By Matt Doiron
Citadel Investment Group, a large hedge fund managed by billionaire Ken Griffin, has acquired 11.2 million shares of oil and gas company Halcon Resources Corp. (HK). According to a 13G filed with the SEC, Citadel now owns 5.2% of the shares outstanding. Citadel's 13F filing for the third quarter of 2012 showed that the fund had owned 8.9 million shares at the end of September, nearly triple what it had owned three months earlier, and clearly the fund has continued buying shares over the last two months. Ken Griffin didn't have very large energy positions in his portfolio. The biggest energy position in Ken Griffin's portfolio at the end of September was Anadarko (APC), and it was reduced by 20% during the third quarter (see Ken Griffen's top stock picks here).
We recently covered a large insider purchase at Halcon in mid-September. In addition, our database of insider trading filings shows buying by eight different insiders in November. Since insider purchases tend to be bullish signs, and stocks bought by a consensus of insiders are particularly likely to outperform the market, this is useful to note. The stock is up 9% since the most recent insider buy, however, and it's possible that the outperformance has run its course.
In the third quarter of 2012, Halcon had $73 million in revenue compared to $24 million in the same period in 2011. About 90% of revenue came from sales of oil, with nearly all of the rest coming from sales of natural gas and natural gas liquids. Oil production more than tripled from a year earlier, while natural gas and NGLs were roughly double the previous levels. Production costs were up as well, and Halcon also recorded higher SGA expenses. As a result, the company experienced an operating loss of about $5 million during the quarter, while at its lower production levels of a year ago it had earned a small amount of operating profits.
Wall Street analysts -- and, apparently, the Citadel investment team -- expect the expansion and development of Halcon's fields to pay off going forward. Consensus for 2013 is that the company will earn 49 cents per share, implying a forward P/E multiple of 13. We're worried that Halcon might need higher oil and gas prices in order to meet those targets, as its production increases have thus far driven much better revenues but have also resulted in increased costs. We do see heavy insider buying, and so it's possible that digging further would show that there's a reasonable expectation that cost growth will slow. Still, with the most recent data showing that about half of Halcon's outstanding shares are held short there does seem to be a popular bear case here, and so we're not sure that further investigation would be a high priority. Billionaire Tom Steyer's Farallon and Steve Cohen's SAC Capital weren't concerned about the short positions in the stock, as both hedge funds initiated brand new positions in the stock during the second quarter.
Certainly, in terms of pure value we think that oil majors such as Exxon Mobil (XOM) and even BP plc (BP) are more appealing; their forward P/Es are closer to 10, although of course their growth rates are lower as they aren't seeing as much of an increase in production. However, the majors would also benefit from higher energy prices just as Halcon would, and are priced more competitively at present. Both Exxon Mobil and BP made our list of the most popular energy stocks among hedge funds for the third quarter of the year (see the full rankings here). If an investor is interested in the U.S. oil boom, Continental Resources (CLR) has been one of the leaders in North Dakota's Bakken Shale. In its most recent quarter, revenue was up nearly 50% from the same period in the previous year. The sell-side expects continued earnings growth: Its forward P/E is 16, and the five-year PEG ratio is 0.7. Of course, these figures are likely also based on an expectation of higher prices. Continental is priced at a premium to Halcon on a forward-earnings basis, and the company has also seen skidding earnings along with its rising production, but we'd consider it as an alternative.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.