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Leading hedge fund and mutual fund managers that have a long-term track record of generating high market-beating returns are neutral on the oil and gas exploration and production industry, cutting a minor $650 million from their $19 billion prior quarter position in the group. Overall, they are under-weight the group by a factor of 1.4.

That is, taken together, the 70+ high alpha or guru funds have invested 3.6% of their assets in the group, slightly short of the 5.0% weighting of the group in the overall market. However, seven of these guru funds have invested twice the average or over 10% in the oil and gas exploration and production group. The following is our take on their top picks in the group:

Buy Canadian Natural Resources Ltd. (CNQ): CNQ is engaged in oil and gas exploration and production in western Canada, the North Sea and offshore West Africa. It has a significant presence in the Athabasca oil sands deposits in northeastern Alberta, Canada. Colloquially known as tar sands, due to their similar appearance, odor and color to tar, they are more costly to extract than conventional oil and until recently, were not even considered to be part of the world's oil reserves.

However, the recent strength and long-term optimistic outlook of the price of crude have made it very profitable to extract oil from the deposits. Seven guru funds own 0.7% of CNQ, and they added a net $10 million to their $281 million prior quarter position. Three guru funds that are over-concentrated in the oil and gas exploration group hold CNQ in their portfolio, including Wintergreen Advisors LLC ($107 million) and RS Investment Management ($114 million) and BP Capital Management ($15 million).

CNQ trades at a forward price-to-earnings ratio (P/E) of 8, at the bottom of its historic P/E range. It has corrected recently due to damage and work disruption costs associated with the fire at its Coker unit at its Horizon Oil Sands facility in early January, and the forest fires in North Central Alberta. Although insurance covered most of the damages from the fire, the incident also resulted in a revenue decline of almost C$600 million due to work stoppages.

Consequently, March 2011 quarter revenues were down nine percent year-over-year versus being up 10%-30% in the prior three quarters. This is an opportunistic decline due to a short-term incident, and the long-term fundamentals for the company continue to be promising. Besides trading at a low P/E, the company also offers a decent 0.9% dividend yield. Furthermore, they have strong reserves, with an estimated 2.9 billion barrels of synthetic crude oil from the oil sands alone, not including any international properties. Valuing these reserves conservatively in the $12-$15 per barrel alone would justify the current market capitalization. Furthermore, analysts are bullish on the company and they have a $52 mean target on CNQ, with a high of $57, well above the current $44 price; and of the twelve analysts that cover the company, ten rate it at buy/strong buy and two rate it at hold.

Buy Sandridge Energy Inc. (SD): SD is engaged in the exploration and production of crude oil and natural gas. SD is headquartered in Oklahoma City, and focuses its exploration and production activities in West Texas, the Cotton Valley Trend in East Texas and the Gulf Coast. SD also owns oil and gas properties in the Piceance Basin of Colorado, the Gulf of Mexico and the Anadarko and Arkoma Basins.

A total of eight guru funds own 10.6% of SD, including three that are concentrated in the sector. They bought a net $40 million during the quarter, adding to their $413 million from the prior quarter. Prem Watsa of Fairfax Financial Holdings owns $273 million or 6% of SD. Furthermore, at $25 million, SD is the fifth largest holding of T. Boone Pickens’ BP Capital Management LP that has 94% of its funds invested in the energy sector. Other funds with major SD holdings include Weitz Wallace R & Co. ($73 million), SAC Capital Advisors LP ($39 million), Ruane Cunniff & Goldfarb Inc. ($19 million) and Bruce & Co. ($13 million).

SD trades at a forward P/E of 24, and is up 200% from the $4 lows in August of last year. The company has engineered a complete transformation from being 100% weighted in natural gas in 2009 to a focus on oil production by acquiring Arena Resources and Forest Oil Corporation. It has significant undeveloped acreage and an aggressive drilling program going forward for drilling more oil wells in the Permian and the horizontal Mississippian. Furthermore, analysts have a $14 mean target on SD, with a high of $18, well above the current $12 price; and of the 26 analysts that cover the company, 14 rate it at buy/strong buy, eleven at hold, and one at underperform.

Gurus Bullish on Chesapeake Energy (CHK)

: CHK is engaged in the exploration and production of natural gas and crude oil properties in three primary operating areas in the U.S.: the Mid-Continent region of Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle; the Gulf Coast region consisting primarily of the Austin Chalk Trend in Texas and Louisiana and the Tuscaloosa Trend in Louisiana; and the Helmet area of northeastern British Columbia. A total of 14 guru funds own 15.5% of CHK, at more than four times their weighting in the group, and they cut only a minor $50 million from their $3.0 billion prior quarter position. This is also the largest position ($30 million) in energy-focused BP Capital’s portfolio; and it is the largest energy position ($2.66 billion) in Southeastern Asset Management’s portfolio, that has 12.8% of its assets deployed in this group. Furthermore, analysts have a $40 mean target on CHK, with a high of $59, well above the current $34 price; and of the 33 analysts that cover the company, 18 rate it at buy/strong buy, thirteen at hold, and two at sell.

