The Top Five Energy Picks of a Multi-Billion Dollar Fund

With around $25 billion in assets under management, Pzena Investment Management, led by Richard S. Pzena, disclosed an equity portfolio worth $15.71 billion in its latest 13F filing for the end of the third quarter. The filing also revealed that more than a third of the fund’s equity portfolio is invested in financial stocks, followed by technology, consumer discretionary and energy, In this article we will examine Pzena’s top five energy picks. Amid a decline in oil prices, which dragged the oil prices lower, Pzena made some interesting moves in his energy holdings, as you shall see in this article.

Why are we interested in the stock picks of an investor like Pzena? In fact, we are more interested in the collective picks of more than 730 investors, which we analyze after each round of 13F filings. We determined that by following hedge funds and other smart money investors into the stocks that they are collectively bullish on, we can beat the market by double digits each year. However, following their most popular picks overall, does not generate the best returns, according to our backtests. On the other hand, imitating a portfolio of 15 most popular small-caps among these funds, showed returns that beat the market by around one percentage points per month on average in backtests and has generated returns of over 102% in forward testing since August 2012, outperforming the S&P 500 ETF (SPY) by some 53 percentage points (see more details here).

Murphy Oil Corporation (NYSE:MUR) represents Pzena’s fifth-largest energy holding in terms of value. The fund disclosed holding 4.74 million shares of the company worth $114.67 million as of the end of September. Murphy’s stock has lost over 38% since the beginning of the year as lower oil prices affected the company’s top and bottom lines. For the third quarter, Murphy Oil Corporation (NYSE:MUR) posted revenue of around $715 million, representing a decline of around 50% on the year and it swung to a loss of $9.26 per share, versus a profit of $1.38 delivered in the third quarter of 2014. However, its adjusted net loss of $0.72 managed to beat the estimates of a loss of $0.91 projected by analysts. Among the funds we track, just 24 reported holding shares of Murphy Oil Corporation (NYSE:MUR) at the end of June, although they amassed around 13% of the company’s outstanding stock.

In Baker Hughes Incorporated (NYSE:BHI), Pzena cut its stake by 36% on the quarter to 2.71 million shares worth $140.91 million. Between July and September the stock lost around 15%, although in year-to-date terms, it performed better than many of its peers, declining by some 7.5%. Baker Hughes Incorporated (NYSE:BHI) is currently in the process of being acquired by Halliburton Company (NYSE:HAL), the deal being highly scrutinized and currently awaiting regulatory approval from antitrust authorities. Analysts are divided on the prospects of the deal, but smart money investors are most likely betting on the merger to succeed. During the second quarter, the number of funds (among those we follow) with long stakes in Baker Hughes advanced to 73 from 67, while in aggregate they held over 17% of the company’s outstanding stock. In October, Jeff Ubben‘s ValueAct Capital restated its 5.3% stake in Baker Hughes Incorporated (NYSE:BHI) that contains some 23.25 million shares and expressed intention to engage the company’s board and management in dialogue in order to increase the shareholder value.

On the next page, we are going to discuss Pzena’s top three energy holdings, which are represented by BP plc (ADR) (NYSE:BP), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and Exxon Mobil Corporation (NYSE:XOM).

In BP plc (ADR) (NYSE:BP), Pzena trimmed its position by 14% during the second quarter, reporting ownership of 9.74 million shares valued at $297.53 million. Since the beginning of October, the stock has advanced by more than 14%, offsetting its year-to-date decline, which currently amounts to around 9%. Amid a decline in oil prices, BP plc (ADR) (NYSE:BP)is embarking on a wide cost-cutting plan, under which it could break even with oil at $60 a barrel in around two years. The oil is currently trading lower than $60, though with Brent at around $47 and WTI at $44. However, other oil giants are also projecting their cost reductions to break even at $60. Meanwhile, 33 investors from our database held around 0.80% of BP plc (ADR) (NYSE:BP)’s outstanding stock at the end of June.

On the other hand, in Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Pzena increased its stake by 23% to 9.27 million shares valued at $439.19 million. Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s last financial results were quite disappointing, the company halting several projects, which resulted in a $7.9 billion impairment charge, which reduced its bottom line to a loss of $7.40 billion, compared to $4.5 billion a year earlier. Nevertheless, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) pays a $0.94 quarterly dividend, which gives its stock a yield of 7.24% and it intends to maintain the same dividend policy even amid the current environment.

In Exxon Mobil Corporation (NYSE:XOM), Pzena also added some 1.91 million shares, reporting a stake containing 6.11 million shares valued at $454.26 million, which ranked as the fifth-largest in terms of value. Low crude prices sparked a lot of talks among investors and analysts lately, as oil giants like Exxon Mobil Corporation (NYSE:XOM) are undertaking severe cost reductions in order to keep returning capital to shareholders through dividends. The main concern is that the high dividends won’t be sustainable at the current oil prices, although they are most likely to rebound in the next couple of years. Meanwhile, investors with a lot of capital can buy shares of energy companies on the cheap and stick to their positions for a while in order to reap higher profits. Another investor that is bullish on Exxon Mobil Corporation (NYSE:XOM) is billionaire Ken Fisher‘s Fisher Asset Management, which owns 5.47 million shares as of the end of September.

Disclosure: none