What Does Billionaire Steve Cohen’s SAC See In This Energy Company?
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In May, billionaire Steve Cohen’s SAC Capital Advisors filed its 13F with the SEC, disclosing many of its long equity positions in U.S. stocks as of the end of Q1 2013. Even though the information in 13F is a bit old by the time it is released, we think there are still a few ways to make use of it. For one, we’ve found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, and think that more strategies are possible as well. We also like to go through filings from top managers to see what big changes they are making in their portfolios. SAC, it turns out, more than tripled the size of its position in energy company and utility EQT (NYSE: EQT) during Q1 to a total of 4.3 million shares, making it the fund’s largest single-stock 13F holding by market value (see more of Cohen's stock picks).
The $12 billion market cap EQT produces natural gas, natural gas liquids, and oil in the Appalachian Basin; gathers and processes natural gas; and distributes gas to customers in the Appalachian region. The company’s most recent 10-Q shows a fairly even split in operating income among these three segments. Upstream and midstream activities provide 37% of operating income each, with downstream accounting for 26%. Significant improvement in operating income occurred in all three segments in the first quarter of 2013 versus a year earlier, with earnings rising by 52%.
Still, even if we annualize earnings per share figures from Q1 we get a fairly high P/E multiple (of 31), so markets have already accounted for significant future growth. Wall Street analysts are expecting continued growth, with the result being a forward P/E of 26. In other words, SAC would seem to be expecting EQT to outperform expectations going forward; it’s possible, for example, that Cohen and his team see the integrated natural gas-focused company as a pure-play investment in higher natural gas prices. Billionaire George Soros reported a position of 3.1 million shares in EQT as of the beginning of April (find Soros's favorite stocks).
We’d compare EQT to a peer group consisting of natural gas focused E&P companies Chesapeake (NYSE: CHK) and SandRidge (NYSE: SD), integrated energy company Cabot Oil & Gas (NYSE: COG), and natural gas utility ONEOK (NYSE: OKE). SandRidge is expected to be unprofitable both this year and next year--even as revenue has been up over 30%--as the company struggles in the low price environment. According to the most recent data, 15% of the float is held short and it certainly seems to speculative to buy at this time. Chesapeake has been in a similar situation, but a string of asset sales has put it in a position where the sell-side is predicting $1.49 in EPS for this year. That implies a current-year earnings multiple of 15, with further upside beyond that point or in the event of a rise in prices, and so Chesapeake might be a better way to play natural gas than EQT.
Cabot has more than doubled in price over the last year, and while net income has also been up strongly this has resulted in some very high earnings multiples. Specifically, the stock trades at 28 times consensus earnings for 2014 and so Cabot might best be placed on a watch list to see if performance continues to be excellent. ONEOK is actually priced at a premium valuation as well, with trailing and forward P/Es of 26 and 20 respectively; that seems aggressive from a value perspective, given that net income actually fell in its most recent quarter compared to the same period in the previous year. As a utility, ONEOK pays a dividend yield of a little over 3%.
We’d avoid the stock on that basis, as we would with SandRidge and Cabot (at least until there are positive developments at those companies). EQT’s valuation seems a bit high as well- Chesapeake, even with its recent troubles, seems to be a better buy and surely any rise in natural gas prices (which EQT may actually be depending on in order to justify the current price) would benefit that company as well.
Energy investors would be hard-pressed to find another company trading at a deeper discount than Chesapeake Energy. Its share price depreciated after negative news surfaced concerning the company's management and spiraling debt picture. While the debt issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in CHK. The Motley Fool recommends ONEOK. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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!