Greenwich, Conn.-based energy and natural resources focused hedge fund manager Wexford Capital LP manages over $5.9 billion in assets, with over $3.9 billion in three hedge funds: the opportunistic/global macro Wexford Spectrum Fund, the multi-strategy credit oriented Wexford Credit Opportunities Fund, and the energy, natural resources and industrials focused Wexford Catalyst Fund.
The firm was co-founded in 1994 by Chairman and CEO Charles Davidson, who also serves as the senior Portfolio Manager for the flagship Spectrum Funds and the Wexford Catalyst Funds. The double-digit long-term returns generated by Mr. Davidson along with the worst draw-down of 19% since fund inception in 1997 for their flagship Spectrum Funds ranks it among the top energy-focused hedge funds, and puts Mr. Davidson in near-Guru territory. Hence, it would benefit us to look at his most recent buy and sells and his largest holdings in the energy sector, so that we can use it as a starting point to inform our own thinking in investing in that sector.
Per the latest 13-F Q3 filing, the fund holds a diversified portfolio of over 240 positions. The fund is focused on the energy sector, which accounts for almost 60% of its investments. Almost half of the portfolio is in large-cap equities, 35%-40% is in mid-cap equities, and the remaining 15%-20% is in small-caps.
The following are Wexford's most bullish picks in the energy sector that are also trading at a discount compared to their peers (see table):
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. At $45 million, this was Wexford's largest buy in Q3, adding to their $1 million prior quarter position in the company. CHK is under-valued and trades at a discount 10 forward P/E and 1.1 P/B compared to averages of 21.4 and 5.3 for its peers in the U.S. oil exploration and production group.
A number of analysts, most recently Baird, have come out in support of the stock, raising its price target to $36, well above the current price in the $23 range. Also, of the 35 analysts that cover the stock, 21 rate it at buy/strong buy, 12 at hold, and only two at sell, with a mean price target of $35. The drag on valuation is at least in part due to investor concerns over its high debt levels, but the company seems to be making progress on that of late, with targets to slash long-term debt to approximately $9.5 billion by year-end 2012 under its 30/25 plan.
Peabody Energy Corp. (NYSE:BTU): BTU is engaged in coal production and sale through 28 operations in the U.S. and Australia. Wexford added $4 million in Q3 to its $10 million prior quarter position in the company. BTU trades at a discount 7-8 forward P/E and 1.8 P/B compared to averages of 10.7 and 2.6 for the coal mining group, while earnings are projected to increase at 28.2% compound growth rate from $3.09 in 2010 to $5.08 in 2012.
Recently, the stock appeared on Credit Suisse's list of eleven top stock picks to buy, with the second highest score among the eleven that is a measure of the possible upside from current prices. Also, analysts have a mean target of $60, well above current prices in the $36 range; and of the 25 analysts that track the company, 21 rate it at buy/strong buy, three at hold and only one at hold.
Suncor Energy Inc. (NYSE:SU): SU is an integrated energy company, engaged in the development of petroleum resource basins in Canada's Athabasca oil sands; acquisition, exploration, development, production and marketing of crude oil and natural gas in Canada and internationally; transportation and refining of crude oil; and marketing of petroleum and petrochemical products primarily in Canada. Wexford added a new $4 million position in SU in Q3.
The stock currently trades at a discount 8-9 forward P/E and 1.2 P/B compared to averages of 44.4 and 2.6 for its peers in the Canadian integrated oil & gas group, while earnings are projected to rocket up at a compound 44.5% annualized rate from $1.73 in 2010 to $3.61 in 2012.
The following are energy sector companies that Wexford is bearish about (see table):
Canadian Natural Resources Ltd. (NYSE:CNQ): CNQ is engaged in oil and gas exploration and production in western Canada, the North Sea and offshore West Africa. At $39 million, this was Wexford's largest sell in Q3 from its $60 million prior quarter position. CNQ trades at a discount 10-11 forward P/E and 1.9 P/B compared to averages of 15.8 and 1.5 respectively for its peers in the Canadian oil & gas exploration & production group, while earnings are projected to increase strongly at 28.4% annual growth rate from $2.28 in 2010 to $3.76 in 2012.
Occidental Petroleum (NYSE:OXY): OXY is engaged in the exploration and production of crude oil and gas worldwide. It operates in three segments: Oil and Gas; Chemical; and Midstream, Marketing, and Other. Wexford dropped out of its entire $36 million prior quarter position in Q3. OXY trades at a premium 11-12 forward P/E and 2.2 P/B compared to averages of 8.0 and 1.2 for its peers in the U.S. integrated oil & gas group, while earnings are projected to grow strongly from $5.72 in 2010 to $8.56 in 2012 at an annual growth rate of 22.4%.
Marathon Petroleum (NYSE:MPC): MPC engages in the refining, transporting and marketing of petroleum products. It operates six refineries in the Gulf Coast and Midwest regions that refine crude oil and other feedstocks, and distribute the refined products through barges, terminals and trucks.
Wexford dropped out of its entire $23 million prior quarter position in Q3. MPC is undervalued, trading at 6-7 forward P/E and 1.2 P/B compared to averages of 12.0 and 2.5 for its peers in the oil refining and marketing group, while earnings are projected to rise from $1.80 in 2010 to $8.07 in 2011 and then fall to $5.43 in 2012. Also, it has a 3.0% dividend yield, at par with the 3.0% average for its peers.
Teck Resources Ltd. (TCK): TCK is a Canadian miner of coal, copper, zinc, molybdenum, gold and lead, mainly in Canada, the U.S., Chile and Peru. Wexford cut out its entire $10 million prior quarter position in Q3. TCK trades at a forward 6-7 forward P/E and 1.3 P/B, while earnings are projected to increase at 48.8% compound growth rate from $2.62 in 2010 to $5.80 in 2012.
Other energy stocks that Wexford sold in Q3 include cutting out of its entire $16 million prior quarter position in oil drilling services provider Nabors Industries Ltd. (NYSE:NBR); cutting $9 million from its $12 million prior quarter position in international oil & gas exploration and production company Apache Corp. (NYSE:APA); and cutting out its entire $5 million prior quarter position in Key Energy Services Inc. (NYSE:KEG), an on-shore rig-based well services provider to oil & gas companies in the U.S. and internationally.
Note: 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: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, 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.