Three days after OPEC decided to raise its production quota and go ‘all in’ on Saudi Arabia’s strategy of ensuring oil prices stay ‘lower for longer’ so weaker marginal supply leaves the market, many market participants are exiting out of energy related names such as Chesapeake Energy Corporation (NYSE:CHK), Seadrill Ltd (NYSE:SDRL), Whiting Petroleum Corp (NYSE:WLL), Energy Transfer Partners LP (NYSE:ETP), and Kinder Morgan Inc (NYSE:KMI). Given the breadth of their declines, let’s put the five stocks under a microscope.
In addition, let’s also analyze relevant hedge fund sentiment toward these stocks. Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
Whiting Petroleum Corp (NYSE:WLL), Seadrill Ltd (NYSE:SDRL), and Chesapeake Energy Corporation (NYSE:CHK) are all down today because the prices of the front month contracts of WTI and Brent crude are down by more than 4.3% and 3.6%, respectively. In addition, because of natural gas’ correlation with crude, the price of the front month contract of natural gas at Henry Hub is off by 3.7% in morning trade. Given that Whiting Petroleum Corp (NYSE:WLL) depends on WTI, Seadrill Ltd (NYSE:SDRL) depends on Brent, and Chesapeake Energy Corporation (NYSE:CHK) depends on WTI and Henry Hub prices for a big part of their fortune, investors are selling off the companies. OPEC’s December 4 decision has prompted many energy bulls to give up and buy into the ‘lower for longer’ story. The record inventory levels and slow pace of non-OPEC oil production declines certainly doesn’t help. Given the dire price outlook for energy commodities, cash flow and liquidity are now king, and the companies will need to do more cost cutting and/or divestments to please the market.
According to our data, plenty of smart money funds are still long the three stocks, however. Carl Icahn’s Icahn Capital LP owned 73.05 million shares of Chesapeake Energy Corporation (NYSE:CHK), while Jim Simons’ Renaissance Technologies was long almost 3 million shares of SDRL at the end of the third quarter. John Paulson‘s Paulson & Co reported owning a stake of 9.6 million shares of WLL during the latest 13F filing period too. On the next page, we examine why Energy Transfer Partners LP (NYSE:ETP) and Kinder Morgan Inc (NYSE:KMI) shares are down.
