6 Energy Stocks in the Short-Sellers' Sights

I was recently perusing a list of the most-shorted stocks in the Russell 1000 (an index of approximately 1,000 of the largest U.S. equities). Being an energy nut, the following names jumped out at me:

Company

Industry

Short Interest as % of Float

SunPower (Nasdaq: SPWRA  )

Solar

27.7%

Diamond Offshore Drilling (NYSE: DO  )

Oil and gas services

23.2%

Core Laboratories (NYSE: CLB  )

Oil and gas services

18.7%

First Solar (Nasdaq: FSLR  )

Solar

18.2%

Mariner Energy

Oil & gas exploration & production

17.8%

Comstock Resources (NYSE: CRK  )

Oil & gas exploration & production

14.6%

Source: Bespoke Investment Group.

This is an interesting mix of companies, as some are beaten down, while others are flying high. Let's start with a look at the laggards.

Taking a dim view of solar
SunPower has been dogged by concerns about foreign competition from low-cost Chinese rivals, and the former high flyer is now trading barely above its tangible book value of $10.47. That's exactly where analyst Mark Bachman said the firm should trade back in April, when SunPower traded hands at around $18. The short case has been borne out, but I don't see why bearish investors would be pressing their bets at this point.

(It was once the case that SunPower "A" shares traded at a big premium to the "B" shares, which created a long-short opportunity to bet on a collapse of the spread between share classes, but that's over with, so the continuing short interest must be an expression of negative sentiment toward the company itself.)

As we saw in the case of Energy Conversion Devices (Nasdaq: ENER  ) , it doesn't take too much good news to set off fireworks in the face of low expectations and heavy short-selling. It may well be that there are more financial fudges remaining to be uncovered, but this looks like a risky short to me.

All washed up?
Diamond Offshore is an offshore drilling contractor that has really lost favor with investors this year, having shed about as much market value as Transocean. This, despite having no involvement in the Macondo disaster. Diamond looks pretty cheap (as do most peers), but the firm does have one of the oldest deepwater fleets around. I think there's a valid concern out there that in the case of a continued difficult market, Diamond will be hit disproportionately hard as its rigs lose work to more capable competitors. I forecasted a challenging 2011 even before the Gulf spill, so there may be more choppy waters in the near term.

Digging in the wrong sandbox
Our final bedraggled short target is Comstock, a natural-gas-focused E&P. Three years ago, the company sported a market cap of $1.3 billion, proved reserves of 851 billion cubic feet equivalent of natural gas, and daily production of 236 million cubic feet equivalent. Today, those numbers are $990 million, 726 Bcfe, and 219 million per day. The company does not appear to have much to show for the past few years of heavy capital investment.

Long-term disappointments aside, the more immediate concern among investors is likely Comstock's exposure to natural gas, at 94% of reserves. Specifically, Comstock is highly exposed to the Haynesville shale, where the numbers haven't been adding up for me. The shorts have figured this out as well. Comstock is a cut above hypester Goodrich Petroleum (NYSE: GDP  ) and a certain Cotton Valley competitor that will remain nameless, and the firm's liquidity position is solid, with an undrawn $500 million line of credit. It no longer looks like a compelling short, but there are better buys in natural gas.

My overall take on this trio of despised energy stocks is that short-sellers have had good reasons to ride these shares down to date. That said, I don't see a lot of further gains to be had on the short side. Now how about the remaining stocks?

Let's break a deal
The Mariner Energy short may be a wager that the firm's pending merger with Apache could be called off following the recent explosion of a Mariner platform. That seems unlikely, but I suppose the risk/reward here is favorable, since it would take a lot to sharply move the shares of Apache upward (which would drive up the shares of Mariner via merger arbitrage, and scorch the shorts). It's not the worst bet I've ever seen.

I'm guessing that First Solar and Core Laboratories are short targets largely based on valuation. The former has long had its share of detractors -- including yours truly, on occasion. It's usually a bad idea to short based on rich valuation alone, however, when a company is actually performing. Core Labs, in particular, looks like an insane company to short.

In February, I told you not to buy this stock if you hate free cash flow. For those who don't hate free cash flow, and bought the stock, you've done well. This company is highly profitable and takes care of its shareholders. Shorts should probably pack up and move on to more deserving targets.

First Solar is a Motley Fool Rule Breakers selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 16, 2010, at 5:18 AM, TimoDOZ wrote:

    You have forgotten to include ASX in your list of shorts. The Fool! who recommended shorting that one at near $3.30 2 or 3 weeks ago was certainly a fool but not as big a fool as those who followed that advice. ASX up 16% since the FOOL article by the fool recommending that short. With that kind of move higher it just has to be an even better shorting idea now! Right?

    As usual the Fool hawking it's diverse but never comprehensive advice to unwary readers. Caveat emptor fools!

  • Report this Comment On September 16, 2010, at 5:38 AM, TimoDOZ wrote:

    As for the tease I am not going there but China is importing 60% of it's soybeans. China will triple it's purchases of US corn in the next 4 years eschewing long term treasuries and getting stuff with intrinsic value instead. Bets on ADM, Bungee, and Dupont a price chopping leader in drought resistant strains of seed corn all good bets on market pull backs. DD with the strong near 4.25% yield. ETFs like MOO and DAG working very well as of late. Anything fertilizer. Mosaic and Chile's SQM maybe? Then that leads back to the weakness in natural gas a key component in most fertilizer manufacture that the author would short. Longer term for those with patience the shale gas thing south of Houston and east of the Rio Grande is probably a Saudi Arabia of Nat Gas? The recent developments with Cheniere Energy seeking to become an exporter from nearby existing import terminals and the recent acquisition /partnering by Chesapeake with the dubious Goodrich Petroleum may have some play. With their E&P basically having some success and their pockets being a little deeper from the CHK infusion, GDP may be able to make good on their GDPAN payments. They may even eventually call that one at par and restructure the debt if "ZIRP" "continues for the foreseeable future"? GDPAN that is right down there near a low like the ASX was a few weeks ago. Maybe GDPAN is a good short too, just now in the immediate shadow of it's ex date?

  • Report this Comment On September 17, 2010, at 2:08 PM, TimoDOZ wrote:

    & up shoots DAG!!!! Whoa !!! Watch out for the cusp of wheat knocking on $8.98. It will be time to unload DAG by then. Corn is cranking it out as well! But what is this ??? Referring to the tease that was on China but now has been changed to an Ad for the snake oil selling Ken Fisher..... Some of Ken's minions were telling perspective clients before the melt down in stocks that they would consider "Allowing" up to 12% of their clients assets to be in bonds. They would allow? Talk about control freaks with an agenda?The "hypster Goodrich Petroleum" adding on +5.5% today. Not a bad associated move with that strong distribution CV prfd GDPAN either. A hypster? Hummmmm. Meanwhile back on the road from Kaoshiung to Keelung we find ASX gaining the $3.90 handle then falling back a bit on the nascent Tech rally snuffed out by the later consumer confidence decline report. Maybe if you got that short on in ASX @ $3.90? BVut then what if it keeps going up. We find the Unifazians putting their fazers on "deadly" crushing shorts over there the last couple days. JDSU... is there a more euphonius sounding dog? Arf ! Arf!

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