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Value investors, bottom-feeders buy into shale gas stocks

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Value investors, bottom-feeders buy into shale gas stocks

Most institutional investors were selling Appalachian shale gas stocks in the fourth quarter of 2017 as their share values kept dropping along with the NYMEX gas futures price, an analysis of S&P Global Market Intelligence data showed.

Only three of the top 10 Appalachian shale gas companies saw more investment from their top three buyers than sales by their top three sellers during the fourth quarter of 2017, according to information that institutional investors reported to the SEC on Form 13F. That number could be inflated by the two index funds and the family trust that reported large increases in their EQT Corp. stakes after EQT acquired Rice Energy Inc. Those stakes increased because owners of Rice Energy shares exchanged them for 0.37 EQT shares as part of the deal's $6.7 billion mix of stock and cash for Rice owners.

An equally weighted index of the 10 Appalachian shale gas drillers lost 7% in the fourth quarter of 2017, capping off a year of 21% declines in the index's value as natural gas prices stuck at about $3/MMBtu.

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Among the investors that finally lost patience with the debt-fueled fall of Chesapeake Energy Corp. was long-time Chesapeake investor Southeastern Asset Management Inc., which for years was Chesapeake's single-largest shareholder. Southeastern sold 23% of its Chesapeake shares and told investors in its Longleaf Partners Funds' growth fund that the Oklahoma driller is still too tied to cheap gas despite attempts to add more crude oil to its production mix. Chesapeake was one of the few holdings in the Longleaf fund that showed a decline, the fund told investors in its quarterly commentary.

"Overshadowing strong operational performance by CEO Doug Lawler and his management team, domestic gas oversupply weighed down strip prices," Longleaf said. "We reduced the position to reflect the broad range of outcomes dependent on commodity prices."

The continued decline of share prices brought out activist investors and value funds that see a bottom to the market.

Daniel Loeb, famous for sharp-tongued letters to company management, had his Third Point LLC acquire a new 3% stake in the other big gas driller held hostage to the commodities strip, Southwestern Energy Co. Southwestern's biggest institutional buyer was a hedge fund powered by quantitative analysis, AQR Capital Management LLC, which more than doubled its stake to 4%. AQR said its quants routinely outperform indexes because they can identify the growth in value situations. AQR was also a buyer of Chesapeake in the fourth quarter of 2017.

At the same time that Third Point moved in on Southwestern, activist SailingStone Capital Partners LLC moved out. It liquidated its 30 million shares, a roughly 5% stake. SailingStone has not soured on Appalachian value plays. It added another 8% to bring its stake in Range Resources Corp. near 15% as Range continues to trade for less than the book value of its assets.

Another signal of a bottom for share prices was more investment from growth and value hedge fund manager Ken Griffin's Citadel LLC, which bought stakes in Range and in Pittsburgh's coal-turned-gas-producer CNX Resources Corp. Citadel increased its stake in Range to 1% of Range shares and 2% of CNX shares.