Why Are These Energy Stocks Fading Today?

The energy sector can’t seem to catch a break, as crude futures are off by 6% and natural gas futures are down by 5.5% on the first full trading day after OPEC decided to increase its crude production quota by 1.5 million barrels a day (bpd), to 31.5 million bpd. Because of the blood bath in the futures market, shares of energy-related companies CONSOL Energy Inc. (NYSE:CNX), Oasis Petroleum Inc. (NYSE:OAS), Southwestern Energy Company (NYSE:SWN), Williams Companies Inc (NYSE:WMB), and Energy Transfer Partners LP (NYSE:ETP) are down as well. In this article, we take a closer look at the hedge fund sentiment toward these five declining stocks.

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 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.6% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Leading the way is CONSOL Energy Inc. (NYSE:CNX), whose stock has fallen by 14% in afternoon trading. CONSOL Energy Inc. (NYSE:CNX) has substantial coal and natural gas operations that will take a hit if natural gas prices remain low. Falling natural gas and coal prices have caused shares of Consol Energy to retreat by more than 77% year-to-date already and today’s commodity price declines could aggravate the situation even further. Despite the poor performance, David Einhorn’s Greenlight Capital is a believer in the company, with the savvy hedge fund manager recently calling CONSOL Energy his best idea at an investor conference. Einhorn thinks the company’s coal and natural gas operations have plenty of upside given CONSOL’s cost cutting and CapEx-reducing efforts. In addition, CONSOL owns valuable acreage in the Utica Shale.

Oasis Petroleum Inc. (NYSE:OAS) hasn’t been spared either, as shares of the Williston Basin independent E&P have fallen by 12.65% today. Oasis Petroleum Inc. (NYSE:OAS) depends on WTI to bring in cash flow and today’s declining WTI prices don’t help the bull case for its stock in the least. The elite funds we track were a little less optimistic about the company in the third quarter, although they still owned a substantial portion of the company’s float. 26 funds in our database owned $416.93 million worth of Oasis Petroleum shares (accounting for 34.50% of the float) on September 30, down from 28 funds holding shares valued at $868.21 million on June 30.

Next up is Southwestern Energy Company (NYSE:SWN), whose stock is down by 7% in afternoon trading on the back of retreating natural gas prices at Henry Hub. Southwestern Energy Company (NYSE:SWN) would have been in a better position to weather the storm, but the company made an ill-fated decision to buy Chesapeake Energy’s Southern Marcellus and Utica Shale assets late last year for around $5 billion. The acquisition saddled the company with debt that has made the stock vulnerable to market fears. Like other natural gas producers, Southwestern Energy needs natural gas prices to rally in order for its stock to do well.

On the next page, we examine Williams Companies and Energy Transfer Partners LP.

In other news, energy pipeline companies Williams Companies Inc (NYSE:WMB) and Energy Transfer Partners LP (NYSE:ETP) are off by 16.5% and 11%, respectively, as market participants head for the exits simultaneously in the midstream space. Given the recent stock decline of Kinder Morgan Inc (NYSE:KMI), which was considered one of the best-in-class midstream companies not too long ago, many investors are selling first and asking questions later. If Kinder Morgan suspends its dividend or cuts it substantially, investors fear other midstream companies might follow suit. In addition, if crude prices stay ‘lower for longer’, U.S. crude and gas production will not increase as much as analysts forecast and demand for midstream pipelines will not be as great.

Given the steep declines in both stocks, the cost of equity for both companies is rising to a point where the companies may not be able to finance some of their projected future growth capital expenditures anyway. Within our extensive database of around 730 elite funds, 73 of them, or about 10%, were long Williams Companies Inc (NYSE:WMB), while 18 funds were long Energy Transfer Partners LP (NYSE:ETP) at the end of September.

Disclosure: None