According to a filing with the SEC, SAC Capital Advisors and its related funds owned a total of 1.9 million shares of Goodrich Petroleum Corporation (NYSE:GDP) as of late October, which gives it just over 5% of the shares outstanding. SAC’s success since its founding has made manager Steven Cohen a billionaire and so we like to keep track of the large positions that it takes in companies (as these must be reported fairly quickly to the SEC). Goodrich’s operations are focused on natural gas exploration and production in onshore U.S. shale plays such as the Haynesville and Eagle Ford.
Our database of 13F filings- which are filed with a considerably longer lag- shows that SAC owned about 150,000 shares of Goodrich Petroleum Corporation at the end of June (find other stocks that SAC owned). The stock was actually not popular with hedge funds, as the largest position out of the funds and other notable investors we track was only about 850,000 shares. This stake belonged to billionaire Israel Englander’s Millennium Management (see Israel Englander's favorite stocks). In addition, SAC’s small position at that time indicates that the fund has been buying up shares in the company fairly recently. The stock is down 8% since the end of June, and 13% year to date. While we can’t be sure of when SAC bought shares, it’s possible that any present investors are getting in around the same price or lower than where Cohen and his team thought that it would be a good buy. Earlier this month, SAC had filed another 13G to report a 5% stake in Plains Exploration and Production Company (read our analysis of the filing and the company) so it’s possible that the fund’s move here signifies that it is moving more strongly into oil and gas-related investments. We’ll keep that interpretation in mind when SAC files its 13F for the third quarter of the year.
Goodrich Petroleum Corporation is not expected to generate profits either this year or next year, something that we generally don’t like to see in an investment. It is also heavily shorted; the most recent data places 45% of the total shares outstanding as being held short. This creates some degree of upside opportunity through a short squeeze, but also indicates that market players are more bearish on the stock than in many other energy companies.
Other small oil and gas exploration and production companies include EXCO Resources Inc (NYSE:XCO), Carrizo Oil & Gas, Inc. (NASDAQ:CRZO), Stone Energy Corporation (NYSE:SGY), and Berry Petroleum Company (NYSE:BRY). All four of these peers are expected to have positive earnings in 2013; in fact, with the exception of EXCO, they trade at less than 10 times forward earnings estimates. EXCO’s forward P/E is 28, and it recently reported that revenue had fallen 32% in the third quarter compared to the same period in 2011. 20% of its shares are held short, and we don’t think that it’s a good buy.
Of the other three companies, Carrizo is the only one which reported better revenue and earnings numbers in its most recent quarter compared to the same period in the previous year. As we’ve mentioned, its forward earnings multiple is fairly low as well, and continued optimism from the Street places it at a five-year PEG ratio of 0.5. While it looks like a good buy based on these statistics, it also has substantial short interest and we’d want to investigate it further. Stone and Berry both had their net income fall at least 20%, based on more modest declines in revenue; there aren’t as many short sellers here, and with respectable forward earnings multiples they could also be worth a closer look.
None of these early-stage shale exploration and production companies look particularly good. However, Goodrich doesn’t look as good as some of its peers given that its earnings remain negative. We don’t think that investors should copy Cohen on this specific trade, but might take it as a sign to give oil and gas investments more serious consideration.