Gurus Bullish on Nexen Inc. (NXY): NXY is a Canadian company engaged in the exploration and production of crude oil, natural gas, sulphur and chemicals. They are uniquely positioned for growth in the North Sea, Western Canada, including the Athabasca oil sands of Alberta and unconventional gas resource plays such as coalbed methane and shale gas, deep-water Gulf of Mexico, offshore West Africa and the Middle East. A total of four guru funds own 1.8% of NXY, and they are building up their position in NXY, adding a net $58 million to their $140 million prior quarter position. This is also the largest energy sector position of Balyasny Asset Management LLC that is over-concentrated in the group. Furthermore, analysts have a $26 mean target on NXY, with a high of $29, near the current $24 price; and of the eleven analysts that cover the company, two rate it at buy/strong buy, seven at hold, and two at underperform.

Gurus Bearish on Plains Exploration and Production (PXP): PXP is engaged in the exploration and production of oil and natural gas properties primarily in the U.S. The Company owns oil and gas properties with principal operations in the Los Angeles and San Joaquin Basins onshore California; the Santa Maria Basin offshore California; the Piceance and Wind River Basins in the Rocky Mountains; the Permian Basin in West Texas and New Mexico; the Anadarko Basin in the Texas Panhandle, and the South Texas and Gulf Coast regions, including the Gulf of Mexico. Three guru funds hold 4.2% of PXP stock, and they aggressively lightened their position in the company, cutting $320 million from their $529 million prior quarter position. PXP is up over 100% in the last 12 months while earnings are projected at $1.97 in 2011, on par with their earnings of $1.98 in 2009.

Gurus Bearish on Cimarex Energy Co. (XEC): XEC is engaged in the exploration and production of oil and gas in TX, OK, NM, KS, LA and WY. Five guru funds hold 3.7% of XEC stock, and they cut $252 million from their $520 million prior quarter position.

Gurus Bearish on Devon Energy Corp. (DVN): DVN is engaged in the exploration and production of oil, gas and natural gas liquids in the U.S. and Canada. Eleven analysts hold 1.0% of DVN stock, and they cut $212 million from their $546 million prior quarter position.

Gurus Bullish on Tesoro Corp. (TSO): TSO is engaged in the refining and marketing of petroleum products in the mid-continental and western U.S. A total of seven guru funds own 9.3% of TSO, and they added $57 million to their $236 million prior quarter position. This is the largest new position of Balyasny Asset Management LLC ($50 million) that is over-concentrated and has 12.3% of its assets deployed in this group. Furthermore, analysts have a $29 mean target on TSO, with a high of $37, well above the current $24 price; and of the 19 analysts that cover the company, seven rate it at buy/strong buy, nine at hold, and three at underperform.

Gurus Bullish on McMoran Exploration Co. (MMR): MMR is engaged in oil and natural gas exploration and production in offshore Gulf of Mexico and U.S. onshore Gulf coast area. A total of three guru funds, including BP Capital Management, own 2.1% of MMR, and they added a net $17 million to their $35 million prior quarter position. Furthermore, analysts have a $22 mean target on MMR, with a high of $26, well above the current $18 price; and of the eight analysts that cover the company, six rate it at buy/strong buy and two rate it at hold.

Gurus Bearish on Pioneer Natural Resources (PXD): PXD is engaged in the exploration and production oil and gas in the U.S. and South Africa. Seven gurus hold 8.0% of PXD, and they aggressively sold a net $739 million from their $1.54 billion prior quarter position. This was also the largest energy sector sell of Southeastern Asset Management ($686 million) that is over-concentrated and has 12.8% of its assets deployed in this group. Furthermore, analysts have a $120 mean target on PXD with a high of $135, well above the current $99 price; and of the 27 analysts that cover the company, twenty rate it at buy/strong buy and seven rate it at hold.

Gurus Bullish on Murphy Oil Corp. (MUR): MUR is engaged in the exploration, production, refining and marketing of oil and gas in the U.S. and U.K. Eight guru funds hold 1.8% of MUR stock, and they added a net $100 million to their $128 million prior quarter position.

Gurus Bearish on Clayton Williams Energy (CWEI): CWEI is engaged in the exploration and production of oil and natural gas primarily in TX, LA and NM. No guru funds hold CWEI stock, having dropped their $6 million prior quarter position.

