Greenwich, Connecticut-based Energy-focused Hedge Fund company Sound Energy Partners, manages U.S. equity assets of $304 million, as per their most recent SEC 13-F filing for the March 2012 quarter, an increase from the $244 million in 13-F assets in the prior quarter. The fund is completely focused on the energy sector, which accounts for almost all of their 27 equity holdings in the portfolio. Their investment process depends on both the macroeconomic outlook of the overall market and the economic environment affecting oil and gas stocks, and they use fundamental research to determine long and short positions.
Their hedge fund, Southport Energy Partners, LP, has achieved a 15.5% annual return since fund launch in 1997, and their other Hedge Fund Southport Energy Plus Offshore Fund, Inc., has achieved a 12.4% compound annual return since fund launch in 2000. About 60% of its holdings are in large-caps, and 20% each of the remaining are in mid-caps and small-cap equities.
We analyzed Sound Energy's Q1 13-F to determine its highest conviction bets, selecting the largest buys and sells in size, where the buy/sell is also a significant proportion of its prior quarter position in that company. Based on that analysis, the following are three of its new positions in Q1 2012, with the first two undervalued compared to their peers (see Table):
Hess Corp. (HES): HES is a global integrated oil and gas company engaged in the exploration, production, refining, transportation and marketing of oil and gas worldwide. Sound Energy added a new $11 million position in Q1. Other leading institutions making large bullish bets on HES in Q1 include Deutsche Bank AG adding 2.3 million shares to its 1.7 million share prior quarter position, and billionaire star fund manager Stephen Cohen's hedge fund SAC Capital Advisors adding 1.2 million shares to its 1.1 million share prior quarter position.
HES reported its Q1 (March) four weeks ago, on April 25th, beating analyst revenue and earnings estimates ($1.60 v/s $1.56). Its shares, however, have moved about 18% lower since the report, trading at 5-6 forward P/E and 0.8 P/B compared to averages of 8.5 and 1.5 for the U.S. integrated oil and gas group, while earnings are projected to rise at 15.2% annual rate from $5.75 in 2011 to $7.63 in 2012. Also, it has a dividend yield of 0.9% compared to the 1.3% average for the group.
Rowan Co. Inc. (RDC): RDC is a provider of offshore contract drilling services to the oil & natural gas industry, both domestic and international. Sound Energy added a new $10 million position in Q1. Other leading institutions making large bullish bets on RDC in Q1 include Franklin Resources adding 1.3 million shares to its 3.5 million share prior quarter position, and billionaire and investment legend Ken Fisher's Fisher Asset Management adding 0.7 million shares to its 1.4 million share prior quarter position.
RDC reported its Q1 (March) at the beginning of the month, on May 2nd, beating analyst revenue estimates ($334 million v/s $315 million). Revenue for the quarter was up 62% year-over-year, and earnings at 47c were up 124% year-over-year. Furthermore, analysts are projecting strong growth for the current fiscal year, with revenues rising from $939 million in 2011 to $1.40 billion in 2012, and earnings more than doubling from $1.16 in 2011 to $2.51 in 2012, and on to $4.00 in 2013. The shares, however, have fallen about 15% since the report, and are about flat YTD, trading at 7-8 forward P/E and 0.9 P/B compared to averages of 11.1 and 1.4 for its peers in the oil & gas drilling group.
Schlumberger Ltd. (SLB): SLB provides technology services, project management and information solutions to petroleum industry worldwide. Sound Energy added a new $12 million position in Q1. Other leading institutions making large bullish bets on SLB in Q1 include Los Angeles-based mega fund Capital Research Global Investors, adding 6.2 million shares to its 35.5 million share prior quarter position, and hedge fund guru Andreas Halvorsen's Viking Global Investors adding a new 3.3 million share position. SLB shares currently trade at 12-13 forward P/E and 2.6 P/B compared to averages of 10.4 and 2.9 for its peers in the oil & gas field services group.
The following are Sound Energy's bearish picks, based on its Q1 selling activity (see Table):
- Transocean Ltd. (RIG), that provides offshore contract drilling for oil and gas wells worldwide, in which it cut $13 million in Q1 from its $24 million prior quarter position;
- Nabors Industries Ltd. (NBR), that is a provider of oil, gas, geothermal and land drilling, land well and work-over services worldwide, in which it cut out completely its $13 million prior quarter position;
- Halliburton Company (HAL), that provides a variety of equipment, and maintenance, engineering and construction services to the oil and gas exploration and production (E&P) industry, in which it cut $11 million in Q1 from its $24 million prior quarter position;
- EOG Resources (EOG), engaged in the production and marketing of crude oil and natural gas in the U.S., Canada, Trinidad, U.K. and China, in which it cut $11 million in Q1 from its $16 million prior quarter position;
- Hollyfrontier Corp. (HFC), an independent petroleum refiner and marketer in the U.S., that is engaged in the production of high value light petroleum products such as gasoline, diesel fuel, jet fuel, and other specialty products, in which it cut $11 million in Q1 from its $14 million prior quarter position;
- offshore contract drilling services company Ensco Plc (ESV), in which it cut $8 million in Q1 from its $13 million prior quarter position;
- Pioneer Natural Resources (PXD), that is engaged in the exploration and production oil and gas in the U.S. and South Africa, in which it cut $7 million in Q1 from its $14 million prior quarter position;
- Oil field equipment and services provider Weatherford International Ltd. (WFT), in which it cut $6 million in Q1 from its $18 million prior quarter position;
- Concho Resources Inc. (CXO), an independent oil & natural gas company, engaged in the acquisition, development and exploration of oil and natural gas in southeast NM and west TX, in which it cut out completely its $4 million prior quarter position.
Credit: Fundamental data in this article and company descriptions are based on SEC filings, Zacks Investment Research, Yahoo, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.