Isle of Man-based shipping and energy focused hedge fund Oceanic Investment Management, with $250 million in equity assets under management per its latest 13-F Q3 filing, is a subsidiary of Tufton Oceanic Finance Group (TOFG). TOFG is a shipping investment house registered in Cyprus with offices in London, Isle of Man, Dubai, Cyprus, Hong Kong and Singapore. It was founded in 1985 by a 1977 Harvard MBA graduate, Ted Kalborg, and focuses its investments in shipping and oil services industries.
The fund holds a concentrated portfolio of 27 positions, with 50% of the investment in large-caps, 35% in mid-caps, and the remaining 15% in small-cap equities. The portfolio turnover is over 100%, so that the average holding period is just under a year. Over 40% of the investment is in oil services, 20% is in oil & gas operations, another 20% in the shipping sector, and the remaining 20% is in a variety of miscellaneous capital goods and services companies. It won the best energy fund award in 2008 at the Hedge Week European Performance Awards.
With most shipping companies cut in half or more YTD and currently trading at lows, and also the approximately one-fourth to one-third correction YTD in most oil and gas service companies, now may be a good time to hunt for some bargains in both groups. Based on its most recent Q3 filing, the following are Oceanic's most bullish picks that are also trading at a discount to their peers in the group (see Table):
Exxon Mobil Corp. (XOM): XOM is a world leader in energy exploration and production, engaged in the exploration, production, transportation and sale of crude oil and natural gas worldwide. Oceanic purchased its second largest position in the company in Q3, adding a new $18.0 million position. XOM, along with many of its peers such as Chevron Corp. (CVX), is trading within striking distance of its highs for the year as tensions mount in the Strait of Hormuz, as Iran flexes its military muscle in a quest for regional hegemony and to protect its controversial nuclear program. Its shares trade at a discount 10-11 forward P/E and 2.6 P/B compared to averages of 15.8 and 1.2 for its peers in the international integrated oil group, while earnings growth is projected at a strong 15.9% rate from $6.22 in 2010 to $8.35 in 2012.
Marathon Petroleum (MPC): MPC engages in the refining, transporting and marketing of petroleum products. It operates six refineries in the Gulf Coast and Midwest regions that refine crude oil and other feedstocks, and distribute the refined products through barges, terminals and trucks. Oceanic added a new $4 million position in Q3 in the company. MPC is undervalued, trading at 6 forward P/E and 1.2 P/B compared to averages of 12.0 and 2.5 for its peers in the oil refining and marketing group, while earnings are projected to rise from $1.80 in 2010 to $8.07 in 2011 and then fall to $5.43 in 2012 for a two-year annual growth rate of 33.1%. Also, it has a 3.0% dividend yield, at par with the 3.0% average for its peers. Besides Oceanic, other major funds that accumulated MPC shares in Q3 include AllianceBernstein adding 6.2 million shares to its 12.9 million share prior quarter position, and Lazard Asset Management adding 4.3 million shares to its 2.2 million share prior quarter position.
Royal Caribbean Cruises (RCL): RCL operates in the cruise vacation industry in North America and internationally, and owns five cruise brands: Royal Caribbean International, Celebrity Cruises, Azamara Cruises, Pullmantur and CDF Croisieres de France. Oceanic bought its largest position in the portfolio in Q3 in RCL, buying a new $20 million position. RCL shares have been weak this year, down more than 50% after hitting almost $50 highs in the first two weeks of the year. They trade at a discount 8 forward P/E and 0.7 P/B compared to averages of 26.8 and 4.1 for its peers in the leisure and recreation services group, while its earnings are projected to rise at a strong 24.1% annual growth from $2.02 in 2010 to $3.11 in 2012. More specifically, RCL's nearest competitor in the space, Carnival Corp. (CCL) trades at 10-11 forward P/E and 1.1 P/B, while its earnings are projected to grow at a more modest 12.5% annual growth rate from $2.44 in 2011 to $3.09 in 2013.
The following are additional companies that Oceanic is bullish about based on its Q3 trading activity (see Table):
Schlumberger Ltd. (SLB): SLB provides technology services, project management and information solutions to petroleum industry worldwide. Oceanic added $8 million in Q3 to its $19 million prior quarter position in the company. SLB trades at 13-14 forward P/E and 2.9 P/B compared to averages of 13.8 and 3.3 respectively for its peers in the oil field services group, while earnings are projected to rise at a strong 30.8% annual growth rate from $2.86 in 2010 to $4.89 in 2012.
Frontline Ltd (FRO): FRO provides tanker transportation services of oil and oil products through a fleet of 73 vessels. Oceanic added a new $2 million position in the company in Q3. FRO currently generates losses, and it trades at 0.6 P/B and 2.9 P/CF, compared to averages of 1.2 and 5.0 for the shipping group.
The following are companies that Oceanic is bearish about, based on its Q3 trading activity (see Table):
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. This was the largest trade and sell in Oceanic's activity as it exited its entire $26 million position in Q3. HAL is undervalued, trading at 8 forward P/E and 2.6 P/B, while earnings are projected to increase at a compound 41.9% annualized rate from $2.05 in 2010 to $4.13 in 2012, compared to averages of 14.2 and 3.3 for its peers in the oil field services group.
Petroleo Brasileiro SA (PBR): PBR is a Brazilian company engaged in the exploration, production, supply and distribution of oil and gas in Brazil and abroad. Oceanic dropped its entire $12 million position in Q3 from the prior quarter. PBR trades at a discount 7-8 forward P/E and 0.9 P/B compared to 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 $3.34 in 2012.
Other stocks that Oceanic is bearish on based on its Q3 trading activity (see Table) include offshore contract drilling services company Ensco Plc (ESV), in which it cut $8 million in Q3 from its $36 million prior quarter position; oil and gas pressure control and separation equipment provider Cameron Intl Corp. (CAM), in which it cut $5 million in Q3 from its $23 million prior quarter position; and wellbore products and technology services and systems provider Baker Hughes Inc. (BHI), in which it cut $5 million in Q3 from its $20 million prior quarter position.
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Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way the list is not biased towards the largest companies in the group.
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.
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