The Smart Money’s Top Energy Dividend Stocks

Ever since the August of last year, crude oil has been volatile, mainly in a bad way. The price of Brent and WTI was almost $100 per barrel then, the price of the two grades is around $50 per barrel or less now. Crude has halved because of weak macro economic factors and Saudi Arabia deciding to increase production by 1 million barrels a day.

The oversupply in the industry is so great that even the strongest companies have seen their stocks do poorly lately. But as the saying goes, with great risk comes great opportunity, and given the steep declines in the values of many energy stocks, opportunity certainly abounds. Since dividend stocks are generally better bets than most, given the companies’ wider moats, let’s take a closer look at five hedge fund favorites in the energy sector: Noble Corp plc (NYSE:NE), BP plc (ADR) (NYSE:BP), ConocoPhillips (NYSE:COP), Chevron Corporation (NYSE:CVX), and Macquarie Infrastructure Corp (NYSE:MIC), and see how they did in the third quarter.

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 more than 52 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. 56% gain for the S&P 500 Index (see more 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 Noble Corp plc (NYSE:NE)

Number of Hedge Fund Holders (as of June 30): 27
Total Value of Hedge Fund Holdings (as of June 30): $258.9 million
Hedge Fund Holdings as Percent of Float (as of June 30): 6.40%

Noble Corp plc (NYSE:NE) shares retreated 27% in the third quarter as offshore drilling activities remain depressed. Many offshore projects are not economical at current crude prices, and many E&P companies have cut their offshore capital expenditures as a result. Lower offshore capital expenditure budgets mean less business and cash flow for Noble Corp.

Given the dividend yield of over 12%, Noble’s dividend is not sustainable if crude prices stay low for an extended period of time. The analysts at Credit Suisse think management will trim the dividend as a precautionary measure if crude doesn’t jump (they still like Noble’s stock, however).

“[Noble] remains one of the better-positioned offshore drillers with limited stacking prospects and strong contract coverage. A dividend cut is coming now or later. Noble has a dividend yield of about 12%, which means the market is discounting the dividend. We expect Noble to remain committed to a dividend, just at a lower rate. We expect Noble to lower the annual dividend to about 50 cents (about a 4% yield) which will save Noble about $240 million in cash per year (a smart thing to do, given the uncertain near term outlook).”

Steve Cohen‘s Point72 Asset Management owns 3.87 million shares of Noble Corp as of the end of June.

#4 BP plc (ADR) (NYSE:BP)

Number of Hedge Fund Holders (as of June 30): 33
Total Value of Hedge Fund Holdings (as of June 30): $1.12 billion
Hedge Fund Holdings as Percent of Float (as of June 30): 0.80%

BP plc (ADR) (NYSE:BP)’s shares lost 22.2% in the third quarter as many investors wrote off the possibility of BP selling itself wholesale or piecemeal to other super-majors and crude prices remain depressed. With the Department of Justice settlement, BP has largely moved on from its legal troubles, but the super-major needs Saudi Arabia to cut production and Brent prices to rally for its fundamentals to improve. So far that hasn’t happened yet. BP’s stock sports a a nice 6.7% dividend, however.

#3 ConocoPhillips (NYSE:COP)

Number of Hedge Fund Holders (as of June 30): 43
Total Value of Hedge Fund Holdings (as of June 30): $1.5 billion
Hedge Fund Holdings as Percent of Float (as of June 30): 2.00%

ConocoPhillips (NYSE:COP) fell by 20.9% in the quarter as crude prices remained weak. ConocoPhillips is the only super-major without a downstream unit, and consequently isn’t as protected from low crude prices. Its stock has a dividend yield of 5.36%, which isn’t bad. The payout ratio is above 100%, so the company still needs crude prices to rise for its dividend to be sustainable in the long run. First Eagle Investment Management owns 7.65 million shares of the company, according to its last 13F filing.

#2 Chevron Corporation (NYSE:CVX)

Number of Hedge Fund Holders (as of June 30): 50
Total Value of Hedge Fund Holdings (as of June 30): $2.11 billion
Hedge Fund Holdings as Percent of Float (as of June 30): 1.20%

Chevron Corporation (NYSE:CVX)’s stock declined by 17.2% in the third quarter. The stock has a dividend yield of 4.7%, which is about double the 10-year Treasury bond yield. Management believes the company will have enough cash flow to cover the dividend by 2018. The analysts at Deustche Bank also believe Chevron’s yield is safe:

“While some dividends may be (or should be) at risk (e.g. Marathon Oil’s), we believe the remaining dividends are safe, suggesting the Integrateds’ current yields (vs SPX and Euro Majors and respective historical averages) are overly discounted.”

Ken Fisher’s Fisher Asset Management is one of the shareholders of Chevron with a stake of 3.53 million shares.

#1 Macquarie Infrastructure Corp (NYSE:MIC)

Number of Hedge Fund Holders (as of June 30): 69
Total Value of Hedge Fund Holdings (as of June 30): $2.07 billion
Hedge Fund Holdings as Percent of Float (as of June 30): 31.50%

The stock of Macquarie Infrastructure Corp (NYSE:MIC) depreciated by 8.3% in the third quarter and has a dividend yield of 5.66%. The company owns quality energy infrastructure with durable predictable cash flows and its shares are still up 14% year-to-date. The company also has opportunities to buy energy infrastructure assets on the cheap given the low energy prices.

To sum up, we’re optimistic on energy in the long run because the Middle East can’t run on $50 crude forever.

Disclosure: none