Cooperman’s top energy pick was Linn Energy LLC (NASDAQ:LINE), a $7.9 billion market cap oil and gas exploration and production company. Linn is focused on the onshore U.S., and its sales have been up from their levels a year ago. The company pays a dividend yield above 7%, and even given its exposure to oil and gas prices it might be a good prospect for income investors. Wall Street analyst estimates have it trading at 22 times forward earnings estimates, so it doesn’t seem to be as good a value as the oil majors, though if it can get its earnings to rise at a rate similar to what the top line has been doing recently it might be able to justify its valuation on a growth basis.
Another high-yield energy stock in Omega’s portfolio was Atlas Pipeline Partners, L.P. (NYSE:APL). The current dividend yield is close to 7% here as well, though Atlas tends to be more exposed to the broader market than Linn- its beta is 1.9- and its most recent quarterly report showed a decline in revenue compared to the third quarter of 2011. The valuation multiples are high here as well, but Atlas- which gathers, processes, and transports natural gas and natural gas liquids- has substantial upside if natural gas prices begin to rise on increasing demand.
Kinder Morgan Inc (NYSE:KMI) was the most popular energy stock among hedge funds during the third quarter (see the full rankings), as 59 filers in our database of hedge funds and other notable investors that file 13Fs reported a position. Omega was among them, owning 4.7 million shares. It also has a good dividend yield, above 4%, and as another pipeline company it too benefits from more oil and gas production in the U.S. At a market capitalization of about $36 billion, it carries a forward P/E of 26. It has been growing recently, but that is at least partly due to recent acquisition activity.
Omega increased its stake in Transocean LTD (NYSE:RIG) by 19% to a little over 3 million shares. Transocean is a leading offshore contract driller operating globally (with a focus on the Gulf of Mexico and the North Sea). Analyst expectations imply that the stock is cheap- the forward P/E multiple is 9 and the five-year PEG ratio is 0.6- and it’s possible that the valuation is being driven down by Transocean’s association with the Deepwater Horizon disaster. Billionaire Steve Cohen’s SAC Capital Advisors owned 1.9 million shares of the stock at the end of September, though this was a 46% reduction from the beginning of July (find more stock picks from billionaire Steve Cohen). We think that the demand for offshore drilling will depend more strongly on oil prices than onshore activity, so investors should consider onshore-focused operators, oil majors, and services companies as well.
Atlas Energy LP (NYSE:ATLS) was another of Cooperman’s energy picks; it is primarily a producer and processor of natural gas and natural gas liquids. Its revenue was down 12% last quarter compared to the same period in 2011, and earnings numbers have been low. With a very close relationship to movements in the broader market- the stock’s beta is 2.9- and a business that hasn’t been performing well recently, we think that there are better buys in the energy sector.
