Top Q3 Picks Of Energy-Focused Hedge Fund Lucas Capital Management

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 |  Includes: APA, BBL, BP, CHK, CNQ, DMLP, ERF, NOG, NRT, OXY, PBR, SD, SU, XOM
by: GuruFundPicks

Red Bank, NJ-based energy focused hedge fund Lucas Capital Management, founded in 1996 by father-and-son team Geroge Lucas Jr. and his son Russell Lucas, has $730 million in assets deployed across four hedge funds, three private equity funds and their legacy wealth management business. Per its latest Q3 13-F filing with the SEC, it has $280 million deployed in U.S. equities. About 70% of the fund’s equity assets are invested directly in the stocks of companies trading in the energy sector; another 15% are invested in energy trusts, ETFs and the like; and the remaining 10% or so in natural resource, utility and other companies. The fund operates on the premise that we are entering a long cycle in which the supply of energy and other resources will be hard pressed to meet growing global demand, leading to a period of generally strong commodity prices. Thereby, it generally operates as an asset oriented value buyer, seeking to identify companies which offer the lowest cost, and most durable reserves and cash flow.

Based on a review of the latest Q3 SEC 13-F filing, we determined that Lucas Capital Management is bullish on the following energy stocks (see Table):

BP Plc (NYSE:BP): BP is a Britain-based leading international integrated oil & gas company engaged in the exploration, production, refining, marketing and transportation of oil and gas globally. Lucas added a new $11 million position in Q3, its largest buy. BP trades at an attractive discount at 6-7 forward P/E and 1.2 P/B compared with the averages of 16.5 and 1.3 for its peers in the international integrated oil & gas group, while earnings are projected to fall from $6.85 in 2010 to $6.44 in 2012.

Occidental Petroleum (NYSE:OXY): OXY is engaged in the exploration and production of crude oil and gas worldwide. It operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing, and Other. At $27 million, this is Lucas’s largest position in its portfolio, including adding $8 million in Q3. OXY trades at a premium 10-11 forward P/E and 2.0 P/B compared with averages of 8.0 and 1.2 for its peers in the U.S. integrated oil & gas group, while earnings are projected to grow strongly from $5.72 in 2010 to $8.51 in 2012 at an annual growth rate of 22.0%.

Sandridge Energy Inc. (NYSE:SD): SD is an OK-based independent oil and natural gas company, with its primary areas of focus being West Texas, the Cotton Valley Trend in East Texas, and the Gulf Coast. In Q3, Lucas doubled its prior quarter $5 million position in the company. SD is currently generating losses, and it trades at 1.4 P/B and 7.1 P/CF compared with averages of 5.3 and 22.0 for its peers in the U.S. oil & gas exploration & production group.

The following are energy companies that Lucas Capital Management is bearish about:

Suncor Energy Inc. (NYSE:SU): SU is an integrated energy company, engaged in the development of petroleum resource basins in Canada’s Athabasca oil sands; acquisition, exploration, development, production and marketing of crude oil and natural gas in Canada and internationally; transportation and refining of crude oil; and marketing of petroleum and petrochemical products primarily in Canada. Lucas cut $6 million in Q3 from its $13 million prior quarter position in the company. SU is undervalued, trading at a discount 7-8 forward P/E, while earnings are projected to increase at a compound 44.5% annualized rate from $1.73 in 2010 to $3.61 in 2012, compared with an average 44.4 P/E for its peers in the Canadian integrated oil & gas group. Also, it trades at a 1.3 P/B and at 5.4 P/CF, a discount compared with the averages of 2.6 and 52.8 respectively for the peer group.

BHP Billiton Ltd ADR (NYSE:BBL): BBL is an Australian company engaged in the mining of base metals, iron ore, oil, gas, diamonds and coals. Lucas cut $7 million in Q3 from its $9 million prior quarter position in the company. BBL trades at a discount 6-7 forward P/E and 2.7 P/B compared with averages of 17.7 and 2.2 for the miscellaneous mining group, while earnings are projected to increase modestly from $7.83 in 2011 to $8.63 in 2013.

Canadian Natural Resources Ltd. (NYSE:CNQ): CNQ is engaged in oil and gas exploration and production in western Canada, the North Sea and offshore West Africa. Lucas cut $2 million in Q3 from its $11 million prior quarter position in the company. CNQ trades at a discount 9 forward P/E and 1.8 P/B compared with averages of 15.2 and 1.5 respectively for its peers in the Canadian oil & gas exploration & production group, while earnings are projected to increase strongly at 28.4% annual growth rate from $2.28 in 2010 to $3.76 in 2012.

Petroleo Brasileiro SA (NYSE:PBR): PBR is a Brazilian company engaged in the exploration, production, supply and distribution of oil and gas in Brazil and abroad. Lucas dropped completely out of its $2 million prior quarter position in the company. PBR trades at a discount 7-8 forward P/E and 0.9 P/B compared with averages of 16.5 and 1.3 for its peers in the international integrated oil & gas group, while earnings are projected to drop from $4.17 in 2010 to $3.46 in 2012.

Northern Oil & Gas Inc. (NYSEMKT:NOG): NOG is engaged in the exploration and production of oil and natural gas within the Williston Basin in ND and MT. Lucas dropped its entire $10 million prior quarter position in the company in Q3. NOG trades at a discount 15-16 forward P/E and 3.0 P/B compared with averages of 23.1 and 5.3 for its peers in the U.S. oil & gas exploration & production group, while earnings are projected to rocket up from 35cents in 2010 to $1.37 in 2012 at an annual growth rate approaching 100%.

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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: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.