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Encompass Capital Killed The Market in Q1: Newfield Exploration (NFX), Valero (VLO), Others Led the Charge

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Todd Kantor runs Encompass Capital Advisors, a registered investment advisor headquartered in New York City right next to Grand Central Terminal. It was spun off from Ken Griffin’s Citadel Advisors in late 2011 and began with about $100 million in assets under management (AUM). Since then, AUM has grown exponentially to over $1.5 billion. The firm utilizes bottom-up, fundamental research across a variety of global energy sub-sectors which include exploration and production, oilfield services and energy related cyclical businesses. It believes in security selection and relies on its focused investment team to generate alpha by portfolio modeling, disciplined portfolio construction, and risk management. Prior to Encompass, Kantor worked at PioneerPath Capital, one of Citadel’s two hedge fund incubation platforms. Kantor also worked as a senior analyst at both Touradji Capital and Solstice Equity Management. He began his career at the investment banking division of J.P. Morgan after receiving his bachelors in finance at Emory University. Kantor’s 21 long positions in companies with a market cap of over $1 billion returned a solid 8% during the first quarter of 2015.

Newfield Exploration Co. (NYSE:NFX)

Why is it important to follow Todd Kantor and Encompass Capital Advisors? After all, didn’t equity hedge funds return just 1.4% in 2014, 11.1% in 2013, and 4.8% in 2012? These returns are embarrassingly low compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 2.1% gain in 2012. Have money managers lost their touch in picking stocks? The answer is a resounding no and the reason is simply size. As funds grow and take on more assets under management, they have too much capital to only invest in their best small-cap ideas, which our backtests have shown greatly outperform their top large-cap picks. Our small-cap hedge fund strategy, which identifies the best of these small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 14.6% in 2012 (see the details here).

Now let’s look at some of Kantor’s top picks, starting with Newfield Exploration Co. (NYSE:NFX), a $6 billion market cap energy company engaged in the exploration, development and production of crude oil, natural gas and natural gas liquids. The company operates in the Mid-Continent, Rocky Mountains, and offshore in China. Investors believing energy prices will bounce back believe in Newfield Exploration Co. (NYSE:NFX)’s ability to grow reserves and make solid acquisitions. As of the beginning of 2015, Kantor’s Encompass held just over 821,000 shares valued at $22.72 million. Kantor’s bullish sentiment increased during the fourth quarter as the number of shares was increased by 12% increase from the amount disclosed for the previous quarter. Total exposure to the stock stood at 6.85% of Encompass’ 13F portfolio. Citadel Investment Group is the largest shareholder of Newfield among the funds we track with a position of $135 million as of December 31, 2014. Kantor shares his mentor’s bullish stance, as Citadel nearly doubled its position in Newfield Exploration Co. (NYSE:NFX) in the fourth quarter. Other firms with positions in the company are Israel Englander’s Millenium Management and Cliff Asness’ AQR Capital Management, both with bullish activity on the stock. Shares of Newfield rose 29% in the first quarter of 2015.

Carrizo Oil & Gas, Inc. (NASDAQ:CRZO) is an energy company based in Houston, Texas focused on the exploration, development, and production of oil and gas in the United States. The $2.7 billion market cap company’s operations are primarily located in South Texas, Ohio, Colorado, and Pennsylvania. Investors like Carrizo Oil & Gas, Inc. (NASDAQ:CRZO) because it has a number of low cost basins and while West Texas Intermediate Crude Oil was hovering around $45 (currently around $55), Carrizo Oil & Gas, Inc. (NASDAQ:CRZO)’s Eagle Ford property was still profitable. The company has also reduced its capital expenditure program by over 40%. Carrizo’s stock appeared as a new position in Encompass’ portfolio during the latest 13F filing. In the fourth quarter, Kantor added some 424,000 shares at a value of $17.64 million representing 5.4% of his 13F portfolio’s value. Again Ken Griffin’s Citadel Investment Group is the largest shareholder among the funds we track and his position in the stock was increased by 2,551% in the fourth quarter. Carrizo stock gained 19% for the first quarter of 2015.

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