Summary

• There has been an influx of activist investors to small-cap oil and gas names.
• California Resources is the latest target, with Soroban Capital taking a 9.9% stake.
• Shares are up nicely off their all-time low from a earlier this year, but there could be more to come for long-term oriented investors.

California Resources (NYSE:CRC ) has rocketed off its 52-week lows, now up 65% with the help of a slight rebound in oil prices and a new activist hedge fund as a major investor. Soroban Capital took an active stake in CRC this week (per a 13D filing).

As far as activism in oil and gas, some activists are targeting derivative areas of the oil and gas market, choosing to stay away from the hard hit exploration and production players. ValueAct has taken an active stance at Baker Hughes (NYSE:BHI ) and Sandell Asset is trying to split up the pipeline operator TransCanada (NYSE:TRP ).

That’s not to say that some hedge funds haven’t taken a bold stance. This includes SPO Advisory at Oasis Petroleum (NYSE:OAS ) and Atlantic Investment taking an activist stake in Oil States (NYSE:OIS ), both stocks are up since the respective 13D filings. But Baker Street Capital got in a bit early at Swift Energy (NYSE:SFY ), with shares down 70% since the fund filed its 13D in Oct.

However, as a quick side note for those following hedge fund names in energy stocks — Leon Cooperman and TPG-Axon have been dumping shares of SandRidge Energy (NYSE:SD ). A recent SEC filing showed that Cooperman owned 32.1mm shares after dumping 13.3mm shares. This comes after TPG-Axon sold off half its position (20mm shares) in Dec. The two owned 17.5% of SD at the end of 3Q 2014, they now own just over 10%.

Back to CRC — Soroban founder, Eric Mandelblatt, cut his teeth as a partner at TPG-Axon, but also worked as an energy analyst at Goldman Sachs (NYSE:GS ) for seven years.

Soroban is relatively familiar with energy stocks, owning the likes of Williams Companies (NYSE:WMB ), Occidental Petroleum (NYSE:OXY ) and Anadarko Petroleum (NYSE:APC ). Their WMB position is part of an activist wolf pack that includes Corvex Management. Yet, CRC is one of their first forays into the activist space alone.

CRC’s stock is trading around $6.20/share, while Soroban bought the bulk of its 38.5mm shares below $5/share. The hedge fund owns 9.9% of the oil and gas company, although it’s not a huge position in its long-equity fund.

source: stockpucker.com

Soroban hasn’t laid out any activist plans yet. But their plan could be to play an expected rebound in oil prices. Here’s our thoughts.

Who is California Resources? CRC spunoff from Occidental Petroleum in Nov. and includes all of Occidental’s California assets. CRC accounts for roughly 30% of California’s oil production.

OXY spunoff CRC, thinking that as an independent company, CRC would have better growth prospects. This comes as OXY, being a global oil and gas explorer/producer, couldn’t give the proper attention or investment to its California assets.

But the stock was hit hard after the spinoff. Just poor timing for a spinoff, perhaps.

But with CRC you have a unique set of assets. It has a strong portfolio of what’s known as low-risk conventional wells/assets — versus unconventional assets. This gives CRC a relatively stable production base. When you look across CRC’s wells, about three-quarters of its drilling is being done within conventional oilfields.

I’ve also seen speculation that CRC could be a buyout target given its stronghold in the California market. Chevron (NYSE:CVX ) has been upping its presence in the state.

Where we stand: Granted CRC is heavily tied to oil prices, it’s still one of the more interesting plays in the oil and gas space. Shares are still well off their $9/share 52-week highs thanks.

Par of that is due to the slide in oil prices, with the other part being selling pressure after the spinoff, where some OXY investors just weren’t interested in owning CRC. For investors looking for some exposure to oil without investing in some of the overcrowded shale plays like the Eagle Ford or Permian, CRC is worth a look.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.