Billionaire Steve Cohen's Big Bet On Oil & Gas

By Marshall Hargrave - February 8, 2013 | Tickers: FST, NFX, PXD, KWK | 0 Comments

Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Forest Oil (NYSE: FST) is down almost 50% over the last twelve months, but that has not been a deterrent for billionaire Steve Cohen of SAC Capital. A recent SEC filing shows that Cohen upped his stake in Forest Oil by 150%; he owned 4.6 million shares at the end of the third quarter and now owns 11.5 million shares, or 9.8% of Forest Oil's outstanding shares (check out Cohen's stock picks). Cohen has been active of late, not only doubling his Forest Oil position, but taking a renewed interest in DVR pioneer TiVo (read more here).

Forest remains a somewhat speculative play given its hindered liquidity and elevated debt levels. A couple other notable E&P companies include Quicksilver Resources (NYSE: KWK), Newfield Exploration (NYSE: NFX), and Pioneer Natural Resources (NYSE: PXD). By stacking these companies up against each other we see just how severe the balance sheet issue is:

	Forest Oil	Quicksilver Resources	Newfield Exploration	Pioneer Natural
Current Ratio	0.3	1.4	1.0	1.6
Debt Ratio	75%	87%	33%	27%

Forest Oil has been under pressure of late and is now embarking on restructuring efforts and debt reduction. Forest Oil has been dumping assets, which includes Alaska, Gulf of Mexico, and old Permian Basin assets, including the spin-off of Lone Pine Resources in September of 2011. During the last six months, management has sold roughly $600 million of non-core assets, and more recent divestment news includes plans to offload its assets in Texas for $325 million, which it will use for paying down debt. As a result of these initiatives the oil and gas company has reduced its long-term debt around 30% from a $3 billion high in 2009 to just over $2 billion now:

The major competition has also been struggling: Quicksilver posted third quarter results that saw top and bottom line results falling short of consensus estimates, with weak natural gas prices and low production levels being the major drags. Pioneer also posted below-expected EPS last quarter, with results falling on a year over year basis. Newfield, on the other hand, has been hitting on a number of cylinders, including better utilization from wells drilled in the Bakken and Eagle Ford. The oil and gas company expects to boost output by about 50% in the coming years. Getting back to Forest Oil, the company has robust exposure to natural gas, but now plans to diversify its production portfolio by expanding its liquid production. This includes focusing on Eagle Ford and the company's core acreage position. The shift will help not only drive the company's top line but also boost margins as its focuses on higher-margin oil development.

Although earnings are expected to remain below 2011 levels, when coupling its EPS with the industry average price to earnings the stock could well be undervalued. The industry average P/E multiple is around 30 times; put that multiple up against the 2013 expected EPS (Wall Street estimates) of $0.38 and the company shows over 60% upside. Furthermore, the industry trades at an average 8.8 price to operating cash flow multiple, whereas Forest Oil is at 2.5 times. It appears that concerns surrounding high leverage and over-exposure to natural gas are both being addressed by Forest Oil, and so some of the pressure on the stock might be overdone. Cohen is now one of the Forest's top fund owners, topping Owl Creek Asset Management, which owned 9.8 million shares at quarter end (see all the hedge funds loving Forest Oil).

mhargra has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

Billionaire Steve Cohen's Big Bet On Oil & Gas

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