Gurus Bullish on SM Energy Co. (SM): SM is engaged in the exploration, production and acquisition of crude oil and natural gas in North America. Seven guru funds hold 6.9% of SM stock, and they added a net $31 million to their $255 million prior quarter position.

Gurus Bullish on Rosetta Resources Inc. (ROSE): ROSE is engaged in the exploration and production of oil and natural gas properties in the U.S. Five guru funds hold 12.7% of ROSE stock, and they cut a net $22 million from their $316 million prior quarter position. This is also the largest position of First Pacific Advisors’ (FPA) Crescent Fund ($199 million) that that is over-concentrated and has 10.7% of its assets deployed in this group.

Gurus Bullish on Range Resources Corp. (RRC): RRC is engaged in the exploration and production of oil and natural gas in the south-western and Appalachian regions of the U.S. Seven guru funds hold 12.7% of RRC stock, and they added a net $469 million to their $596 million prior quarter position.

EOG Resources (EOG) is engaged in the production and marketing of crude oil and natural gas in the U.S., Canada, Trinidad, U.K. and China. Ten guru funds hold 1.0% of EOG stock, and they added a net $73 million to their $201 million prior quarter position. Furthermore, analysts have a $125 mean target on EOG with a high of $145, well above the current $106 price; and of the 30 analysts that cover the company, thirteen rate it at buy/strong buy and seventeen rate it at hold.

Encana Corp. (ECA): ECA is engaged in oil and gas exploration and production in British Columbia, Alberta, Offshore Nova Scotia, WY, CO, LA and TX. A total of seven guru funds own 1.2% of ECA, and they added $28 million to their $254 million prior quarter position. Furthermore, analysts are neutral on the stock, giving it a mean price target of $33, near the current $31 price; and of the 21 analysts that cover the company, three rate it at buy/strong buy, sixteen at hold, and two at underperform/sell.

Occidental Petroleum (OXY): OXY is engaged in the exploration production of crude oil and natural gas worldwide, and manufactures and markets a variety of basic chemicals, including chlorine, caustic soda, and ethylene dichloride, as well as specialty chemicals and vinyl’s, including polyvinyl chloride resins and vinyl chloride monomer. Eleven guru funds holds 1.5% of OXY and they cut a net $80 million from their $1.4 billion prior quarter position. However, two guru funds that are over-concentrated in the group added OXY to their positions, including BP Capital Management ($5 million) and First Pacific Advisors’ (FPA) Crescent Fund ($10 million). Furthermore, analysts have a $122 mean target on OXY, with a high of $149, well above the current $107 price; and of the 23 analysts that cover the company, fifteen rate it at buy/strong buy and eight rate it at hold.

Southwestern Energy Co. (SWN) is engaged in the exploration and production of oil and natural gas primarily in AK, OK, TX and PA. Six guru funds own 3.3% of SWN, and they cut a net $8 million from their $488 million prior quarter position. Furthermore, analysts have a $48 mean target on SWN with a high of $63, near the current $49 price; and of the 29 analysts that cover the company, ten rate it at buy/strong buy, sixteen rate it hold and three rate it underperform.

Apache Corp. (APA): APA is engaged in the exploration and production of crude oil, natural gas liquids and natural gas globally. Twelve guru funds hold 3.2% of APA stock, and they cut a net $136 million from their $1.58 billion prior quarter position.

Talisman Energy (TLM): TLM is a Canadian company engaged in oil, natural gas liquids and natural gas exploration and production internationally. Four guru funds hold 1.7% of TLM stock, and they cut a net $739 million from their $1.54 billion prior quarter position.

Denbury Resources (DNR): DNR is engaged in the acquisition, exploration, development and operation of oil and gas properties in the Gulf Coast region. Three guru funds hold 4.7% of DNR stock, and they cut a net $6 million from their $375 million prior quarter position.

ATP Oil & Gas (ATPG): ATPG is engaged in oil and natural gas exploration and production in the Gulf of Mexico and the North Sea. Two guru funds hold 1.7% of ATPG stock, and they cut a net $7 million from their $22 million prior quarter position.

Andarko Petroleum Corp. (APC): APC is engaged in oil and natural gas exploration and production in the U.S. Eight guru funds hold 2.5% of APC stock, and they added a net $127 million to their $800 million prior quarter position.

Transatlantic Petroleum (TAT): TAT engaged in crude oil and natural gas exploration and production in Turkey, Morocco, Bulgaria and Romania. Two guru funds hold 0.7% of TAT stock, and they cut a net $3 million from their $7 million prior quarter position.

