Sound Energy Partners Inc, founded and managed by Anthony Giammalva is a Greenwich, Connecticut-based hedge fund focused on the energy sector, with 49.63% of its holdings as of March 31 being tied up in energy stocks. The fund’s picks are coming off a very strong second quarter, in which the ten long positions in stocks with a $1 billion market cap delivered weighted average returns of 27.02%, pushing the year-to-date by the same metric to 28.2%. It should be noted that these are only based on the fund’s long positions at a fixed point in time, and do not account for changes to positions, certain other holdings, bonds, options, or short positions, so the actual returns of the fund could be very different than our calculated stock pick returns. Sound Energy investments are made using fundamental research, as energy sector stocks are more dependent on macroeconomic factors of the market and the economic environment affecting oil and gas companies. At the end of the first quarter, the fund had a public equity portfolio valued at $15.21 million, up from $11.70 million at the end of the previous quarter. It appears the overall of the fund’s portfolio paid dividends, as many of its top picks were sold off completely in the first quarter, while some of its new picks ended up being strong performers in the second quarter. Three of those well-performing stocks were McDermott International, Inc (NYSE:MDR), Oasis Petroleum Inc (NYSE:OAS), and Rosetta Resources Inc (NASDAQ:ROSE), which we’ll discuss below.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activity. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds partly underperformed because they aren’t 100% long. Hedge funds’ fees are also very large compared to the returns generated, which reduces the net returns delivered to investors. We uncovered through extensive research that historically, hedge funds’ long positions in certain stocks actually outperformed the market greatly, and it has held true to this day. For instance, the 15 most popular small-cap stocks among funds has beaten the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 139.7% vs. less than 59% for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying, particularly in the small-cap sector, rather than what their net returns are, which the media primarily focuses on.
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Sound Energy Partners opened a new position in McDermott International, Inc (NYSE:MDR) during the first quarter. The fund held a total of 661,500 shares with a market value of $2.54 million at the end of the first quarter of 2015. This was equivalent to 16.69% of its total portfolio and vaulted it straight to the top of said portfolio in terms of long positions. The company is in the engineering, procurement, construction, and installation of oil and gas projects across the world, and the new position reaped big rewards for Sound Energy, as the stock returned 39% in the second quarter. In addition to operating in North America, the Middle East, the Caspian Sea, and the Pacific Rim, McDermott International, Inc (NYSE:MDR) is set to expand its business to include work with Saudi Aramco, as well as at the Otis Field Subsea Tieback Project of LLOG Exploration Offshore, LLC (LLOG). Other shareholders of the stock going into the second quarter who surely loved the big gains were Royal Capital Hedge Fund, founded by Robert W. Medway and Yale M. Fergang, which held 1.37 million shares of the company, and Michael Blitzer’s Kingstown Capital Management, which held 4.0 million shares.
Oasis Petroleum Inc (NYSE:OAS) was not a new position of the fund’s, but it was increased by 323% in the first quarter, to 110,000 shares with a value of $1.56 million at the end of the first quarter of 2015. The fund’s position in the stock amounted 10.28% of its total portfolio holdings, up from just 3.67%. Oasis responded by returning 11.47% in the second quarter. The independent exploration and production company is focused on the acquisition and development of unconventional oil and natural gas resources in the North Dakota and Montana regions of the Williston Basin. The Company had average daily production of 388 net barrels of oil equivalent per day for the year ended December 31, 2014. The oil was produced from the Bakken and Three Forks formations. The company reported a net loss of $18 million in the first quarter of 2015 and an earnings per share loss of 17 cents per share, due to lower oil prices. Going into the second quarter of 2015, a few other hedge funds with prominent positions were John H. Scully’s SPO Advisory Corp with 20.37 million shares, and John Paulson’s Paulson & Co with 8.81 million shares of the company.
At the end of the first quarter of 2015, Sound Energy Partners held a total of 35,700 shares of Rosetta Resources Inc (NASDAQ:ROSE) with a market value of $608,000. The fund’s holding in the stock moving into the second quarter of 2015 represented 3.99% of its total portfolio value, and had been increased by 48% during the first quarter. The U.S-based company is an independent exploration and production company engaged in the acquisition and development of onshore energy resources in Eagle Ford shale in South Texas and in the Permian Basin in West Texas. On May 10, Noble Energy Inc (NYSE:NBL) and Rosetta Resources Inc (NASDAQ:ROSE) entered into a Merger Agreement pursuant to which Noble Energy Inc agreed to acquire Rosetta Resources Inc(NASDAQ:ROSE) in an all-stock transaction valued at $2.1 billion, while also assuming Rosetta’s net debt of $1.8 billion as of March 31, 2015. Under the definitive agreement, it was concluded that Rosetta shareholders will receive 0.542 shares of Noble Energy’s common stock for each share of Rosetta’s common stock held. On the day of the merger announcement, shares of Rosetta rose 25% to $24.23, while shares of Noble fell by 7% to $45.39 on the New York Stock Exchange. All told, the stock returned 35.75% in the second quarter. Other pleased shareholders of the stock were First Pacific Advisors, managed by Steven Romick and Robert Rodriguez, and Jim Simons’ Renaissance Technologies. The former held 5.55 million shares of the company on March 31.
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