Billionaire Steve Cohen’s SAC Owns 5.2% of SM Energy

According to a filing with the SEC, billionaire Steve Cohen’s SAC Capital Advisors owns 3.4 million shares of SM Energy Co. (NYSE:SM), a $3.8 billion market cap oil and gas exploration and production company. SM is notable for its positions in many onshore U.S. shale plays, including the Eagle Ford in Texas and the Bakken in North Dakota. We track quarterly 13F filings from hedge funds in our database; while we primarily use this information to develop investment strategies (for example, we have found that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year), we can also use it to see that SAC had only owned 1.3 million shares at the end of December. See more of Cohen’s stock picks from the 13F. So the fund has bought most of these shares within the last two and a half months.

We can also see that SAC is likely the largest shareholder in SM Energy Co. out of the filers we track. The largest position out of the hedge funds and other notable investors in our database at the end of the fourth quarter of 2012 belonged to Dmitry Balyasny’s Balyasny Asset Management, which owned 2.1 million shares (find Balyasny’s favorite stocks). Billionaire Ken Griffin’s Citadel Investment Group increased its holdings of SM by 11% to a total of 1.6 million shares (check out more stocks Griffin was buying).

Since over half of the energy equivalent of SM’s production is natural gas, which experienced a difficult market environment in 2012, it’s not surprising that the company was struggling in terms of its financial performance. Last year revenue was actually down compared to 2011, even though SM Energy Co. recorded an increase in production expenses. As a result operating income- after adding back some property impairments- was about $200 million, down by about two-thirds from the previous year on the same basis. Interest expenses have also increased as SM has taken on more debt.

We believe that SM is dependent on an improved natural gas market in order to justify its valuation. We do think that natural gas has prospects for increased demand, including export potential, though we aren’t sure how high those trends will carry prices. Wall Street analysts expect enough earnings for 2014 that the forward P/E is 18.

How does this compare to SM’s peers?

SM is best compared to other energy companies which have an emphasis on shale. The leading example of a natural gas-focused shale producer- in both good and bad respects- is Chesapeake Energy Corporation (NYSE:CHK). Chesapeake is also unprofitable on a trailing basis after overextending itself and then getting hit hard by the fall in natural gas prices. While the sell-side is more optimistic about this company- it trades at only 12 times forward earnings estimates- 15% of the outstanding shares are held short. Other peers include Apache Corporation (NYSE:APA), EOG Resources Inc (NYSE:EOG), and Cabot Oil & Gas Corporation (NYSE:COG). These companies are all at least somewhat profitable, though both EOG and Cabot are desperately in need of an improved bottom line with trailing P/E multiples over 60 in both cases. Revenue was up at double-digit rates at these peers last quarter compared to the same period in the previous year. Apache carries a trailing P/E of 15, but its net income dropped 44% in the fourth quarter of 2012 versus a year earlier.

It’s possible that SM Energy is set to benefit from a coming rise in natural gas prices, but we would certainly be hesitant to take on too much commodity pricing risk. In addition, analysts at least believe that Chesapeake is better positioned to capitalize on the same trend and we think that investors should take a look at that company if they are interested in natural gas producers.

Disclosure: I own no shares of any stocks mentioned in this article.