Undervalued Large-Cap Oil And Gas Exploration Picks By World's Largest Money Managers

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Includes: APC, CEO, CHK, CNQ, DVN, ECA, EPD, KMP, MUR, OXY, PWE, SE, SWN, TLM, XOP
by: GuruFundPicks

After a nearly 20% surge in January and February, the SPDR S&P Oil & Gas Exploration & Production Index (NYSEARCA: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 large-cap oil and gas exploration and 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 (prior articles on the investing activities of mega funds in small-cap and mid-cap oil and gas exploration and production companies can be accessed by clicking on the above hyperlinks). 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 large-cap oil and gas exploration and production companies that these mega fund managers are most bullish on, and that are also trading at a discount to the peers in their group (see Table):

Andarko Petroleum Corp. (NYSE:APC): APC is one of the world's largest independent oil and gas exploration and production companies, with a majority of its reserves located in the U.S., in the mid-continent in KY, OK and TX, offshore in the Gulf of Mexico, and in AK. Mega funds together added a net $449 million in Q4 to their $13.58 billion prior quarter position in the company, and taken together, mega funds hold 39.5% of the outstanding shares. The top buyer was mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets ($307 million), and the top holders were Fidelity Investments ($1.99 billion), and mega fund Wellington Management, with $254 billion in 13-F assets ($1.94 billion).

APC received favorable news last month on a resolution of its long-standing dispute with Algeria and its state oil company Sonatrach, under which APC will receive $1.8 billion worth of crude over 12 months once the deal is finalized. However, its shares have trended lower, off about 20% from the February/March highs, and trading at 13-14 forward P/E and 2.0 P/B compared to averages of 15.3 and 5.2 for its peers in the U.S. oil and gas exploration and production group, while earnings are projected to increase from $3.38 in 2011 to $5.24 in 2013 at an annual growth rate of 24.5%.

Spectra Energy Corp. (NYSE:SE): Spectra is engaged in the gathering, processing, transmission, storage and distribution of natural gas in the U.S. and Canada. Mega funds together added a net $171 million in Q4 to their $6.20 billion prior quarter position in the company, and taken together mega funds hold 32.8% of the outstanding shares. The top buyer was diversified financial services provider Ameriprise Financial, with $131 billion in 13-F assets ($120 million), and the top holder was mega fund T Rowe Price Associates, with $288 billion in 13-F assets ($1.15 billion). Spectra shares trade at a discount 14-15 forward P/E and 2.4 P/B compared with averages of 23.7 and 2.7 for its peers in the oil & gas transportation & pipeline group.

Chesapeake Energy (NYSE:CHK): CHK is an independent oil and gas company, with its primary operating assets in mid-continent region of Oklahoma, western Arkansas, southwestern Kansas and the Texas panhandle. Mega funds together added a net $139 million in Q4 to their $3.42 billion prior quarter position in the company, and taken together, mega funds hold 30.0% of the outstanding shares. The top buyer was Wellington Management ($139 million), also the top holder at $893 million. CHK shares have been weak lately, falling to multi-year lows, and currently trading at 6-7 forward P/E and 0.8 P/B compared to averages of 15.3 and 5.2 for its peers in the U.S. oil and gas exploration and production group.

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

  • Kinder Morgan Energy Partners LP (NYSE:KMP), an MLP engaged in the ownership and management of three pipeline systems used to transport natural gas liquids, refined petroleum products and carbon dioxide, in which mega funds together added a net $316 million in Q4 to their $790 million prior quarter position in the company;
  • Enterprise Products Partners (NYSE:EPD), an MLP engaged in transportation, gathering, processing and storage of natural gas, natural gas liquids and crude oil, in which mega funds together added a net $206 million in Q4 to their $3.65 billion prior quarter position in the company;
  • Canadian Natural Resources Ltd. (NYSE:CNQ), engaged in oil and gas exploration and production activities in Western Canada, the North Sea and offshore in West Africa, in which mega funds together added a net $168 million in Q4 to their $7.03 billion prior quarter position in the company;
  • Nexen Inc. (NXY), a Canadian company engaged in the exploration and production of crude oil, natural gas, sulphur and chemicals, in which mega funds together added a net $163 million in Q4 to their $2.98 billion prior quarter position in the company;
  • Penn West Petroleum (NYSE:PWE), an open-end investment trust engaged in the exploration, development and production of oil and gas, mainly in western Canada, in which mega funds together added a net $116 million in Q4 to their $814 million prior quarter position in the company;
  • Murphy Oil Corp. (NYSE:MUR), engaged in the exploration, production, refining and marketing of oil and gas in the U.S. and U.K., in which mega funds together added a net $96 million in Q4 to their $3.69 billion prior quarter position in the company; and
  • Encana Corp. (NYSE:ECA), engaged in oil and gas exploration and production in British Columbia, Alberta, Offshore Nova Scotia, WY, CO, LA and TX, in which mega funds together added a net $61 million in Q4 to their $1.89 billion prior quarter position in the company.

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

  • Devon Energy Corp. (NYSE:DVN), engaged in the exploration and production of oil, gas and natural gas liquids in the U.S. and Canada, in which mega funds together cut a net $404 million in Q4 from their $9.41 billion prior quarter position in the company;
  • Occidental Petroleum (NYSE:OXY), engaged in the exploration and production of crude oil and gas worldwide, in which mega funds together cut a net $369 million in Q4 from their $28.23 billion prior quarter position in the company;
  • Southwestern Energy Co. (NYSE:SWN), engaged in the exploration and production of oil and natural gas primarily in AK, OK, TX and PA, in which mega funds together cut a net $66 million in Q4 from their $3.98 billion prior quarter position in the company; and
  • Canadian company Talisman Energy (NYSE:TLM), engaged in activities in oil and gas exploration and production activities in North America, the North Sea and Southeast Asia, in which mega funds together cut a net $14 million in Q4 from their $2.28 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.

General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds, and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

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.

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.