As I flip though this quarters stack of 13-HF filings, I have been trying to keep track of energy names that were bought by the best value and distressed investors during the fourth quarter. Buying in the September-December quarter would have been early to the party for most of these names, especially if they are natural gas related.
If the best investors on the planet were buying some of these stocks before they sold off along with natural gas pricing, then they are probably worth another look now that their shares are cheaper. I often think that value and distressed investors have a proclivity to buy stocks that go down for a period of time before they reverse course. I believe the energy sector has enormous investment potential over the next decade, so I am interested in an opportunity to buy the ideas of the best and brightest at lower prices.
When I scan the list of energy stocks being bought by value investors one names that leaps out at me is C&J Services (CJES). The Royce Funds (which specialize in small-cap value investing) were buying the stock in the quarter and are down more than 20% so far on the stock. C&J is a busted IPO stock that benefits from being in business that has become the energy equivalent of a curse word. The bulk of the firm's earnings and cash flow are produced by fracking in the shale fields. The stock traded as high as $32 in the aftermath of its August IPO but has since dropped below the $20 mark.
The company is active in major shale and unconventional filed such as Eagles Ford in Texas and Granite Wash in Washington State and its customer list includes most of the major exploration and production companies. C&J is a leader in fracking equipment as well as coiled tubing and pressure pumping technologies -- and it is on track to continue growing very rapidly for many years. In spite of impressive growth and potential the negative publicity surrounding fracking have pressured the shares. CJES trades at an enterprise value (EV)/earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of just 4.2 and 7x trailing earnings.
I have made some money over the years following Leon Cooperman of Omega Advisors on some of his purchases in the energy patch. During the past quarter, he was buying one of the smaller, more troubled natural gas shale filed companies. GMX Resources (GMXR) operates in unconventional gas projects in Wyoming, North and South Dakota, and eastern Texas. The stock has dropped by more than 50% in the last year because the combination of high leverage on the balance sheet and rapidly declining natural gas prices have pressured sales and earnings. Management is trying to transition to more oil and liquids by buying more than 75,000 acres in the Bakken and Niobraska fields. GMX has also suspended drilling in its East Texas gas assets to focus on oil production. When I look at the company's bond pricing, it is obvious the market is skeptical that the company can execute a full turnaround. However if they do and natural gas prices increase the equity could act like an LBO stub and rise by many multiples of the current price. Cooperman also added to more traditional energy holdings such as Transocean (RIG) and El Paso (EP) in the quarter.
I have been a little surprised by the lack of energy sector activity by the leading value and distressed investors I follow during the quarter. Many of the better investors held pat as the markets rose steadily during the quarter and this appears to have been the case with energy stocks as well.
I am tracking 13D and 13G filings as the first quarter develops to see if the plunge in natural gas inspires more value types to follow Wilbur Ross and others in building up positions in cheap natural gas and energy stocks. Next to small banks, the search for energy independence is going to be a major source of profits for investors over the next decade and this will bode well for domestic production, exploration and services companies.