What Do Hedge Funds Think of These Three Surging Energy Stocks?

Shares of Peabody Energy Corporation (NYSE:BTU), Stone Energy Corporation (NYSE:SGY), and Unit Corporation (NYSE:UNT) are surging as WTI for November delivery is up 4.3% and natural gas is up 1.06% on the day. Peabody Energy leads the pack with a 27% daily gain, while Stone Energy is not far behind with a 25% gain. Unit Corporation rounds out the three with a 22% jump in afternoon trading. Let’s take a closer look at the energy companies and put under the microscope the hedge fund sentiment towards them in order to see if these stocks have a long-term potential.

In the eyes of most traders, hedge funds are assumed to be underperforming, old investment tools of the past. While there are more than 8,000 funds in operation at present, hedge fund experts at Insider Monkey look at the aristocrats of this group, around 730 funds. Contrary to popular belief, Insider Monkey’s research revealed that hedge funds underperformed in recent years because of their short positions as well as the huge fees that they charge. Hedge funds managed to outperform the market on the long side of their portfolio. In fact, the 15 most popular small-cap stocks among hedge funds returned 118% since the end of August 2012 and beat the S&P 500 Index by 60 percentage points (see more details here).

Peabody Energy Corporation (NYSE:BTU) shares are off more than 70% year to date as weak energy prices weigh on investor’s minds. Because natural gas is $2.46 per thousand cubic feet, coal prices are low and Peabody Energy’s financials are poor. The company missed analyst earnings expectations for four straight quarters and fell short of revenue expectations for two consecutive quarters. Compounding Peabody Energy’s troubles are strict EPA regulations and a multi-billion dollar debt load.

Management isn’t standing still, however, and plans to de-leverage through ‘potential avenues including debt exchanges’. If Peabody successfully restructures its $6.3 billion in debt and extends the maturities, it will buy itself more time to wait for coal prices to rise again. Peabody is one of the strongest companies in the sector and investors are buying because they realize Peabody will be a good holding if it successfully restructures and coal prices rise.

Hedge funds that we follow were bullish on Peabody Energy Corporation (NYSE:BTU) during the second quarter. Although the number of funds increased to 27 from 19, the total value of their holdings in the stock declined to $142.06 million from $225.96 million, and was equal to over 23% of the company at the end of June. Dmitry Balyasny‘s Balyasny Asset Management cut its position by 33% to 18.4 million shares while Robert Pitts’ Steadfast Capital Management and Anand Parekh’s Alyeska Investment Group went the other way by establishing new positions of 8.95 million shares and 3.75 million shares, respectively.

Investors are buying Stone Energy Corporation (NYSE:SGY) and Unit Corporation (NYSE:UNT) because WTI is up more than 4% on the day. If Russia works with OPEC and cuts oil production, WTI and Brent will fly and many energy E&P’s will look attractive at current prices. Shares of Unit Corporation are also up because the company filed a business update announcing its production guidance will be higher than previous guidance and its capital expenditures budget will likely be $30 million less than anticipated.

Hedge funds from our database also seemed to like Stone Energy Corporation (NYSE:SGY) in the second quarter as they amassed over 11% of the company at the end of June. Moreover, while the number of funds with long positions remained flat at 13, the total value of their stakes declined to $80.76 million from $95.79 million during the second quarter. However, its also important to mention that around 19.43% of the float is short. Israel Englander‘s Millennium Management increased its position by 1% to 2.22 million shares, while Paul Reeder and Edward Shapiro’s PAR Capital Management cut its stake by 58% to 900,000 shares. Brian Taylor’s Pine River Capital Management kept its holding static at 68,459 shares.

Hedge funds amassed 15.30% of Unit Corporation (NYSE:UNT) in the second quarter and although the number of funds increased to 14 from 11, the total value of their holdings in the stock declined to $209.61 million from $215.77 million. 11.4% of the float is short. Chuck Royce‘s Royce & Associates decreased its position by 6% to 4.54 million shares, while Steve Cohen’s Point72 Asset Management established a new stake of 1.37 million shares.

Disclosure: None