5 Energy Stock Pick Ideas You Should Pay Attention To

Russell Lucas‘ Lucas Capital, a fund with a focus on energy equities, especially in the North American market, recently filed its 13F with the SEC for the September quarter. The firm’s public equity portfolio stood at $172 million as of September 30, while it currently manages approximately $570 million across its various funds and other wealth management services. Russell Lucas founded the firm in 1996 with his father, George B. Lucas Jr, and continues to serve as its principle, alongside Ralf Sellig. Given the firm’s knowledge of the energy market, we wanted to take a look at its top picks for the fourth quarter, which are Plains GP Holdings LP (NYSE:PAGP), Western Gas Equity Partners LP (NYSE:WGP), Energy Transfer Equity LP (NYSE:ETE), ConocoPhillips (NYSE:COP) and EOG Resources Inc (NYSE:EOG).

Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

#5 ConocoPhillips (NYSE:COP)

Shares held (as of September 30): 72,236
Total Value (as of September 30): $3.46 million
Percent of Portfolio (as of September 30): 2.01%

Lucas Capital bumped up its holding in ConocoPhillips (NYSE:COP) by 11% in the third quarter to 72,236 shares, good for around 2% of its equity portfolio. While ConocoPhillips is no longer an integrated and thus doesn’t have a refining division that benefits from low oil prices, analysts still think the company will be profitable next year, with predictions of EPS of $0.89 for the year. Given ConocoPhillips’ attractive dividend yield of 5.3% and the fact that crude prices will rebound eventually as low crude prices will effectively cure low crude prices by inhibiting production, we’re optimistic on the stock. First Eagle Investment Management owned 7.65 million Conoco shares at the end of June.

#4 Energy Transfer Equity LP (NYSE:ETE)

Shares held (as of September 30): 169,160
Total Value (as of September 30): $3.52 million
Percent of Portfolio (as of September 30): 2.04%

Energy Transfer Equity LP (NYSE:ETE) shares have fallen by 27% year-to-date as sentiment has deteriorated despite the company announcing a deal to merge with Williams Companies Inc (NYSE:WMB) that should yield up to $2 billion in annualized EBITDA synergies by 2020. Because crude prices are less than half of what they were a year-and-a-half ago, investors are less optimistic on the future of U.S energy production growth. In addition, expectations of normalizing interest rates have weighed on shares. The company also reported mixed third quarter earnings, beating EPS expectations by $0.02 per share but missing revenue estimates by $1.83 billion. We’re still fans of the company, however, as the dividend yield of 5.67% is secure at the present moment.

Lucas Capital’s top three energy stock picks light up the next page.

#3 Western Gas Equity Partners LP (NYSE:WGP)

Shares held (as of September 30): 92,672
Total Value (as of September 30): $3.65 million
Percent of Portfolio (as of September 30): 2.12%

Western Gas Equity Partners LP (NYSE:WGP), which indirectly owns the entire general partner interest in Western Gas Partners, LP (NYSE:WES), had a solid third quarter, as Western Gas Partners’ adjusted EBITDA came in at $182.9 million and DCF was $152.8 million. In addition, Western Gas Partners’ management has raising the mid-point of their full-year adjusted EBITDA outlook. Hedge funds are not sold on the company however, as only eight funds out of the 730 elite funds that we track owned Western Gas Equity Partners LP (NYSE:WGP)’s shares at the end of the second quarter. The funds held a cumulative total of just 0.30% of the float at that time.

#2 Plains GP Holdings LP (NYSE:PAGP)

Shares held (as of September 30): 215,703
Total Value (as of September 30): $3.78 million
Percent of Portfolio (as of September 30): 2.19%

Nine analysts have a ‘Buy’ rating and eight have a ‘Hold’ rating on Plains GP Holdings LP (NYSE:PAGP), with them having a consensus price target of $23.54 per share. Despite the analysts’ optimism, at least as far as their consensus target price goes, shares are down by almost 50% year-to-date as sentiment deteriorates due to low energy prices. Shares have also been hurt because of a bad third quarter, in which the company missed EPS estimates by $0.02 per share and revenue expectations by $2.26 billion. Shares will recover once energy prices rebound.

#1 EOG Resources Inc (NYSE:EOG)

Shares held (as of September 30): 64,210
Total Value (as of September 30): $4.67 million
Percent of Portfolio (as of September 30): 2.71%

Lucas Capital increased its position in EOG Resources Inc (NYSE:EOG) by 18% in the third quarter, as the leading independent remains a potential takeover candidate for reserve-hungry super-majors. According to analysts at Goldman Sachs, super-majors only own around 5% of U.S shale oil resources, despite making up the majority of the oil and gas market capitalization. While many areas of the American energy landscape are currently economically unprofitable, the future of unconventional oil and gas production in the U.S is still promising given the strong U.S economy and the need for domestic production to improve national security, which became even more apparent yesterday as President Obama rejected the application for the proposed Keystone XL pipeline from Canada. Ken Griffin‘s Citadel Investment Group owned 5.38 million shares of EOG Resources at the end of June.

Disclosure: None