Billionaire Steve Cohen’s SAC Owns Over 5% of This Energy Company
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Billionaire Steve Cohen’s SAC Capital Advisors has reported a position of 4.1 million shares in Energy XXI Limited (NASDAQ: EXXI), a $2.5 billion market cap oil and gas exploration and production company. This stake gives SAV ownership of 5.1% of the company’s outstanding shares, and is up from 1.1 million shares at the end of September (see more stock picks from Cohen and SAC). Energy XXI recently announced its earnings for the quarter ending 2012, the second of its fiscal year; the stock price fell about 5% on the news, and the stock is currently down about that much year to date.
We think it’s particularly interesting to see what hedge funds are doing in the small-cap space, since stocks at these valuations are more likely to be mispriced in the market due to the lack of attention from the media and other institutional investors. In fact, our list of the most popular small cap picks among hedge funds from our newsletter beat the market by 18 percentage points between September and January (read the details here).
Revenues last quarter were down 6% from a year earlier; oil revenues, which are responsible for the vast majority of Energy XXI Limited’s business, fell while natural gas sales were actually up slightly. This pattern was partly due to lower oil production and considerably higher natural gas production. Total production actually increased in terms of barrels of oil equivalent, but the shift in production mix to cheaper natural gas harmed revenues. At the same time, operating costs were increasing with the result being a 57% decline in earnings. The stock now trades at 12 times trailing earnings and 8 times analyst consensus for the fiscal year ending in June 2014.
Billionaire Paul Singer’s Elliott Management reported a position of 3 million shares in Energy XXI Limited at the end of September. Omega Advisors, managed by billionaire Leon Cooperman, had a slightly smaller position in its own portfolio (check out more stocks Cooperman likes). While SAC’s purchases have allowed the fund to overtake these two in terms of ownership of the company, it might not be the largest holder of Energy XXI stock in our database. At the end of the third quarter, Mount Kellett Capital Management, a hedge fund co-managed by Mark McGoldrick and Jason Maynard, owned 5.9 million shares, and this made Energy XXI that fund’s largest position by market value.
We can compare Energy XXI to peers including Newfield Exploration (NYSE: NFX), Denbury Resources (NYSE: DNR), Kodiak Oil & Gas (NYSE: KOG), and SandRidge Energy (NYSE: SD). These companies generally have December fiscal year ends, and are generally valued at 12 to 16 times expected earnings for this year, placing Energy XXI on the lower end of the valuation range, and we have noted that the company is primarily an oil producer. We would also note that Kodiak, an oil producer with a strong position in North Dakota’s Bakken Shale, is expected to reach this valuation range as a product of very high earnings growth this year (the trailing P/E is 37) though of course if the company then continues its high growth rates it would be undervalued even at this price. SandRidge, primarily a natural gas producer, is barely profitable despite high production growth as natural gas prices remain low, and Wall Street analysts expect the company to report net losses in 2013. 15% of SandRidge’s outstanding shares are held short.
Energy XXI seems to be a better value than some of its peers, though we do think that Kodiak would be worth looking into as we do think that the Bakken has strong prospects, and the company may be able to grow its earnings enough to merit a higher stock price. We would be interested in learning more about Energy XXI, including attempting to determine if its production mix could be held steady or if it is likely to shift further towards natural gas.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!