Millennium Management fund is a global hedge fund with assets of around $18.17 billion under management as of May 31, 2013. It has generated an average return of 16% per year over the last 22 years. The firm has a Sharpe ratio of 2.5, which is the highest among other hedge funds. The Sharpe ratio measures a fund’s efficiency to manage its portfolio by generating excess return per unit of risk from its trading strategies. As per its last 13F filings with the SEC, the funds top holdings as on March 31, 2013 were:
| Company | Percentage Holding |
|---|---|
| American Electric Power Company Inc (NYSE:AEP) | 0.63% |
| EOG Resources Inc (NYSE:EOG) | 0.58% |
| NRG Energy Inc (NYSE:NRG) | 0.51% |
These companies are striving for long-term growth by deploying various strategies. Let’s find out how their strategies are going to benefit investors.
Advancing in renewable energy by signing long-term PPAs
Extension of the Production Tax Credit in January for the next three years has helped American Electric Power Company Inc (NYSE:AEP) expand its power generation capacity from wind energy. This factor favors the company for signing long-term power purchase agreements, or PPAs, in the U.S., resulting in strong growth opportunities.
American Electric Power Company Inc (NYSE:AEP) plans to enhance its wind power portfolio to meet the increasing demand of renewable energy in Indiana, Michigan, and Oklahoma by signing a new PPA. Recently, the company, with its wholly owned subsidiary, Indiana Michigan Power, or I&M, signed a 20-year PPA with EDP Renewables. Under this agreement, EDP will purchase renewable energy of 200 megawatt, or MW, from I&M’s Headwaters wind farm. This wind farm will be installed and be fully operational by the end of next year. Headwaters will add 450 MW capacity to I&M’s total wind power portfolio. This project will help American Electric Power Company Inc (NYSE:AEP) to supply power to both Michigan and Indiana customers.
Additionally, the company’s Oklahoma unit currently serves 540,000 customers with its power generating capacity of 4,200 MW. It recently issued a request for proposal seeking 200 MW of long-term purchase deals of wind energy resources. It expects that this project will generate and supply power by Jan. 1, 2016, subject to Oklahoma utility regulators’ approval. It will replace the earlier PPA, which will expire by the end of 2015.
With these new deals, the company expects to generate revenue of $15.2 billion this year, $15.6 billion next year, and approximately $16 billion in 2015, from $14.9 billion in 2012, with a gross operating margin of around 58%.
Expansion to drive growth
EOG Resources Inc (NYSE:EOG) plans to increase capital expenditure from $7 billion to $7.2 billion, which will help enhance its drilling and production efficiencies. This will be mainly allocated to its operations in the Eagle Ford and Bakken region.
It is one of the largest oil producers in the Eagle Ford with a net acreage of 639,000 acres. The company estimated that it has 26.4 billion barrels of oil reserve under its development area in the Eagle Ford region, with more than 4,900 untapped drilling locations. It plans to increase the drilling program of 400 wells to 425 wells in 2013, and expects to ramp up production in 2014. The company expects its production in this region to grow 28% year-over-year in 2013.
EOG Resources Inc (NYSE:EOG) has the second-largest oil accumulation in the Bakken region and Three Forks formations in North Dakota. It is generating strong results from the 160 acre downspacing program in Parshal, the Three Forks reservoir. Its two recent 160 acre downspace wells in Parshal are producing oil at the rate of 2,375 bpd and 2,170 bpd. In these wells, the company has working interest, or WI, of 55%.
In the Antelope Extension, a Three Forks well is producing 3,150 bpd of oil, in which the company has WI of 94%, and at another well, it has 100% WI. Looking at the strong performance from the Bakken region, it has planned to drill 53 new wells, using 26 rigs this year, mainly in 160 acre spacing.
The company is anticipating total crude oil production rate of 206 million bpd this year and 250 million bpd in 2014. This will result in year-over-year revenue growth of around 20% to around $13.91 billion in 2013 and $14.55 billion in 2014.
Debt restructuring and synergies from acquisition
In December 2012, NRG Energy Inc (NYSE:NRG) acquired U.S.-based energy company GenOn Energy for $1.7 billion to increase its presence in the U.S. GenOn is one of the largest power producers with a power generation capacity of more than 14,000 megawatts. With this acquisition, NRG Energy Inc (NYSE:NRG) became the largest U.S.-based competitive-rate power company. The company expects to generate total cost and operational synergy of around $200 million this year and $325 million per year from 2014 onward.
To improve its operating margin and to enhance its utility service, NRG Energy Inc (NYSE:NRG) has planned to raise additional funds and repricing previous loans. In June 2013, NRG Energy Inc (NYSE:NRG) repriced its $1.57 billion Term loan B, due in 2018. In this repricing, the company reduced its interest rate spread from 2.5% to 2%. It also raised an additional $450 million at the same interest rate. Now, the total loan liability has increased to $2.02 billion.
Furthermore, NRG Energy Inc (NYSE:NRG) has also repriced and extended the maturity of its $2.3 billion credit facility by two years to 2018, and reduced the spread from 2.75% to 2.25%. It has raised the credit facility an additional $200 million, taking it to a total of $2.5 billion. By the repricing of its term loan and credit facility, the company expects an annualized interest saving of $49 million from 2014 onward.
Conclusion
American Electric Power Company Inc (NYSE:AEP) is signing new PPAs and the Production Tax Credit will help the company enhance its footprint in renewable energy, which should generate strong long-term growth for it.
EOG Resources Inc (NYSE:EOG)’s expansion plan in Eagle Ford and Bakken oil fields will widen the scope for further growth of the company and these regions are expected to drive its revenue higher.
NRG, with the acquisition of GenOn, expects long-term synergies. Additionally, the repricing of its term loan will result in a higher net operating margin.
Due to these strategies, I recommend a buy on all three stocks.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Shweta is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Benefit From Millennium Management’s Top Holdings originally appeared on Fool.com is written by Shweta Dubey.
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