Undervalued Mid-Cap Oil & Gas Exploration Picks By World's Largest Money Managers

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 |  Includes: COG, ERF, EVEP, FST, KOG, LNG, MMR, NFX, OAS, PGH, SD, SM, UPLMQ, XCO
by: GuruFundPicks

After a nearly 20% surge in January and February, the SPDR S&P Oil & Gas Exploration & Production Index ($XOP) is flat for the year, giving back the gains in March and the first half of 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 mid-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 mid-cap oil & gas exploration & production companies that these mega fund managers are most bullish about, and that are also trading at a discount to the peers in their group (see Table):

Newfield Exploration Co. (NFX): NFX is an independent oil & gas company engaged in the exploration and development of crude oil and natural gas properties in the U.S., Malaysia and China. Mega funds together added a net $147 million in Q4 to their $2.32 billion prior quarter position in the company, and taken together mega funds hold 56.0% of the outstanding shares. The top buyer was mega fund Wellington Management, with $254 billion in 13-F assets ($303 million), and the top holders were Los Angeles-based Capital World Investors, with over $262 billion in 13-F assets ($503 million) and Wellington Management ($477 million).

NFX shares have been plunging for a while, down 15% YTD on top of a near 50% drop in 2011, as quarter earnings results have continued to disappoint, missing analyst estimates and down year-over-year three quarters in a row. The shares, have more than corrected to account for the earnings shortfall, trading at 8-9 forward P/E and 1.1 P/B compared to averages of 17.8 and 5.3 for its peers in the U.S. oil & gas exploration & production group.

Oasis Petroleum Inc. (OAS): OAS is engaged in the exploration and production of oil and natural gas in the Williston Basin in ND and MT. Mega funds together added a net $16 million in Q4 to their $937 million prior quarter position in the company, and taken together mega funds hold 33.2% of the outstanding shares. The top buyers were Morgan Stanley ($34 million) and Neuberger Berman Group ($27 million), and the top holders were mega fund T Rowe Price Associates, with $288 billion in 13-F assets ($188 million) and Capital World Investors ($140 million).

OAS shares are currently consolidating at their highs, slightly up YTD, and trading at 11-12 forward P/E and 4.6 P/B compared to averages of 17.8 and 5.3 for its peers in the U.S. oil & gas exploration & production group.

Enerplus Corp. (ERF): ERF is an independent oil & gas producer, with property interests located in western Canada, as well as in the U.S. in MT, ND, PA, MD and DE. Mega funds together added a net $16 million in Q4 to their $179 million prior quarter position in the company, and taken together mega funds hold 6.0% of the outstanding shares. The top buyer was Royal Bank of Canada ($26 million), also the top holder at $93 million.

ERF shares are currently in free fall, having been cut by a third YTD, on top of a 20% drop in 2011. The shares trade at 17.3 forward P/E and 1.0 P/B compared to averages of 17.8 and 5.3 for its peers in the U.S. oil & gas exploration & production group, while earnings are projected to be up strongly from 61c in 2011 to $1.04 in 2013 at a 30.6% annual growth rate.

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

  • EXCO Resources Inc. (XCO), an independent oil and natural gas company, engaged in the exploration, exploitation, development and production of onshore North American oil and natural gas properties with a focus on shale resource plays, in which mega funds together added a net $47 million in Q4 to their $159 million prior quarter position in the company;
  • Pengrowth Energy Corp. (PGH), a Canadian energy trust with crude oil and natural gas properties in Western Canadian Sedimentary Basin, and offshore along the east coast of Canada, , in which mega funds together added a net $75 million in Q4 to their $190 million prior quarter position in the company;
  • Cheniere Energy Inc. (LNG), an operator of LNG receiving terminals and natural gas pipelines in the Gulf Coast of the U.S., including the Sabine Pass LNG terminal, in which mega funds together added a net $48 million in Q4 to their $206 million prior quarter position in the company;
  • EV Energy Partners (EVEP), a MLP engaged in the acquisition, development and production of oil & natural gas properties in the continental U.S., in which mega funds together added a net $33 million in Q4 to their $474 million prior quarter position in the company; and
  • McMoRan Exploration Co. (MMR), engaged in oil and natural gas exploration and production in offshore Gulf of Mexico and U.S. onshore Gulf Coast area, in which mega funds together added a net $24 million in Q4 to their $232 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 mid-cap oil & gas exploration & production stocks (see Table):

SM Energy Co. (SM), engaged in the exploration, production and acquisition of crude oil and natural gas in North America, in which mega funds together cut a net $84 million in Q4 from their $1.77 billion prior quarter position in the company;

  • Sandridge Energy Inc. (SD), an OK-based independent oil and natural gas company, in which mega funds together cut a net $65 million in Q4 from their $661 million prior quarter position in the company;
  • Denver-based Kodiak Oil & Gas (KOG), an independent energy exploration and development company focused on exploring, developing and producing oil and natural gas in the Williston and Greater Green River Basins in the U.S. Rocky Mountains, in which mega funds together cut a net $51 million in Q4 from their $539 million prior quarter position in the company;
  • Forest Oil Corp. (FST), that is engaged in the exploration and production of oil, natural gas and natural gas liquids primarily in North America, with interest in the Texas Panhandle, the Western Canadian Sedimentary Basin in Alberta and British Columbia, the Eagle Ford Shale in South Texas, and the East Texas/North Louisiana area, in which mega funds together cut a net $46 million in Q4 from their $378 million prior quarter position in the company;
  • Cabot Oil & Gas Corp. (COG), that is engaged in the exploration and production of oil and gas in Rocky Mountain and Appalachian areas and in the Andarko Basin in TX and LA, in which mega funds together cut a net $41 million in Q4 from their $1.75 billion prior quarter position in the company; and
  • Ultra Petroleum Corp. (UPL), an independent, exploration and production company focused on developing its long life, tight-gas sand resource play in the Green River Basin in WY, in which mega funds together cut a net $34 million in Q4 from their $1.11 billion prior quarter position in the company.

Table

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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: 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.

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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