An avid deep-sea fisherman, Arthur L. Smith likes to see a lot of action out on the water, but when it comes to investing in energy, he prefers a bit more tranquility. Oil and gas investing is the specialty of Triple Double Advisors LLC, the firm he founded in 2007 when the former chief executive officer of John S. Herold Inc. sold the latter to IHS. Thus, Triple Double focuses on low-turnover, long-term and low-volatility portfolios filled with energy companies that can build asset value per share through bull and bear energy markets.

Smith is president of the new firm. He is joined by John M. White, a former equity and high-yield analyst with firms such as Natixis Bleichroeder, Herold and BMO Capital; and Gabriel G. Chavez, a former research analyst with Koch Quantitative Trading and Enron. Chavez is also currently a candidate for a master's in philosophy, in addition to his financial acumen.

The team manages Equity Energy portfolios and Balanced Energy portfolios, and aims to cover all the bases. It invests in public equities, master limited partnerships and fixed income securities, including E&P, midstream and upstream MLPs, oil services, integrateds, pipelines and diversified natural gas companies, and refining and marketing. It invests in all size categories, including large-, mid- and small-capitalization companies.

Originally a part of Herold, Triple Double was spun out when Smith sold Herold in 2007. He'd built the latter into one of the leading providers of independent research covering the oil and gas sector. That focus continues at Triple Double, which has about $38 million under management. The trio selects securities from their database of over 300 oil, gas and energy companies, divided into 45 energy subsectors to allow for more detailed analysis.

Through November 30, 2010, the balanced portfolio had returned 19.5% and the equity portfolio 15.7%—both outperforming the Energy SPDR (NYSE: XLE) exchange-traded fund. Oil and Gas Investor visited the Triple Double team for insights into its investment success.

"We want to see a demonstrated increase in per-share value, year after year," says Arthur L. Smith, president, Triple Double Advisors LLC.

Investor: What price outlook do you guys have right now?

Smith: We stay with the forward market. Virtually all the numbers are pointing to higher crude demand. For gas we are extremely enthusiastic about the emergence of the shale plays, but it's going to take time for demand to catch up with them.

Investor: Given that, what's your overall investing philosophy at Triple Double?

Smith: Having followed oil and gas companies my entire career, we are always thinking they are worth some measure of future discounted value from their production, minus debt. And we want to see them spend a dollar to create at least $1.50. The disconnect is, we are not always sure that this is taking place.

Investor: Why is that?

Smith: It is very easy to destroy capital in this business. These E&P companies have an inherent bias to spend money, but there is a difference between investing and spending money. We keep an eye on capex versus cash flow.

Overall, we are value investors. We want to see a demonstrated increase in per-share value, year after year. Admittedly, this can be tricky to do. One example of a company that has grown tremendously, but not really moved the stock that much, is Chesapeake Energy. Aubrey (McClendon, chairman and CEO) has done a great job growing the company, we like him, but the stock has pretty much stayed in the same range.

Investor: What kind of E&P companies would you cite then, that have done a better job?

Smith: Newfield Exploration, EOG Resources and Oxy have been more attuned to value creation, to increasing their value per share.

Investor: How do you approach the sector?

Smith: We analyze the macroeconomic data first. Is the racetrack wet, is the track dry? We look for thoroughbreds that are priced like stable horses. Then we go talk to the jockey (management) because the jockey makes all the difference in the world. We go to their office and ask the questions you might not ask otherwise.

The worry is, you do fall in love with management, but in the end, you have to watch their performance and make your decisions based on that.

Chavez: If the stock is expensive, we ask why. We try to find the right combination of value and quality, of both the management and the assets.

Investor:What were some companies that ran great races for you in 2010?

Smith: We pinch ourselves all the time about Concho Resources. We've known those guys since they were at Parker & Parsley. That has developed into a fabulous company. We are searching for emerging "pacesetter" companies. Oxy is a pacesetter, but it is not valued like one. Continental Resources is a pretty good company that arguably deserves its valuation.

Investor:How is Triple Double different from other investment firms?

