Cobalt Capital's Thesis on EOG Resources: Q3 Letter ~ market folly

Monday, October 21, 2013

Cobalt Capital's Thesis on EOG Resources: Q3 Letter

Wayne Cooperman's hedge fund Cobalt Capital is out with its Q3 letter.  In it, they briefly detail their thesis on EOG Resources (EOG), a stock they were buying in the third quarter.

If you're unfamiliar with Cobalt, the name Cooperman should ring a bell as Wayne is Lee Cooperman's son.  Lee, of course, runs a hedge fund himself: Omega Advisors.  Cobalt has compounded 15.3% net annually since inception.

During Q3, Cobalt averaged 60% long and 28% short for net exposure of 32%.

Their view on markets is that interest rates heading higher and less earnings growth will be problematic for markets.  That said, Cooperman, like his father, feels equities are the best asset class.  And with the Fed on the market's side for the time being, the market should have a tailwind.  They're cautious but still on the lookout for opportunities both long & short.

Cobalt's Thesis on EOG Resources

In his Q3 letter, Cooperman writes,

"Our largest purchase in the third quarter was EOG resources. EOG has some of the best oil   resource assets in North America, particularly its large core position in the Eagle Ford Shale. We tracked EOG’s well results in the state-reported data and believed that production was trending above expectations. With the stock trading at just 5-6x forward EBITDA, a one-to-two- turn discount to peers despite better assets and growth, we took advantage and purchased shares at a meaningful discount to intrinsic value. Generally speaking, we have found that oil-focused E&P stocks have been a much better value than gassy E&P’s and other energy plays lately, especially given their scarcity value as oil prices have risen and global tensions remain acute. In general, oil stocks do not price in oil remaining at or near current levels for long so we have been able to purchase high quality oil assets at good prices and we have hedged out some of our oil exposure by shorting oil futures."

At the end of the third quarter, EOG was Cobalt's fifth largest position.

For more hedge fund letters, we recently posted up David Einhorn's Q3 letter, as well as Corsair Capital's thesis on News Corp.

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