Billionaire Ken Griffin’s Citadel Owns 1.5 Million Shares of PDC Energy (PDCE)

Citadel Investment Group, a hedge fund managed by billionaire Ken Griffin, has reported ownership of 1.5 million shares of PDC Energy (NASDAQ:PDCE) in a filing with the SEC. In Citadel’s 13F for the fourth quarter of 2012, the fund had disclosed that it owned about 360,000 shares and a small number of both call and put options at the end of December (find more stocks Citadel owned); therefore, we can conclude that Griffin and his team have bought most of their shares over the course of 2013. PDC Energy (NASDAQ:PDCE), a $1.5 billion market cap natural gas and oil exploration and production company, is up 44% year to date.

Product sales were off slightly last year compared to 2011. While production of natural gas, natural gas liquids, and crude oil all increased, this was offset by lower prices for the natural gas substances. While natural gas was responsible for the majority of energy equivalent production, crude oil sales made up 65% of revenue due to the spread between oil and natural gas prices. With production rising and revenue falling, pretax income came in negative even after adding back impairment charges; it had been positive in the previous year.

CITADEL INVESTMENT GROUPWe’d noted that even though crude oil is currently responsible for most of PDC Energy (NASDAQ:PDCE)’s revenue, the majority of production is natural gas. This means that the company does have potential upside if the natural gas market recovers (of course, the same is also true of other natural gas producers); higher prices would essentially drop directly to the bottom line. Analyst expectations for 2014, however, imply a high forward earnings multiple of 28. The most recent data shows that 32% of the outstanding shares are held short.

Our database of 13F filings from hedge funds and other notable investors, which we use to develop investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), can also be used to see which funds like PDC Energy (NASDAQ:PDCE). Point State Capital, founded by Sean Cullinan and a number of other former portfolio managers at billionaire Stanley Druckenmiller’s Duquesne Capital, initiated a position of 1.1 million shares in PDC Energy (NASDAQ:PDCE) during the fourth quarter of 2012 (see Point State’s stock picks). Phil Gross and Robert Atchinson’s Adage Capital Management increased its own stake by 80% between October to a total of over 900,000 shares (check out Adage’s favorite stocks).

Other natural gas and oil producers include Chesapeake Energy Corporation (NYSE:CHK), SandRidge Energy, Inc. (NYSE:SD), Devon Energy Corp (NYSE:DVN), and Apache Corporation (NYSE:APA). Chesapeake Energy Corporation (NYSE:CHK) and SandRidge Energy, Inc. (NYSE:SD) have had management issues as well as financial problems related to their overextension, though Chesapeake’s CEO is out and activists are gaining a measure of control over SandRidge as well. The sell-side is actually optimistic on Chesapeake, with the forward earnings multiple only being 11 there; SandRidge is expected to be unprofitable both this year and in 2014. The Street is forecasting that Devon Energy Corp (NYSE:DVN) and Apache Corporation (NYSE:APA) are set for strong improvement as well. Devon, which was dragged into the red in 2012 due to impairment charges and had its revenue fall 11% in the fourth quarter of 2012 versus a year earlier, trades at 11 times forward earnings estimates. Apache was profitable, but with trailing and forward P/Es of 15 and 7 respectively it is clear that analysts are quite bullish on the company.

We don’t find PDC particularly attractive compared to its peers. The company looks quite dependent on higher natural gas prices, a dicey enough prospect in any case, and even assuming an improvement in the market we’d note that analyst expectations have some larger companies priced much more cheaply in terms of forward earnings. As a result we’d be more interested in using Chesapeake, Devon, or Apache as ways to play the natural gas thesis.

Disclosure: I own no shares of any stocks mentioned in this article.