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Greenwich, Connecticut-based Energy-focused Hedge Fund company Sound Energy Partners, manages U.S. equity assets of $890 million, as per their most recent SEC 13-F filing for the September 2011 quarter. The fund is completely focused on the energy sector, which accounts for almost all of their 65 equity holdings in the portfolio. Their investment process depends on both the macroeconomic outlook of the overall market and the economic environment affecting oil and gas stocks, and they use fundamental research to determine long and short positions.

Their hedge fund, Southport Energy Partners, LP, has achieved almost 20% compound annual since fund launch in 1997, and their other Hedge Fund Southport Energy Plus Offshore Fund, Inc., has achieved over 17% compound annual return since fund launch in 2000. Over two-thirds of its holdings are in large-caps, another 25% is in mid-caps and the remaining 5%-10% is in small-cap equities. Their portfolio turnover is just over 100%, implying an average holding period of slightly less than one year.

Based on a review of the latest Q3 SEC 13-F filing, we determined that Sound Energy is bullish on the following undervalued stocks in the oil and gas industry (see Table):

Baker Hughes Inc. (BHI): BHI provides wellbore products and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the global oil and natural gas industry. At $65 million, including the $3 million added during Q3, this is the third largest position in Sound Energy’s portfolio. BHI is undervalued, trading at less than 10 forward P/E while earnings are projected to increase at a compound 59.0% annualized rate from $2.20 in 2010 to $5.56 in 2012, compared to an average of forward 14.2 P/E for the its peers in the oil field services group. Also, it trades at a 1.5 P/B and at 2.4 P/CF, a discount compared to the averages of 3.3 and 12.2 respectively for the peer group. Besides Sound Energy, other major funds that accumulated BHI shares in Q3 include Capital World Investors adding 7.0 million shares to its 6.4 million share prior quarter position, Eaton Vance Management adding 2.7 million shares to its 0.1 million share prior quarter position, and SAC Capital adding 2.2 million shares to its 1.3 million share prior quarter position.

Halliburton Company (HAL): HAL provides a variety of equipment, and maintenance, engineering and construction services to the oil and gas exploration and production (E&P) industry, including reservoir completion and drilling services. At $55 million, this is the second largest position in Sound Energy’s portfolio. HAL is undervalued, trading at 8.3 forward P/E, while earnings are projected to increase at a compound 41.1% annualized rate from $2.05 in 2010 to $4.08 in 2012, compared to an average 14.2 forward P/E for its peers in the oil field services group. Also, it trades at a discount 2.6 P/B, and at 9.7 P/CF compared to the averages of 3.3 and 12.2 respectively for its peers. Besides Sound Energy, other major funds that accumulated HAL shares in Q3 include Goldman Sachs Group that added 9.3 million shares to its 1.0 million prior quarter position, and Marsico Capital Management that added 5.9 million shares to its 15.5 million prior quarter position.

Weatherford Intl Ltd (WFT): Geneva, Switzerland-based WFT is a leading provider of equipment and services used in the drilling, evaluation, completion, production and intervention of oil and natural gas wells to independent oil and natural gas producing companies worldwide. Sound Energy added $6 million to its $13 million prior quarter position in Q3. WFT is undervalued, trading at 9.2 forward P/E, while earnings are projected to increase at a compound 97.4% annualized rate from 39c in 2010 to $1.52 in 2012, compared to an average 12.1 forward P/E for its peers in the oil field machinery & equipment group. Also, it trades at a discount 1.1 P/B, and at 16.7 P/CF, compared to averages of 2.0 and 13.6 respectively for its peers. Besides Sound Energy, other major funds that accumulated WFT shares in Q3 include Credit Suisse adding 5.1 million shares to its 0.3 million prior quarter position, and Balyasny Asset Management adding a new 4.5 million share position.

Tenaris SA (TS): a Luxembourg manufacturer of seamless and welded steel tubular products for energy and industrial applications. Sound Energy added a new $3 million position in TS. TS is undervalued, trading at 11.3 forward P/E, while earnings are projected to increase at a compound 24.3% annualized rate from $1.91 in 2010 to $2.95 in 2012, compared to an average 15.7 forward P/E for its peers in the Steel Pipe & Tube group. Also, it trades at 1.9 P/B and 18.2 P/CF, compared to averages of 1.8 and 13.9 respectively for its peers. Besides Sound Energy, other major funds that accumulated TS shares in Q3 include Citigroup adding a new 1.6 million share position, and Aberdeen Asset Management adding 9.0 million shares to its 43.2 million prior quarter position.

Also, besides the undervalued stocks listed above, Sound Energy by is also bullish on (see Table) oil and gas exploration and production company Encana Corp. (ECA), in which they added a new $16 million position. Also, select stocks that Sound Energy is bearish on (see Table) include oil and gas exploration and production companies Chesapeake Energy (CHK) and Sandridge Energy Inc. (SD), in which they dropped their entire $37 million and $23 million prior quarter positions respectively; leading oil & gas field services company Schlumberger Ltd. (SLB), in which they cut $34 million from their $52 million prior quarter position; Brazilian integrated oil & gas company Petroleo Brasileiro (PBR), in which they dropped their entire $12 million prior quarter position; and coal miner Alpha Natural Resources (ANR), in which they cut $21 million from their $37 million prior quarter position.


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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.

Disclosure: 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 Undervalued Q3 Picks of Energy-Focused Hedge Fund Sound Energy Partners