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The exploitation of shale gas using induced hydraulic fracturing or 'fracking' has fundamentally altered the natural gas landscape, creating an abundant supply and the possibility of transforming the U.S. into not just being self-sufficient in energy, but making us into a net energy exporter. This has the added promise of not compelling us into getting entangled into overseas conflicts, but that potential will only be realized if politicians in Washington can summon the vision and the will to allow energy companies to make that happen, a promise that seems hollow given the bickering along party lines that has characterized U.S. politics in recent times.

Partly as a result of the abundant supply of natural gas created by the 'fracking' of shale gas formations, and partly due to a result of the mild winter, the price of natural gas has plummeted more than 50% in the U.S. over the past year to less than $2 per MMBtu, and well below recent multi-year highs in the $16 range in 2005. As a result, most natural gas-focused energy exploration companies are trading at their lows, creating an opportunity for natural gas energy bulls to take advantage of these attractive prices in investing for the long-term.

In this article, via an analysis based on the latest available Q4 institutional 13-F filings, we identify the natural gas-focused energy exploration & production companies that are being accumulated and those being distributed by the world's largest fund managers. These mega managers, managing between $50 billion and over $700 billion in 13-F assets, 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. Taken together, they are bearish on the group, cutting a net $448 million in Q4 from their $35.81 billion prior quarter holdings in the group.

The investing activities of these mega fund managers in non-natural gas focused large-cap oil & gas, mid-cap oil & gas, and small-cap oil & gas exploration & production companies were discussed in prior articles, that can be accessed by clicking on the above hyperlinks. (for more general information on these mega funds, please read the end of the article).

The following are the natural gas-focused energy exploration & production companies that these mega fund managers are most bullish about, and that have a significantly higher dividend compared to their group peers (see Table):

Encana Corp. (ECA): ECA is engaged in oil and gas exploration and production in British Columbia, Alberta, Offshore Nova Scotia, WY, CO, LA and TX. Mega funds together added a net $73 million in Q4 to their $2.30 billion prior quarter position in the company, and taken together mega funds hold 14.9% of the outstanding shares. The top buyer was Wellington Management, with $254 billion in 13-F assets ($141 million), and the top holders were Royal Bank of Canada ($742 million) and Wellington Management ($546 million).

ECA reported its Q1 (March) the week before last, on Wednesday, beating analyst revenue and earnings estimates (33c v/s 3c), benefiting mostly from the successful commodity hedging program which netted them $358 million in after-tax gains for the quarter. Its shares are up almost 20% since the report, and up about 15% YTD, a rarity in the group given the extreme bearishness on natural gas exploration plays due to the falling natural gas prices.

The stock trades at 30.6 current P/E on a TTM (trailing-twelve-month) basis and 1.9 P/B compared to averages of 22.5 and 1.6 for its peers in the Canadian oil & gas exploration & production group, while earnings are projected to fall off from 81c in 2011 to 11c in 2013. Also, it yields a rich 3.8% dividend yield, the highest that we could find among natural-focused exploration plays, and well above the 0.8% average for that group.

EXCO Resources Inc. (XCO): EXCO is 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. Mega funds together added a net $56 million in Q4 to their $197 million prior quarter position in the company, and taken together mega funds hold 16.7% of the outstanding shares.

The top buyer was New York-based Bank of New York Mellon Corp., with over $1.2 trillion in assets under management ($41 million), and the top holders were mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets ($66 million) and Bank of New York Mellon Corp. ($47 million). BNY Mellon has since filed its Q1 2012, summarized by us in a prior article, in which it cut 0.2 million shares in XCO from its 6.6 million share position at the end of Q4.

EXCO reported its Q1 (March) last week, on Tuesday, missing on revenues but also beating earnings estimates (3c v/s 1c loss). Its shares are flat since the report, and currently trade at 16.2 current P/E on a TTM basis and 1.2 P/B compared to averages of 20.2 and 1.8 for its peers in the U.S. oil & gas exploration & production group, while earnings are projected to fall off from 56c in 2011 to a 5c projected loss in 2013. Also, EXCO yields a 2.3% dividend, higher than the 0.8% average for its peers in the natural-gas focused energy exploration group.

The following are some additional natural gas-focused energy exploration and production companies that mega fund managers accumulated in Q4 (see Table):

  • Chesapeake Energy (CHK), 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, in which mega funds together added a net $132 million in Q4 to their $3.26 billion 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 $25 million in Q4 to their $238 million prior quarter position in the company.

Besides these, mega fund managers based on their Q4 trading activity indicated that they are bearish on the following natural gas-focused energy exploration and production companies:

  • Range Resources Corp. (RRC), that is engaged in the exploration and production of oil and natural gas in the south-western and Appalachian regions of the U.S., with 79% of its total reserves being natural gas, in which mega funds together cut a net $415 million in Q4 from their $4.72 billion prior quarter position;
  • Devon Energy Corp. (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 $395 million in Q4 from their $9.18 billion prior quarter position;
  • Southwestern Energy Co. (SWN), engaged in the exploration and production of oil and natural gas primarily in AK, OK, TX and PA, with almost 100% of its estimated proved reserves being natural gas, in which mega funds together cut a net $69 million in Q4 from their $4.09 billion prior quarter position;
  • 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, with 96% of its reserves and 95% of its current production being natural gas, in which mega funds together cut a net $46 million in Q4 from their $1.94 billion prior quarter position;
  • 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, with 76% of its proved reserves being natural gas, in which mega funds together cut a net $44 million in Q4 from their $352 million prior quarter position;
  • Ultra Petroleum Corp. (UPL), that is an independent, exploration and production company focused on developing its long life, tight-gas sand resource play in the Green River Basin in WY, with current production comprising 97% gas and 3% crude oil or liquid hydrocarbons, and about 96% of its proved reserves is natural gas, in which mega funds together cut a net $35 million in Q4 from their $1.15 billion prior quarter position;
  • 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 $31 million in Q4 from their $159 million prior quarter position;
  • QEP Resources Inc. (QEP), that is an independent natural gas and oil exploration and production company, with operations in the Rocky Mountain and Midcontinent regions, with 82% of its current production being natural gas, in which mega funds together cut a net $17 million in Q4 from their $2.13 billion prior quarter position; and
  • Comstock Resources Inc. (CRK), that is 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, with about 85% of its reserves and 95% of its current production being natural gas, in which mega funds together cut a net $12 million in Q4 from their $319 million prior quarter position.

Table

(click to enlarge)

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: High Dividend Natural Gas Focused Energy Exploration Stocks Accumulated By Mega Funds