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The average oil and gas exploration and production company, as represented by the SPDR S&P Oil & Gas Exploration & Production Index (NYSEARCA:XOP) is flat for the year, after a near 20% surge in January and February got corrected in March and early April. Fears over an Iranian conflict are keeping price of crude oil at elevated levels, despite near-term concerns of a flagging world economy and fears of a slowdown in China.

However, long-term fundamentals continue to be bullish, as eventually growth in the emerging economies of China, India, Brazil and others are bound to keep supplies tight and prices high. Natural gas, however, is another story, revolutionized by 'shale gas' that has driven prices lower and is positioning the U.S. for energy independence, that is, if politicians in Washington can summon the will to make that happen.

In this article, via an analysis based on the latest available Q4 institutional 13-F filings, we identify the small-cap oil & gas exploration & production companies that are being accumulated and those being distributed by the world's largest fund managers, managing between $50 billion and over $700 billion in 13-F assets. Taken together these mega fund managers control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets. Also, taken together, they are bearish on the group, cutting a net $356 million in Q4 from their $187.61 billion prior quarter position (for more general information on these mega funds, please look at the end of the article).

The following are the small-cap oil & gas exploration & production companies that these mega fund managers are most bullish about (see Table):

Houghton Royalty Trust (HGT): HGT operates as an express trust, created in 1998 when XTO Energy Inc. conveyed 80% of net profits interest in certain predominantly gas-producing properties located in KS, OK and WY to the trust. Mega funds together added a net $11 million in Q4 to their $41 million prior quarter position in the company, and taken together mega funds hold 10.5% of the outstanding shares. The top buyer was mega fund company Bank of America, with $169 billion in 13-F assets ($8 million), also the top holder at $34 million.

HGT shares have plunged to multi-year lows, down by about a third YTD, and trading at a current 8.9 P/E on a TTM (trailing-twelve-month) basis and 4.4 P/B compared to averages of 13.7 and 7.4 for its peers in the (small-cap) oil & gas U.S. royalty trust group.

Permian Basin Royalty Trust (PBT): PBT is a trust holding overriding royalty interest in oil & gas properties located in Texas. Mega funds together added a net $9 million in Q4 to their $43 million prior quarter position in the company, and taken together mega funds hold 5.2% of the outstanding shares. The top buyer was Bank of America ($12 million), also the top holder at $30 million.

PBT shares are currently consolidating near multi-year highs, after a sharp rally from early 2009 that nearly tripled the share price. Its shares trade at a current 15.7 P/E on a TTM basis compared to the 13.7 average for its peers in the (small-cap) oil & gas U.S. royalty trust group.

San Juan Basin Royalty Trust (SJT): SJT operates as an express trust, and has a 75% net overriding royalty interest carved out of Burlington Resources Oil & Gas Company LPs oil and gas leasehold and royalty interests located in the San Juan Basin in northwestern New Mexico. Mega funds together added a net $8 million in Q4 to their $32 million prior quarter position in the company, and taken together mega funds hold 5.2% of the outstanding shares. The top buyer was Bank of America ($6 million), also the top holder at $26 million.

SJT shares are currently diving to multi-year lows, and trading at a current 11.9 P/E on a TTM basis compared to the 13.2 average for its peers in the (mid-cap) oil & gas U.S. royalty trust group.

The following are some additional small-cap oil & gas exploration and production stocks that mega funds bought in Q4 (see Table):

  • ATP Oil & Gas (ATPG), engaged in oil and natural gas exploration and production in the Gulf of Mexico, the United Kingdom and the Dutch sectors of the North Sea, in which mega funds together added a net $4 million in Q4 to their $68 million prior quarter position in the company;
  • QR Energy LP (QRE), an MLP engaged in the acquisition, exploitation, development and production of onshore crude oil and natural properties in the U.S., in which mega funds together added a net $3 million in Q4 to their $23 million prior quarter position in the company;
  • Hyperdynamics Corp. (HDY), engaged in the exploration of oil and gas in the offshore coast of the Republic of Guinea in West Africa, in which mega funds together added a net $3 million in Q4 to their $16 million prior quarter position in the company; and
  • Triangle Petroleum Corp. (TPLM), engaged in the acquisition, exploration, and development of unconventional shale oil resources in the Bakken Shale and Three Forks formations in the Williston Basin of ND and MT, in which mega funds together added a net $1 million in Q4 to their $41 million prior quarter position in the company.

Besides these, mega funds based on their Q4 trading activity indicated that they are bearish on the following small-cap oil & gas exploration & production stocks (see Table):

  • Quicksilver Resources (KWK), a leader in the development and production of unconventional resources, including coal bed methane, shale gas, and tight sand gas in North America, in which mega funds together cut a net $27 million in Q4 from their $137 million prior quarter position in the company;
  • Goodrich Petroleum Corp. (GDP), an independent oil & natural gas company, engaged in the exploration, development and production of oil & natural gas in TX and LA, in which mega funds together cut a net $11 million in Q4 from their $213 million prior quarter position in the company;
  • Comstock Resources Inc. (CRK), an independent energy company engaged in the acquisition, exploration, development and production of oil & natural gas properties, concentrated mainly in the Gulf of Mexico, Southeast Texas and East Texas/ North Louisiana regions, in which mega funds together cut a net $11 million in Q4 from their $300 million prior quarter position in the company;
  • Magnum Hunter Resources (MHR), an independent oil and gas company engaged in the acquisition, drilling and production of oil and natural gas properties in the U.S., primarily in WV, ND, TX and LA, in which mega funds together cut a net $7 million in Q4 from their $172 million prior quarter position in the company;
  • BPZ Resources Inc. (BPZ), engaged in the exploration and production of oil and natural gas primarily in Peru and Ecuador, in which mega funds together cut a net $5 million in Q4 from their $144 million prior quarter position in the company; and
  • Penn Virginia Corp. (PVA), an independent oil & gas exploration & production company operating in Texas, Appalachia, the Mid-Continent and Mississippi, in which mega funds together cut a net $3 million in Q4 from their $68 million prior quarter position in the company.

Table

(click to enlarge)

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: Fundamental data in this article were based on SEC filings, 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: Small-Cap Oil & Gas Exploration Stocks Being Accumulated By World's Largest Money Managers