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Oil & Gas Stocks the Most Guru Hedge Fund Managers Own: GP, HFC, SUN
Posted by: Holly LaFon (IP Logged)
Date: December 7, 2011 05:32PM

As a continuation of the most-owned stocks of hedge funds report yesterday, today is an analysis of where hedge funds gurus are finding most appeal in the oil & gas sector.

Worldwide E&P spending for oil & gas companies in 2012 is expected to increase 10% to $598 billion, versus $544 billion in 2011, according to a Barclays Capital research note released Monday. Barclays analysts anticipate an 11% rise in spending internationally, and an 8% rise in North America. Last year, International spending grew 20%, and spending in North America grew 30%. Their research led them to believe that the oil service, equipment and drilling companies overall will “significantly outperform the broader equity market over the next several years.”

New guru Kyle Bass, a macro investor, is bullish on oil & gas, situating nearly 46% of his portfolio in the sector. Hedge fund managers GuruFocus tracks have found several oil & gas stocks particularly attractive. The most purchased are: BP Plc ADS (BP), HollyFrontier (HFC) and Sunoco Inc. (SUN).


BP has extensive plans for growth. It will start up 32 new upstream projects by the end of 2016, which will add 1 million barrels a day to its total production. New start-ups for 2012 will take place in the Gulf of Mexico, Angola, the North Sea and Russia. In a speech to the World Petroleum Congress in 2011, Group Chief Executive Bob Dudley highlighted the imperative of exploration as world energy demand is projected to increase by up to 40% by 2030, according to a report published by BP. He sees natural gas rising at 2% annually and also believes that as oil loses market share, it will be offset by a rising level of demand.

BP has generated decreasing annual free cash flow since 2008, as its COGS increased significantly in 2010. It also dramatically bolstered its cash holdings from $8.3 billion in 2009 to more than $18.6 billion in 2010. Operating cash flow also diminished for the past three years primarily due to repercussions of the Gulf of Mexico oil spill that BP shared responsibility for. The net cash outflow related to that event was $16 billion in 2010.

The company resumed dividend payments on Feb. 1, 2010, at 7 cents per share and did not buy back any shares that year.

Crispin Odey, a London hedge fund manager, commented on BP in October: “When BP suffered from the Macondo rig disaster, the company's market capitalization fell by $120 billion, the company set aside $30 billion in provisions and recently announced actual claims of about $5.5 billion. Has the share price recovered the missing $114.5 billion? Of course not. Presumably investors are pricing in more Macondos and, given that they actually cost just over $5 billion each, they are expecting 20 such explosions. As an investor in the shares today this gives me a great deal of protection — a margin of error. It also convinces me that the stock market is a better historian than it is a forecaster or a mathematician.”

Bp Plc Ads has a market cap of $137.64 billion; its shares were traded at around $43.56 with a P/E ratio of 6.2 and P/S ratio of 0.4. The dividend yield of Bp Plc Ads stocks is 3.9%. Bp Plc Ads had an annual average earnings growth of 10.1% over the past 10 years.

HollyFrontier (HFC)

HollyFrontier Corporation it produces and markets gasoline, diesel, jet fuel, asphalt, heavy products and specialty lubricant products. Located in Dallas, it aims to be “the premier U.S. refining and logistics company.”

HollyFrontier has a 13% payout ratio and a 2.9% dividend yield, which it increased to 40 cents per share annually on November 16. It also declared a special cash dividend of 50 cents per share payable on December 8. Mike Jennings, President and CEO, said the increase reflected the Board’s commitment to maximizing shareholder value.

HollyFrontier operates refineries in El Dorado, Kansas; Tulsa, Okla.; Artesia, N.M.; Cheyenne, Wy.; and Woods Cross, Utah. It markets its products throughout the Southwest U.S., and Rocky Mountains, including the Pacific Northwest and neighboring Plains states.

In November, the owners of the Seaway crude oil pipeline announced they would reverse the direction of the flow so that it would transport oil from Oklahoma to the U.S. Gulf Coast, with an initial capacity of 150,000 barrels per day by the second quarter 2012. HollyFrontier could be affected as the change may increase the cost of crude and make it less profitable to convert it to fuel, according to Bloomberg.

HollyFrontier Corp. was formed through the merger of Holly Corp. and Frontier Oil Corp. in July, 2011. Consequently, its third-quarter results – its first as a combined company – showed a 147% increase in sales and other revenues, and a 922% increase in net income from the same period of 2010.

HollyFrontier Corporation is engaged in refining petroleum. Hollyfrontier has a market cap of $4.93 billion; its shares were traded at around $23.56 with a P/E ratio of 4.5 and P/S ratio of 0.6. The dividend yield of Hollyfrontier stocks is 2.9%. Hollyfrontier had an annual average earnings growth of 19% over the past 10 years.

Sunoco Inc. (SUN)

Sunoco Inc. is a petroleum refiner and marketer with interests in cokemaking, which deals principally in the eastern half of the U.S.

Sunoco plans to spin-off its SunCoke Energy Inc. and declared a special stock dividend to its shareholders of 56,660,000 shares of common stock of SunCoke Energy, or approximately 81% of its common shares. The new company projects that its full-year 2012 adjusted EBITDA will fall between $250 million and $280 million, and that coal production will increase by about 400,000 tons to about 1.8 million tons in 2012. The expected increases will be driven by production from its new Ohio facility, improvement in its Indiana Harbor operations and higher sales prices and production volumes in its coal mining segment. The company wants to obtain permission to build a new cokemaking plant in Indiana, in anticipation of market recovery.

Sunoco’s third-quarter financial results became skewed as the company exited its refining business and will sell existing refiners located in Philadelphia and Marcus Hook, Penn. At the same time, in September, the company announced it would conduct a “strategic review” of the company to consider how best to deliver value to shareholders as it makes decisions about employing its strong cash position and enhancing its logistics and retail business. The company’s refining and supply segment had a pretax loss of $17 million in the third quarter compared to $70 million in the third quarter of 2010, helped by higher margins and lower expenses, but offset partially by lower production volumes. The company’s overall loss for the quarter was $1.2 billion, compared to net earnings of $65 million in last year’s third quarter.

In the 10 years prior to its exit of its refining segment, the company grew its revenue at an annual rate of 18.4% and EBITDA at 10.8%. It announced a $500 million share repurchase authorization in August of 2011. Sunoco Inc. has a market cap of $4.2 billion; its shares were traded at around $39.35 with a P/E ratio of 562.2 and P/S ratio of 0.1. The dividend yield of Sunoco Inc. stocks is 1.5%.

Explore more stocks owned by hedge fund gurus by sector here.

Guru Discussed: Kyle Bass: Current Portfolio, Stock Picks
Stocks Discussed: BP, HFC, SUN, OIL,
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