Five Unheralded Energy Plays This Hedge Fund Likes

Lucas Capital Management is a New Jersey-based energy focused hedge fund that was founded by Russell Lucas in 1996. The firm currently manages four hedge funds, three private equity funds and its legacy private wealth management business. Its Total Return Strategies fund aims to deliver an attractive total return through investments primarily in energy equities and secondarily in other natural resource related equities. The fund’s 13F portfolio totalled more than $130 million at the end of the third quarter.

Academic studies have shown that industry focused funds usually perform slightly better than generalist hedge funds, however, these funds continue to invest in their industries even during down cycles. We believe their stock picks are a good resource for investors who are interested in finding out stocks that stand out in a given industry. In this article we will take a look at Lucas Capital’s stock picks to find out what they think are the best stocks in the energy industry.

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Sabine Royalty Trust (NYSE:SBR) is Lucas Capital Management’s largest holding constituting 5.67% of its portfolio. The fund holds approximately 201,034 shares of this stock at the end of the third quarter which was valued at $7.93 million. Sabine Royalty Trust (NYSE:SBR) is an express trust that owns interest in oil and gas. It owns interest in 5400 acres of producing and proved undeveloped oil and gas properties located in Florida, Louisiana, Mississippi, New Mexico, Oklahoma and Texas. This trust has a market value of  ~$560 million and is currently trading 10% shy of its 52 week high price. Sabine Royalty Trust (NYSE:SBR) reported revenues of $48 million in 2015 with net income of more than $45 million. The trust recently announced a monthly cash dividend of 11.7 cents per share in November. This distribution reflects the production of 33,645 barrels of oil in August and 485,265 million cubic feet of gas for July. Seven funds from our system held positions worth $13 million in this stock during the third quarter.

Dorchester Minerals LP (NASDAQ:DMLP) is the second largest holding of Lucas Capital Management with the Fund holding more than 374,000 shares of this stock which was valued at $5.78 million at the end of the third quarter. Dorchester Minerals LP (NASDAQ:DMLP) owns Royalty Properties and net profits interests (NPIs) in 570 countries and parishes in over 30 states in USA. The company owns varying undivided perpetual mineral interests in approximately 9,000 acres located in Burke, Divide, Dunn, McKenzie, Mountrail and Williams Counties, North Dakota of Horizontal Bakken, Williston Basin. The stock has been in a wide range over the last year trading between $8.57 and $17.95 and currently has a market value of ~$450 million. The company reported revenues of $10.69 million with net income of $6.65 million and declared a cash dividend of more than 25 cents during the third quarter. During the third quarter, $15 million worth of shares up from $14 million in the second quarter were held by 4 hedge funds as per our records.

Western Gas Equity Partners LP (NYSE:WGP) is Lucas Capital Management’s other major holding. The fund held 101,144 shares worth $4.29 million at the end of the third quarter. This limited partnership owns partnership interests with Western Gas Partners, LP (NYSE:WES) which in turn operates, acquires and develops midstream energy assets. Out of the 15 analysts covering this stock, 4 have rated it as a buy while 10 have rated it as a hold. The company earned $1.07 in net income per share last year and the average current year’s estimate is that it will earn $1.41. Western Gas Equity Partners LP (NYSE:WGP) has a market capitalization value of $9.2 billion and is currently trading near the top of its 52 week trading range. The company recently reported good quarterly results with net income of 54 cents per share and distributable cash flow of $237.3 million. The strong results were driven by growth in the Delaware Basin with Ramsey IV successfully ramping to capacity during the quarter, and Ramsey V being placed into service. Western Gas Equity Partners LP (NYSE:WGP) saw the value of its hedge fund holding increase by 31% to $80 million by the third quarter end.

Magellan Midstream Partners, L.P. (NYSE:MMP) is engaged in the transportation and storage petroleum products and crude oil. Lucas Capital held 50,932 shares valued at $3.6 million during the third quarter. The company owns 9,500 miles of refined oil products pipelines system with 50 terminals. The company also owns 1,700 miles of crude oil pipelines and storage facilities with a capacity of over 20 million barrels. Magellan Midstream Partners, L.P. (NYSE:MMP) has a market value of more than $15 billion and is trading near the middle of its 52 week price range. The company reported $551 million of revenues in the last quarter with net income of $194.6 million. It has more than $4 billion in total debt with cash of $291 million on its balance sheet. As per our records, 14 hedge funds held $123 million of this stock during the third quarter, when compared to 16 funds holding $148 million worth of shares in the second quarter.

EOG Resources Inc. (NYSE:EOG) is a large cap resource stock owned by Lucas Capital Management. The fund held 31,265 shares of this stock worth $3.02 million in the third quarter, forming 2.32% of its total portfolio as of September 30th. This $54 billion company explores, owns and develops oil and gas fields in USA, China, Trinidad and Tobago, UK and Canada. The company’s total estimated net proved reserves is approximately 2,118 billion barrels of oil equivalent, which includes a mix of oil and gas reserves. The company reported revenues of more than $2 billion in the last quarter with an operating loss of $193 million. The merger with Yates was an important event this quarter. The average analyst rating is “overweight” for this, stock with 15 analysts rating it as a buy and 22 analysts rating it as a hold. The stock is currently trading near the top of its 52 week price range. The number of hedge funds from our system, having long position in this stock increased to 51 during the third quarter from 36 in the quarter earlier. The value of their holdings almost doubled to $1.27 billion quarter over quarter.

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