Richard Chilton founded Chilton Investment Company in 1992. The successful hedge fund has nearly $8 billion in assets under management. Recently, Chilton released his latest holdings in a 13F filing. About half of his portfolio is invested in the basic material sector. We like basic material stocks too. Most of them, especially energy stocks, are trading at low multiples. In this article, we are going to take a closer look at Chilton’s most bullish energy bets and decide whether it makes sense for investors to imitate these stock picks.
Chevron Corp (CVX) is the largest position in Chilton’s 13F portfolio at the end of last year. Chilton had $134 million invested in this position. CVX is very popular among hedge funds tracked by us. At the end of last year, there were 38 hedge funds with CVX positions in their 13F portfolios. Billionaire Jim Simons’ Renaissance Technologies also significantly boosted its position in CVX by nearly 500% over the fourth quarter. RenTech reported owning $108 million worth of CVX shares at the end of 2011.
Chevron’s output in the first three quarters of last year went down by 2.5% largely due to the Thailand pipeline incident. That partly explains why CVX is currently trading at low multiples. Its P/E ratio is only 8.16, versus 19.24 for the average of its industry. CVX is expected to make about $12.80 in 2012 and its forward P/E ratio is also less than 9, versus 12.43 for its industry. It is also expected to make $13.17 next year but of course these estimates are highly dependent on the fluctuations in oil prices. The stock has a decent dividend yield of 2.96% and its payout ratio is only 23%, which means that the company is able to raise its dividend payouts even if its earnings do not grow as fast as expected. Therefore, CVX is a good option for dividend growth investors. CVX has been restructuring its business. It is shifting from downstream business to large upstream projects which have higher margin potential.
The main competitors of CVX include BP Plc (BP), ConocoPhillips (COP) and Exxon Mobile Corp (XOM). We have a long position in COP and we are considering a long position in BP mainly because of its relatively higher dividend yield and low PE ratio. BP’s forward PE ratio is 7 vs. 9.7 for XOM. We don’t think XOM deserves such a high premium over BP.
EOG Resources Inc (EOG): Chilton also invested over $100 million in EOG, a company that is engaged in exploration and production of oil and natural gas. As of December 31, 2011, there were 32 hedge funds reported to own EOG in their 13F portfolios. Ken Griffin was the most bullish hedge fund manager about EOG. His Citadel Investment Group had over $200 million invested in EOG at the end of last year. Ric Dillon’s Diamond Hill Capital also had $165 million invested in this stock.
We are not considering a long position in EOG though. It looks a bit overvalued compared with its peers. Its current P/E ratio is 27.99, versus 19.24 for industry average. In 2012, EOG is expected to make about $4.89 per share, which means that its forward P/E ratio is 23, still higher than the industry average of 12.43. The main reason for the high valuation is EOG’s high growth. For the fourth quarter of 2011, the company’s revenues were up 55% compared to the same quarter a year ago, heavily beating its industry’s average growth rate of 23%. Its net income also increased by 125% from $53.67 million to $120.7 million. The high growth expectation has been reflected in its current stock price and that explains why it is trading at a premium. In 2013, the company is expected to earn $6.50 per share, up more than 30% from the expected EPS in 2012. As contrarian investors, we do not recommend investors to purchase EOG. It is relatively difficult for the company to beat the challenging growth expectations. We would rather purchase value stocks with stable businesses. For example, one of EOG’s competitors, Apache Corp (APA), has an expected grow rate of 6.6% but its P/E ratio is 9.25 and its forward P/E ratio is 8.7.EOG has to increase its earnings by more than 200% to have the same earnings yield as Apache.
A few other large energy positions in Chilton’s portfolio include Southwestern Energy Co (SWN) and Occidental Petroleum Corp (OXY). Both stocks were also among the top 10 positions in Chilton’s 13F portfolio. Chilton had $95 million invested in SWN and another $83 million invested in OXY. We like OXY but we are not very bullish about SWN. OXY has a relatively low P/E ratio of 12.79 and it is expected to grow at 11%, while SWN has a similar expected growth rate but is trading at a much higher P/E ratio of 18.34.