Five Cheap Energy Stocks Poised to Explode

The fall in crude oil and natural gas prices starting in mid-2014 took a heavy toll on stocks of energy companies with some of them losing more than half of their market capitalization in the last two years. Though the prices of both those commodities has bounced back from their lows this year and have been fairly stable in the past couple of months, the stocks of most energy companies are still trading at a considerable discount from the levels they traded at in 2014. Earlier this month, ‘the oil god’ Andrew Hall of Astenbeck Capital Management released a letter to his fund’s investors, in which he forecasted that crude oil (Brent) will trade in the range of $45 to $50 in the short-term. This is a big turnaround from Mr. Hall, who, till last month, was extremely bullish on the commodity and since 2014 has been claiming that oil prices will return back to the $100 levels.

Considering that even the most bullish investor has changed his view on crude oil prices now, we at Insider Monkey think that this might be the right time for energy investors to take a long and hard look at their portfolios and reshuffle it, if necessary, for the times to come. To help them in this process, we have compiled a list of energy stocks that are trading below $10 currently, but had the backing of a considerable number of hedge funds tracked by us while heading into the third quarter. In this post, we will reveal the names of the five energy stocks that topped our list and will discuss how these stocks have performed lately.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points in our backtests that covered the period between 1999 and 2012 (see the details here).

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#5 Weatherford International Plc (NYSE:WFT)

– Hedge Funds with Long Positions (as of June 30): 31

– Value of Hedge Funds’ Holdings (as of June 30): $466.15 Million

Weatherford International Plc (NYSE:WFT) saw a notable drop in its popularity among hedge funds covered by us with its ownership among them declining by six during the second quarter and the aggregate value of their holdings falling by 28.65%. The company has lost over 70% of its market capitalization in the last two years and is currently trading down by 30.55% for 2016. A lot of analysts who cover the stock currently are bearish on it citing the heavy debt load on the company’s balance sheet and the quarterly interest it pays on that debt, which is more than its EBITDA. Some of them are also of the opinion that at current juncture Weatherford International Plc (NYSE:WFT) is insolvent by over $3 billion and is headed towards bankruptcy unless it raises more capital. However, analysts at Citigroup don’t share that view. On September 12, they upped their price target on the stock to $8 from $7 and reaffirmed their ‘Buy’ rating.

#4 Chesapeake Energy Corporation (NYSE:CHK)

– Hedge Funds with Long Positions (as of June 30): 31

– Value of Hedge Funds’ Holdings (as of June 30): $696.95 Million

Though the ownership of Chesapeake Energy Corporation (NYSE:CHK) among funds covered by us remained the same during the second quarter, the aggregate value of their holdings in it fell by $29.8 million. Among the funds that sold their entire stake in the company during that period was Matthew Tewksbury‘s Stevens Capital Management and Leon Shaulov‘s Maplelane Capital. Chesapeake Energy Corporation (NYSE:CHK)’s stock has appreciated by 67% so far in 2016, but is still down by nearly 77% in the last five years. On September 13, the stock took a hit after analysts at FBR & Co. released a note in which they initiated coverage on the stock with an ‘Underperform’ rating and $5 price target, which represents a potential downside of 32% from its current trading price. In their note, the analysts highlighted that the stock is significantly overvalued currently as Chesapeake Energy Corporation (NYSE:CHK)’s financial condition will continue to be stressed going forward and that despite the management’s best efforts the company’s “debt and transportation commitments hole still appear too deep to dig out of.”

#3 Transocean LTD (NYSE:RIG)

– Hedge Funds with Long Positions (as of June 30): 32

– Value of Hedge Funds’ Holdings (as of June 30): $720.6 Million

Moving on, the number of hedge funds covered by us that were long Transocean LTD (NYSE:RIG) came down by seven during the second quarter, but the aggregate value of their holdings in it jumped by $123 million during that time. While shares of Transocean LTD (NYSE:RIG) have fallen by 23% so far in the current quarter, most analysts and seasoned investors still consider it as the best offshore play. According to them, the company’s solid backlog that is expected to last more than a decade, its running contracts with oil majors, its focus on improving the efficiency of its fleet and an increase in demand for offshore drilling going forward will all contribute in pushing Transocean LTD’s stock higher in the coming quarters. On August 25, analysts at Citgroup Inc. upgraded the stock to ‘Neutral’ from ‘Sell’ and also hiked their price target on it to $11 from $7.

#2 Noble Corporation Ordinary Shares (UK) (NYSE:NE)

– Hedge Funds with Long Positions (as of June 30): 33

– Value of Hedge Funds’ Holdings (as of June 30): $287.35 Million

Noble Corporation Ordinary Shares (UK) (NYSE:NE) is the only stock covered in this list that saw its ownership among hedge funds covered by us rise during the second quarter, by four, and the aggregate value of their holdings in it also increase during that time, by 58.5%. After the grand short squeeze that Noble Corporation Ordinary Shares (UK) (NYSE:NE)’s stock saw in early-March this year, it has been on a consistent downward journey and currently trades down 48.64% year-to-date. According to oil industry analysts, the September fleet status that Noble Corporation Ordinary Shares (UK) released recently is a testament that the offshore drilling industry is not experiencing a rebound and will continue to face cash flow and debt problems going forward. For its fiscal 2016 third quarter, analysts are expecting the company to report a loss of $0.17 per share on revenue of $420.94 million. For the same quarter of the previous year, Noble Corporation Ordinary Shares (UK) had posted EPS of $0.72 on revenue of $896.67 million.

#1 Whiting Petroleum Corp (NYSE:WLL)

– Hedge Funds with Long Positions (as of June 30): 41

– Value of Hedge Funds’ Holdings (as of June 30): $493.73 Million

Whiting Petroleum Corp (NYSE:WLL) was the most popular sub-$10 energy stock among hedge funds covered by us at the end of June. During the second quarter, the number of hedge funds we track that were long Whiting Petroleum Corp (NYSE:WLL) inched down by two, but the aggregate value of their holdings in it rose by 62.66%. Arvind Sanger’s GeoSphere Capital Management was one of the hedge funds that initiated a stake in the company during that period; it purchased 370,000 shares. The Colorado-based independent oil and gas company has lost more than 90% of its market capitalization since the second-half of 2014. However, the debt reduction that the company has done through asset sales, convertible notes and debt repurchases in the last few quarters has been appreciated by analysts and investors. The debt on Whiting Petroleum Corp’s balance sheet is down to $4.5 billion now from $5.6 billion at the end of its fiscal 2016 first quarter. Though most analysts don’t expect Whiting Petroleum Corp’s stock to appreciate much in the short-term due to potential dilution of shareholders’ equity from the convertible notes the company has issued, they think that it can see a significant upside in the long run if oil prices start moving higher.

Disclosure: None