QEP Resources Inc. (QEP): QEP is engaged in oil and gas exploration and development in the Rocky Mountain and mid-Continent regions. Five guru funds hold 1.9% of QEP stock, and they cut a net $8 million from their $145 million prior quarter position.

Exco Resources Inc. (XCO): XCO is engaged in oil and gas exploration and production in east TX, north LA, Appalachian and Permian basin. Five guru funds hold 2.9% of XCO stock, and they cut a net $8 million from their $127 million prior quarter position.

Newfield Exploration Co. (NFX): NFX is engaged in the exploration and development of crude oil and natural gas properties in the U.S., Malaysia and China. Six guru funds hold 2.9% of NFX stock, and they added a net $23 million to their $236 million prior quarter position.

Concho Resources Inc.(CXO): CXO is engaged in the acquisition, development and exploration of oil and natural gas in southeast NM and west TX. Six guru funds hold 7.7% of CXO stock, and they cut a net $69 million from their $764 million prior quarter position.

Resolute Energy Corp. (REN): REN is engaged in oil and gas exploration and production in UT, WY, OK, ND and AL. Three guru funds hold 1.8% of REN stock, and they cut a net $7 million from their $24 million prior quarter position.

Approach Resources Inc. (AREX): AREX is engaged in the acquisition, exploration and production of oil and natural gas in TX, NM and KY. Five guru funds hold 2.1% of AREX stock, and they cut a net $7million from their $20 million prior quarter position.

Table

High Alpha or Guru Fund and Manager Total Assets & % Portfolio in Group Major Positions in Group Major New Buys in Group Major New Sells in Group
BP Capital Management LP (T. Boone Pickens) $359 million (57.1% in group) CHK ($30m), SD ($25m), EOG ($24m), PXP ($22m), MMR ($21m), APA ($20m), CNQ ($15m), MUR ($14m), DVN ($14m), OXY ($13m) APA ($20m), CNQ ($15m), MUR ($10m), OXY ($5m), AREX ($3m), EOG ($2m) QEP ($19m), TAT ($6m), CWEI ($6m)
Wintergreen Advisors LLC (David Winters) $592 million (18.1% in group) CNQ ($107m) None None
Bruce & Co. (Robert Bruce) $168 million (15.7% in group) SD ($13m), ATPG ($12m) None None
Southeastern Asset Management (Otis Mason Hawkins) $25.5 billion (12.8% in group) CHK ($2,660m), PXD ($599m) None PXD ($686m), CHK ($84m)
RS Investment Management $12.4 billion (12.7% in group) SWN ($358m), DNR ($300m), CXO ($239m), OXY ($209m), RRC ($129m), CNQ ($114m), TLM ($104m), QEP ($92m) None None
Balyasny Asset Management LLC (Dmitry Balyasny) $2.25 billion (12.3% in group) NXY ($91m), TSO ($50m), CHK ($34m), SM ($33m), APC ($20m) TSO ($50m), CHK ($34m), SM ($33m), APC ($20m) EOG ($69m), DVN ($29m), REN ($12m), ECA ($10m)
Fairfax Financial Holdings (Prem Watsa) $2.3 billion (12.2% in group) SD ($273m), XCO ($14m) None None
First Pacific Advisors (FPA) Crescent Fund (Steven Romick) $6.7 billion (10.7% in group) ROSE ($199m), OXY ($184m), APA ($102m), NFX ($91m), SM ($69m), XEC ($62m) OXY ($10m) ROSE ($38m), XEC ($10m), NFX ($5m), SM ($4m)

General Methodology and Background Information: The latest available institutional 13-F filings of 70+ high alpha or guru funds were analyzed to determine their capital allocation from among 50+ different industry groupings. These were then analyzed to determine which guru funds were over-concentrated in specific industry groups, relative to the weighting of the overall market in that group. Then the holdings of those gurus that were over-concentrated in a specific industry grouping were analyzed to determine what specific stocks they held, bought or sold in significant amounts during the quarter as an indication of their bullishness or bearishness about those stocks.

The argument is that institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When high alpha generating or guru Institutional Investors by virtue of their fund performance, low volatility and elite reputation in the investment community, invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence or even go as far as constructing a model diversified portfolio based on the guru funds best picks.

Please note that each of the gurus has been carefully selected based on their long-term performance and standing in the investment community. Furthermore, the credentials of most of the 70-odd guru funds that justify their inclusion in this elite group were detailed in our previous articles, many of which can be accessed by clicking on the hyperlinks referencing them in the above Table and in article.

These high alpha or guru funds number less than 100 or less than one percent of all funds and they control almost ten percent of the U.S. equity discretionary fund assets.

Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: Top Oil and Gas Exploration Picks by High Alpha Funds Concentrated in the Sector