Billionaires Like These Independent Oil & Gas Companies

ICAHN CAPITAL LPThe oil and gas industry includes the majors, such as Exxon Mobil and BP, as well as independent companies which generally are not as integrated or do not work on as large a scale. We went through our database of 13F filings for the second quarter and here are some independent oil & gas companies which billionaire hedge fund managers and other investors reported large positions in during the second quarter of 2012:

Carl Icahn initiated a large position in Chesapeake Energy Corporation (NYSE:CHK) during the quarter, and by the end of June he owned just over 10 million shares. Chesapeake has excellent growth prospects due to its focus on shale gas in geographies such as the Marcellus Shale, and has carried out its strategy fairly well. However, a combination of factors such as low natural gas prices and questionable behavior by the company’s CEO caused the stock price to fall in early 2012. Short sellers then latched on to the stock as it became clear that Chesapeake would have to raise cash by selling off some of its assets, at fire-sale prices if necessary. The stock price has recovered somewhat since Icahn became involved and is currently up about 4% since the end of the second quarter. Chesapeake trades at 6 times trailing earnings and 15 times analyst estimates for its 2013 earnings.

Anadarko Petroleum (NYSE:APC) was a favorite of several billionaires. Ken Griffin’s, D.E. Shaw’s, Steve Cohen’s, and Jim Simons’s hedge funds all added to their stakes in Anadarko and at the end of June owned over 10 million shares in the company. The $34 billion producer of natural gas, oil, and natural gas liquids concentrates on the U.S. but operates worldwide; the company’s activities include exploration and production as well as midstream and marketing functions. Possibly anticipating a turnaround in natural gas prices, Wall Street analyst consensus is for 2013’s earnings per share to be 26% above EPS for 2012, bringing the company’s forward P/E based on these expectations to 16.

Billionaire Ken Fisher’s Fisher Asset Management slightly reduced its stake in CNOOC Limited (NYSE:CEO) over the course of the second quarter but still finished June with 1.8 million shares in the China-based global energy company. CNOOC has been encountering problems recently with revenue and earnings both falling last quarter compared to the same period in the previous year (earnings, for example, decreased by 19%). The stock itself has been in line with these problems and it currently trades below its level from a year ago, while the S&P 500 is up 20%. As a result, CNOOC is priced fairly well when compared to its trailing earnings- a P/E of 9- and with the sell-side expecting that the company will get back to growing, the forward P/E is only 7. At current prices the company also pays a 3.4% dividend yield.

Finally, two funds closed the quarter with large positions in EXCO Resources (NYSE:XCO). Oaktree Capital Management, managed by Howard Marks, owned about 37 million shares of the company; Wilbur Ross’s Invesco Private Capital reported a position of 32 million shares. EXCO is focused on the booming shale plays in the onshore U.S., with holdings in Texas, the Appalachians, and northern Louisiana. It has only a $1.5 billion market capitalization, so it is surprising to see such large investors getting into the stock. EXCO actually saw its revenue fall last quarter compared to a year ago, likely because of low natural gas prices, but Wall Street analysts anticipate that its 2013 earnings will be high enough to imply a forward P/E of 27. EXCO is also even more beaten down than CNOOC, with its stock price falling 45% in the last year.

We think that Chesapeake has its own corporate issues but it, along with CNOOC (which as a Chinese company bears substantial macro risks as well as commodity price risk) are just trading at much better valuations than the other two companies. If an investor is going to follow any of these major investors we think those two picks are better buys.