seems like a relatively muted market reaction. Anyone who bought at the open (classic retail investor behaviour) on excitement about the news would have suffered a paper loss by the end of they day. However, anyone who put on a position just before the weekend could have crystallized an immediate 11-per-cent gain on Monday. But who would know to put on such a position right before a top-secret international military operation? If we look deeper at the flows data, it appears institutional investors did.
Data firm Exponential Technologies uses their expertise and experience in trading, market microstructure, and machine learning to identify and analyze separately institutional and retail flows minute-by-minute in real time. Looking at the actions of institutional and retail investors on the trading session immediately before and after Mr. Maduro’s capture tells a fascinating story.
As if they had a crystal ball, institutional investors (in aggregate) were strong buyers of Halliburton on Friday, building their biggest cumulative position in weeks. Retail investors, showing no evidence of magical foresight, were (slight) net sellers on the day. On Monday when the market opened, retail investors bought (on net) more than US$470-million of Halliburton shares. For context, this is statistically a “7.5-sigma event,” essentially meaning a level of buying that would occur on an otherwise normal day 0.0000000000001% of the time. Institutions, somehow were prepared for this retail mania, used this liquidity to dump more than US$300-million worth of Halliburton shares, crystallizing a quick, easy profit.
Interestingly, insider trading activity shows a similar pattern. On Monday, according to public record (a Form 4 filing), Halliburton executive vice-president and chief administrative officer Lawrence J. Pope sold 100,000 shares at $32.25 per share, generating US$3.225-million in proceeds. This sale was prearranged, conducted under a Rule 10b5-1 trading plan.
Hugh Smith, CFA, MBA, is director of strategy at London Stock Exchange Group.