Chavez: The equity portfolio can be volatile, so we worked to cut down the beta while having good performance, and so, we added some puts and calls. To clarify, we do not take possession of our clients' funds. They are deposited with a custodian and then we have the power to trade on the clients' behalf. It's completely transparent and they can see what we have traded every day.

White: With a lot of folks we know, they have investments with some hedge funds, but after what happened in 2008 and 2009…we decided on separate, managed accounts.

Chavez: This also allows for customization, whereas with a hedge fund that's a limited partner, not so. We can dial up or dial down according to a client's risk preferences.

Smith: Last year, we saw improving oil demand worldwide and thought if anything, the IEA estimates were too conservative, which has proved to be true. Our biggest call was when we saw natural gas fall off. We saw the rig count not going down and did the math, and we thought the front months would keep drifting down.

The hardest call is to go against the consensus. The 914 data continued to show gas-production growth. The gas-resource companies have been chronic underperformers, so the darlings of yesterday are now the laggards.

Investor: How did you react to the BP tragedy?

White: We sold our Anadarko position when the Macondo well first blew out, and we came up with a worst-case scenario. But then, we bought it back when the stock blew right past our worst-case scenario, in late June. It has been one of our best performers. We also bought Cameron when the stock was being terribly punished.

Chavez: Of course we have rebalanced since then, but we have not liquidated our holdings in Anadarko and Cameron.

Investor: These are some big-cap names. How do you approach the smaller companies?

Chavez: When we look at the small-cap names, we look for someone pursuing lower-risk development plays like NiMin Energy Corp. (NNN) or GeoResources (GEOI). We look for smaller companies not covered by many analysts, but we are comfortable with that. We look for companies that can convert their PUDs to producing reserves.

Smith: People love to talk about the romance of exploration, and now and then we witness a lot of hoopla in the market, like we've seen recently around the Davy Jones well (McMoRan's ultradeep, shallow-water discovery in the Gulf of Mexico). But that kind of thing is not for us. We prefer lower risk than that.

Investor: We've talked about investing in stocks, but what about MLPs or bonds?

Smith: We spend a lot of time on fixed income. That's really John's area of expertise. Inefficiencies in pricing the bonds can be significant.

White: One thing that really helped us in the balanced fund was adding MLP exposure, particularly from the midstream sector, and we've seen strong demand for yield investments. Having them in the portfolio has been a real positive thing for us.

Smith: But, I am on the board of PAA Natural Gas Storage and Pioneer Southwest Energy, Pioneer's MLP, and so we don't invest in those!

Investor: What about upstream MLPs?

Smith: The upstream MLP concept had its day and then everybody converted to a C corp. I'm talking about Devon, Parker & Parsley, back in the 1980s. Then John Walker and Mike Linn resurrected it–with $80 oil it works. But they've had so much appreciation, we're cautious now. But they'll continue to be a part of the portfolio.

White: The spread on distributions still looks fairly attractive compared to other fixed income investments.

Chavez: We track about 300 stocks in 45 energy-industry sectors. We rank them on 36 criteria. Some of the subsectors have 30 companies; some have only five. We track how capital moves into and out of the space. We break down the 45 sectors and see which stocks were up or down for the year. Price-to-net asset value gets two votes, each category is weighted, then we go meet the management. It's a long process and not cherry picking based on one criterion.

Clearly all the gas-weighted stocks were down. A lot of MLPs were in the top 10 and at the very top were the small-cap service and equipment stocks. At the very bottom were the IPPs, geothermal, wind, solar and fuel cells. That was a symptom of low gas prices.

Smith: If it works and the economics are there, I'm all for it, but if it is subsidized or mandated… what does that really mean, and how does it work? I think 2010 was an awfully rough year, so I have to say, we are warming up to gas: for most of 2010 we were bearish on gas.

Investor: Natural gas has been a tough call.

Chavez: We still own some gassy names that have good cost structures. Not everybody is hurting from low gas prices.

White: In 2009 and early 2010 we were bearish on gas when there weren't that many bears yet. But now we are trying to anticipate the end of all the held-by-production drilling.

Chavez: The gas rig count is still way too high. We think it should be 700 to 750 rigs to keep production flat.