Hedge fund D.E. Shaw juggles its bets in the oil patch

Hedge fund D.E. Shaw & Co. Inc. doubled down in the fourth quarter of 2020 on continued recovery in the oil patch, selling some exploration and production companies that have seen triple-digit gains while adding a host of big name producers that are still out of fashion amid $60-per-barrel oil prices.

In the fourth quarter of 2020, Shaw sold portions of its holdings in shale drillers with significant natural gas volumes such as Permian Basin producer Devon Energy Corp. and Appalachian producer Range Resources Corp. as natural gas stocks ended a year of gains. At the same time, Shaw enlarged its stakes in oil producers such as supermajor Exxon Mobil Corp., Occidental Petroleum Corp. and Apache Corp. that have lost significant value in 2020, according to an analysis of SEC filings by S&P Global Market Intelligence.

With oil and gas producers maintaining their spending discipline at the end of the year, the bet on more profits and cash flow as oil prices climb has garnered some fans on Wall Street.

"We see the case for oil prices to rally sooner and higher," Goldman Sachs oil and gas analyst Brian Singer told clients Feb. 22. "At our more bullish oil price deck, we see 15% free cash flow yield on average for [exploration and production, or E&P] coverage in both 2021/22 and accordingly see scope for greater return of cash to shareholders."

"Companies that have reported thus far are reiterating focus on free cash flow versus production growth for 2021, which we expect will continue as a major theme for the remainder of 4Q20 earnings season," the Goldman analysis said. Goldman indicated it may take several more quarters of demonstrated restraint, particularly as crude price rise, before investors are willing to put more money into a sector with a history of drilling profit margins away, leaving room for early investors to rack up some gains.

Shaw's single biggest purchase in the fourth quarter of 2020 was the addition of $181 million more shares of gas and power utility Dominion Energy Inc., which joins peer Duke Energy Corp. in Shaw's energy portfolio, which still leans toward utility companies.

Shaw's biggest sale, in dollar value, was shale oil producer Concho Resources Inc., after double-digit gains since the March 2020 oil crisis, and Concho's $9.7 billion purchase by ConocoPhillips.

The hedge fund's total energy portfolio changed little in the fourth quarter of 2020 and leans toward large electric and multi-utilities such as NextEra Energy Inc. and FirstEnergy Corp. in addition to Duke and Dominion.