The average oil and gas exploration and production company, as represented by the SPDR S&P Oil & Gas Exploration & Production Index (XOP) is down 6% YTD, after a nearly 30% surge in 2010 and 2011. Although oil prices are still at relatively high levels in the $85-$90 per barrel range, the threat of the EU crisis worsening and spilling over into China and the rest of the world are helping keep a lid on prices. However, we believe that the long-term outlook is promising in the face of a growing global economy, led by the BRIC countries, constrained supply, and the threat of an Iran-led crisis in the oil-rich Middle East. In this article, via an analysis based on the latest available Q1 institutional 13-F filings, we identify the large-cap oil & gas exploration & production company stocks that are being accumulated and those being distributed by the world's largest fund managers.
These mega fund managers, such as Fidelity Investments, Goldman Sachs, BlackRock Inc., Vanguard Group, and 22 others, manage between $100 billion and over $1 trillion each, and together control about 40% of the assets invested in the U.S. equity markets. Together, these mega fund managers are bullish on the oil & gas exploration & production group, adding a net $2.78 billion in Q1 to their $159.56 billion prior quarter position in the group. However, overall they are still under-weight the group by a factor of 0.55; that is, taken together, the 25 mega funds have invested 2.0% of their assets in the group, slightly more than half of the 3.7% weighting of the oil & gas exploration & production group in the overall market (for more general information on these mega funds, please look at the end of the article).
The investing activities of these mega fund managers in small-cap oil & gas exploration & production, and mid-cap oil & gas exploration & production companies were covered in prior articles. The following are the large-cap oil & gas exploration & production companies that these mega fund managers are most bullish about (see Table):
Cobalt International Energy (CIE): CIE is engaged in the exploration and production of oil primarily in the deepwater of the U.S. Gulf of Mexico, and in offshore Angola and Gabon in West Africa. Mega funds together added a net 27.82 million shares in Q1 to their 152.01 million share prior quarter position in the company, and taken together mega funds held $4.39 billion or 44.3% of the outstanding shares.
The top buyer was mutual fund powerhouse Fidelity Investments, with $555 billion in 13-F assets, that purchased 15.00 million shares. Other large mega fund purchasers included Wellington Management (12.34 million shares), one of the largest private independent investment management companies in the world, with $634 billion in assets under management, and Los Angeles-based Capital World Investors (4.44 million shares), with over $294 billion in 13-F assets.
CIE shares after a stellar performance in the two months leading up to its all-time $36 highs in February this year, during which the stock made a four-fold move nadir-to-zenith, have since retreated, and are currently off about 35% from those highs, but still up almost 60% YTD. The rally earlier this year was based on indications that its high-risk gamble of exploration activities off of the coast of Angola in West Africa had paid off. Many brokers, including in particular, Goldman Sachs, later postulated that the potential upside from this development was being underestimated even with the massive run-up in share prices.
The dip in CIE share prices, since that mid-February high, is based on two recent negative developments. First, in mid-April, shares were hit after a piece in the Financial Times alleged that the company could be in violation of U.S. anti-corruption laws regarding its activities in Angola, and later in mid-June, the company provided an update that its Canyon Block 814 wellbore in the Gulf of Mexico would be plugged and abandoned as it did not encounter commercial hydrocarbons.
CIE shares currently trade at 3.9 P/B compared to the average of 1.6 for its peers in the oil & gas exploration & production group, while it is expected to generate higher losses going forward, rising from a 35c loss in 2011 to a 41c loss in 2013. Wall Street analysts are bullish on the company, with all twelve that cover the company rating it at buy/strong buy, with a mean price target over 50% above current prices in the $24 range.
Other large-cap oil & gas exploration & production companies that mega fund managers are bullish about include:
- Pioneer Natural Resources (PXD), that is engaged in the exploration and production oil and gas in the U.S. and South Africa, in which mega funds together added a net 4.85 million shares to their 58.73 million share prior quarter position in the company;
- Andarko Petroleum Corp. (APC), that 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, in which mega funds together added a net 2.43 million shares to their 201.12 million share prior quarter position in the company;
- Apache Corp. (APA): APA is an independent energy company engaged globally in the exploration, development and production of natural gas, crude oil and natural gas liquids or NGLs, in which mega funds together added a net 1.22 million shares to their 152.15 million share prior quarter position in the company;
- Noble Energy Inc (NBL), a leading independent energy company, engaged in the acquisition, exploration, development, production, and marketing of crude oil, natural gas, and natural gas liquids in the U.S., and internationally in Argentina, China, Ecuador, Equatorial Guinea, the Mediterranean Sea, the North Sea and Vietnam, in which mega funds together added a net 0.94 million shares to their 88.76 million share prior quarter position in the company;
- 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 mega funds together added a net 0.66 million shares to their 49.82 million share prior quarter position in the company; and
- Linn Energy (LINE), an independent oil & natural gas exploration and production company with properties primarily located in the Mid-Continent, Permian Basin, MI, CA and the Williston Basin in the U.S., in which mega funds together added a net 1.26 million shares to their 10.07 million share prior quarter position in the company.
The following are large-cap oil & gas exploration & production companies that mega funds are bearish about (see Table):
- Canadian Natural Resources Ltd. (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 cut a net 30.88 million shares from their 264.79 million share prior quarter position in the company;
- Canadian company Talisman Energy (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 33.11 million shares from their 226.21 million share prior quarter position in the company;
- 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 mega funds together cut a net 3.17 million shares from their 129.44 million share 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 cut a net 9.91 million shares from their 181.38 million share prior quarter position in the company; and
- Continental Resources Inc. (CLR), an independent oil & natural gas exploration & production company with operations in the north, south, and east regions of the U.S., in which mega funds together cut a net 0.84 million shares from their 24.11 million share prior quarter position in the company.
Furthermore, the following are additional large-cap oil & gas exploration & production companies that are among the top holdings of mega funds in the group (see Table):
- Denbury Resources (DNR), engaged in the acquisition, exploration, development and operation of oil and gas properties in the Gulf Coast region, in which mega funds together hold 182.98 million or 46.8% of the outstanding shares; and
- Penn West Petroleum (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 hold 70.53 million or 14.9% of the outstanding shares.
General Methodology and Background Information: The latest available institutional 13-F filings of the largest 25 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.
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.