Kyle Bass’ Revamped Portfolio Shows Bets On These Small-Cap Energy Stocks

Hayman Advisors, a Dallas-based hedge fund led by Kyle Bass had a tough first quarter. Not only did the investment manager incur big losses from some of his top holdings like Nationstar Mortgage Holdings Inc (NYSE:NSM) and Ocwen Financial Corp (NYSE:OCN), but his sell-off of the majority of his General Motors Company (NYSE:GM) stake also appeared ill-timed, as the stock gained over 8% during the first quarter (though it has since given much of those gains back in the second quarter). All told, we calculated Bass’ losses at an ugly 18.9% based on our returns metric, and the value of his fund’s public equity portfolio crumbled to $62.73 million as of March 31 from $325.01 million at the end of 2014. Bass has seemingly done a complete reset, as his public equity portfolio has been nearly completely upended, with only two positions carrying over from the previous reporting period and 24 new positions alongside them (though his exposure to the new positions only stands at about 27%). Of those, we see that Bass has taken up a position in a number of small-cap energy stocks as he looks to rebound in the second quarter. Those stocks are Bonanza Creek Energy Inc (NYSE:BCEI), Oasis Petroleum Inc. (NYSE:OAS), and Matador Resources Co (NYSE:MTDR), and we’ll look at them in this article.

Kyle Bass

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning over 144% and beating the market by more than 84 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.

Kyle Bass
Kyle Bass
Hayman Advisors

Let’s begin with Bonanza Creek Energy Inc (NYSE:BCEI), in which Bass reported a stake of 31,417 shares in the Colorado-based Oil and Gas company, with the stake valued at $775,000. Bonanza, founded in 1999 and publicly traded since late 2011, has also had a difficult first five months of the year in terms of its stock, which is down by 17% year-to-date and has endured a particularly poor stretch since the end of April, shedding over 27% of its value. In fact Bonanza Creek Energy is barely hanging on to its status as a small-cap company because of the drop, with its market cap currently at exactly $1.0 billion. Bonanza Creek Energy Inc (NYSE:BCEI), like most other companies in the oil business, is struggling with the new market prices for oil and trying to adjust its costs and production structures accordingly. The results for fiscal 2014 suggested more work needs to be done however, with earnings sliding $0.40 per share from $1.32 in 2013 and a high debt-to-equity ratio of 1.14,which is above the industry average. Zimmer Partners and Amy Minella‘s Cardinal Capital also believe the energy company has some life left in it, owning stakes in Bonanza of 681,000 shares and 410,710 shares respectively, with Zimmer Partners’ holding being a new one.

The next step small-cap energy pick made by Bass during the first quarter was in Oasis Petroleum Inc. (NYSE:OAS), in which he took a stake of 54,453 shares with a value of $774,000. Houston-based Oasis Petroleum has been having a better spring than Bonanza, returning 3.8% year-to-date and an impressive 24.2% over the past three months, taking advantage of a recovering oil price. The results for the first quarter did however reveal a low return-on-equity and diminishing operating cash flow. Seemingly, the shares reacted positively to rising oil prices, so high volatility in the stock is likely to continue. Despite the volatility, Oasis Petroleum Inc. (NYSE:OAS) attracted a number of hedge fund investors to it during the first quarter. Among those we find Lyan Street Capital, which increased its stake by 7,657% to 1.16 million shares, Think Investments which opened a stake of 1.30 million shares and John Scully‘s SPO Advisory Corp, which increased its holding by 164% to 20.37 million shares.

The last small-cap oil pick of Bass we’ll look at is Matador Resources Co (NYSE:MTDR). Bass took a stake in the Dallas-based Matador Resources consisting of 29,591 shares valued at $649,000. Things have steadily improved among Bass’ picks, as Matador Resources has returned a stellar 36.7% year-to-date. Matador, also affected by the declining oil prices has however managed to execute some cost reductions which investors have reacted positively to during the spring. On the financial side, Matador, which published its earnings for the first quarter in the beginning of May, presented a debt-to-equity ratio of 0.39, growing revenue, an increased net operating cash flow and a high gross profit margin. The earnings per share were $0.01 which was in line with analysts’ estimates. Moreover, analysts like Matador, having set a consensus “Buy” recommendation and target price on the stock ranging between $33.00 and $36.00, indicating potential upside of another 33%, which is mostly explained by the company’s strong financial situation and recovering oil prices. Another investor that is bullish on Matador Resources Co (NYSE:MTDR) is Bodri Capital Management, which took a stake in Matador during the first quarter of 40,000 shares, while quant fund D E Shaw also jumped on the train with a stake of 170,556 shares.

Disclosure: None