There has been some good news lately on the depressed oil price front, in the form of President Obama’s refusal to support the 40-year-old ban on exports of crude oil and the American Petroleum Institute (APD) crude oil inventories showing a draw down to the tune of 3.1 million barrels in crude stocks for the week of September 11, as opposed to the build-up expected by analysts. In order to get ready for the hike in oil prices, investors need to take positions in equity holdings that would profit the most from it. In this regard we have compiled a list of five cheap energy stocks that hedge funds have been piling into, which in other words means that these companies have been thoroughly researched by elite professional money managers and have not been found wanting.
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
- Oasis Petroleum Inc. (NYSE:OAS)
Investors with Long Positions (as of June 30): 28
Aggregate Value of Investors’ Holdings (as of June 30): $868.21 Million
Although the total number of hedge funds among those that we track with investments in the company fell by four during the second quarter, but total investments actually increased by over $91 million. The rise in interest came despite a 2% drop in Oasis Petroleum Inc. (NYSE:OAS)’s stock price during the second quarter. While John H. Scully‘s SPO Advisory Corp is the largest stockholder of the company among these funds, holding some 20.37 million shares valued at $322.94 million, it was Kyle Bass’ Hayman Advisors that surged its holding in Oasis Petroleum Inc. (NYSE:OAS) by the most during the second quarter, lifting it by 2,064% to 1.18 million shares.
- Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR)
Investors with Long Positions (as of June 30): 31
Aggregate Value of Investors’ Holdings (as of June 30): $760.56 Million
Mired in accounting scandals and corruption, Petrobras has dissuaded investors from holding the stock, since at the end of March, 35 hedge funds had a total investment of $727.10 million in the Brazil-based energy company. However, given the current cheap valuation, the stock is trading at a forward earnings multiple of just 6.15, providing an enticing entry point into the company, whose fortunes could change considerably with a rise in the price of oil. In its latest production report for August, Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) showed an improvement in total production both from July and year-ago levels. Doug Silverman and Alexander Klabin‘s Senator Investment Group is the largest stockholder of Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) within our database, owing 20.0 million shares valued at $181 million.
- Chesapeake Energy Corporation (NYSE:CHK)
Investors with Long Positions (as of June 30): 33
Aggregate Value of Investors’ Holdings (as of June 30): $1.74 Billion
At the end of March, 37 hedge funds had a total investment of $2.53 billion in the $5.73 billion energy company Chesapeake Energy Corporation (NYSE:CHK). The decline in interest hasn’t worried Carl Icahn‘s Icahn Capital LP, the largest stockholder among these firms, as it remained put with its stake during the June quarter, holding 73.05 million shares, valued at $815.97 million on June 30. Chesapeake Energy Corporation (NYSE:CHK) surprised investors with its financial results for the second quarter and not because its loss per share of $0.11 was in line with the estimates or even because its $3.03 billion in revenue beat expectations by $270 million. Rather, shock was elicited because the company chose to expand its production after the previous cost reduction moves left it some room to maneuver. Given the current low commodity prices, this raised the eyebrows of some analysts.
- Weatherford International Plc (NYSE:WFT)
Investors with Long Positions (as of June 30): 37
Aggregate Value of Investors’ Holdings (as of June 30): $840.96 Million
Professional money managers were drawn away from the $4.21 billion company during the April-to-June quarter, as the hedge funds in our database which were invested in the company dwindled from 40, with the value of their collective holdings falling from $941.54 million at the end of March. William B. Gray‘s Orbis Investment Management is the largest stockholder of Weatherford International Plc (NYSE:WFT) among these, and it trimmed its stake by 10% during the second trimester to 26.55 million shares valued at $325.76 million. Weatherford International Plc (NYSE:WFT)’s stock price has risen sharply over the last month, by more than 10%, getting a boost from the recent drawdown in oil inventories in the U.S.
- California Resources Corp (NYSE:CRC)
Investors with Long Positions (as of June 30): 37
Aggregate Value of Investors’ Holdings (as of June 30): $840.96 Million
Even though the stock price of our top-ranked company fell by nearly 30% during the second quarter, the hedge fund interest grew from 31 funds with $1.01 billion in collective holdings at the end of March. Eric W. Mandelblatt‘s Soroban Capital Partners is the largest stockholder of California Resources Corp (NYSE:CRC), holding some 33.91 million shares valued at $204.82 million. The company has cut down its production and deferred on many high return projects given the current climate. However, it still has a considerable inventory of projects that break even at a price of $35 Brent oil. Moreover, California Resources Corp (NYSE:CRC) also prepared itself for a possibly tough future by paying back some of its loans and decreasing the size of its balance sheet.
Disclosure: None
