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"Now that energy prices have tumbled from their summer highs, some of the hot money is shifting from bets on commodities to speculative energy stocks.
In just a few months, hedge funds and other big investors have scored huge gains on these shares, and the profits could continue if energy prices rebound strongly. But some analysts are raising yellow flags about these companies because there is no assurance they will succeed in their production and profit goals. Their share prices are so high that they may not go much higher and could tumble, especially if there is another retreat in oil and natural-gas prices.
"It seems people's risk tolerance has gone up in the last month and a half," says George Shiau, who helps run Copia Capital, a $1.2 billion Chicago hedge-fund firm. "The hottest plays lately are company-specific [investments] as opposed to the direction of oil and gas."
Hedge funds and Wall Street trading desks racked up big profits in the past few years on commodities as prices soared on everything from oil and natural gas to copper and zinc. Many of these markets have taken a hit recently, highlighted by a more than 20% drop in oil prices since July and an even larger plunge for natural gas, leading some players to look for profits elsewhere.
They found them, at least for the short term. Shares of Delta Petroleum Corp., for example, a Denver-based driller, shot up 80% in the past five months. The company now has a $1.4 billion market value. Goodrich Petroleum Corp., an exploration company, is up 80% in five months and now has market value just over $1 billion. Parallel Petroleum Corp, a driller, has climbed 20% in a month; its market value is around $800 million.
Some hedge funds are buying up uranium stocks like Cameco Corp., a $12 billion company that is up 35% in the past year, though it has dropped in recent months.
Most investors should be wary of betting on these companies with smaller market capitalizations. "It's a high-octane strategy that may backfire for individual investors," says Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which manages $48 billion. "It's a leveraged bet on energy prices."
Companies drilling for natural gas look attractive now that prices for the fuel have risen somewhat from late-summer lows.
[Gushing Returns]
"The small-cap natural-gas names have done the best in the past month," says Garrett Smith, who runs SpinnerHawk Capital Management, a Dallas-based $80 million hedge fund. The recent increase in natural-gas futures to around $8 per million British thermal units from below $5 per million BTUs in late September "takes a bunch of names that don't work and makes them work. But if gas collapses back down, these stocks won't hold up," he says.
The first of two natural-gas wells in eastern Washington in which Delta has a partial interest is expected to be completed in the next few weeks. The other will be completed in the first quarter of next year, according to David Donegan, a Delta vice president. Delta could begin to sell gas from the wells, both operated by EnCana Corp., late next year, Mr. Donegan says.
Drilling in the area is challenging, however, due to a thick cover of volcanic rock, making it harder to use conventional seismic technology. Last week, Delta reported a loss of 13 cents a share for the third quarter, compared with a loss of five cents a share a year earlier. As such, the stock is trading on hopes for big profits down the line. The stock has climbed above $27 on the Nasdaq Stock Market from below $14 in June."
MP
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