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

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.

Chesapeake Energy Corporation (NYSE:CHK) is a $10.2 billion market cap producer of natural gas and liquids. It owns interests in over 47,000 natural gas and oil wells around the United States including Texas, Ohio, Wyoming, Oklahoma, and many other locations. Chesapeake is one of Encompass’ new positions and it could take some time for positive returns to be achieved, as the stock dropped 27% for the first quarter of 2015. Investors like Chesapeake Energy Corporation (NYSE:CHK) because the new CEO Robert Lawler and his management team are cleaning up problems from the past. Chesapeake Energy Corporation (NYSE:CHK) spun off its oilfield services business and sold off assets to delever its balance sheet. The fundamentals now look attractive, with the company paying a dividend yield of 2.25%. For the fourth quarter of 2014, Kantor bought for the firm over 634,000 shares valued at $12.42 million, representing 3.82% of his portfolio. Activist Carl Icahn recently increased his position in Chesapeake Energy Corporation (NYSE:CHK) to almost 11% of the company’s outstanding stock.

Valero Energy Corporation (NYSE:VLO) was another solid new pick by Kantor added to Encompass’ portfolio. In the fourth quarter of 2014, Kantor bought for the firm 276,100 shares of Valero Energy Corporation (NYSE:VLO) at a value of $13.67 million. Investors like Valero Energy Corporation (NYSE:VLO) at the moment because the refiner actually performs better with lower prices for oil (its main operating expense). Shares of Valero Energy Corporation (NYSE:VLO) gained 29% for the first quarter of 2015. Valero was also one of Steve Cohen’s top picks this quarter. D E Shaw is the top shareholder among the funds we track followed by Cliff Asness’ AQR Capital Management.

Gulfport Energy Corporation (NASDAQ:GPOR) was another new pick by Kantor and it immediately became the firm’s second largest position. For the fourth quarter of 2014, Kantor bought 551,000 shares at a value of $23.0 million, representing a 7.08% position in Encompass Capital Advisor’s 13F portfolio. Gulfport Energy Corporation (NASDAQ:GPOR) is a $4.35 billion market cap oil and natural gas exploration and production company operating in the U.S. Bulls like Gulfport Energy Corporation (NASDAQ:GPOR) because it is taking advantage of lower energy prices and making solid acquisitions. The company last week announced a $300 million deal to buy oil and gas company Paloma Partners. Even before the announcement Gulfport appeared poised for a solid 2015. The company could still increase its production by 100% for the year even after cutting capital expenditures by 40%. Shares rose 10% for the first quarter of 2015.

Disclosure: None