With WTI futures off by 0.89% and Brent futures hitting lows not seen since 2004, energy stocks Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR), Whiting Petroleum Corp (NYSE:WLL), Denbury Resources Inc. (NYSE:DNR), and Oasis Petroleum Inc. (NYSE:OAS) are deep in the red again today. Let’s put a microscope under why investors are selling.
Moreover, we will also examine relevant hedge fund sentiment towards these equities. 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).
Despite China signaling that crude prices may be too low as the government in the country has suspended gasoline price cuts even if crude prices should fall further, many bullish market participants have clearly given up, as the price of Brent continues to decline.
Fundamentally, the situation is as bad as it looks, with crude inventories piling up and Iran coming onto the market with an additional 500,000-1 million barrels per day of crude exports. Not helping the situation is the potential for commodity contract and equity selling for tax-purposes as the calendar year comes to a close, and the unseasonably warm weather in the United States, which have sent U.S. crude inventories to 490.7 million barrels, the highest level this time of year in over 80 years. Because of the dire fundamentals, the analysts at Goldman Sachs think crude inventories could run out by next spring and crude could trade for the cash cost of highly-leveraged, high-cost shale producers, or about $20 per barrel.
If Goldman’s prediction comes true, Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR) might have more downside as the company depends on Brent for a significant part of its revenues. The company has already been roiled by a corruption scandal and the weak Brazilian Real, which lowers Petrobras’ dollar earnings and magnifies its dollar-denominated debt, and can’t really take any more bad news. Shares of the company are down by 4.8% today and have lost over 40% year-to-date.
According to our data, 24 funds owned $199.1 million worth of Petroleo Brasileiro SA Petrobras (ADR) shares at the end of the third quarter, down from 31 funds and $760.56 million a quarter earlier
On the next page, we examine Whiting Petroleum Corp (NYSE:WLL), Denbury Resources, and Oasis Petroleum.
Despite the U.S. government having lifted its 40-year crude export ban last week, WTI prices have failed to take-off and that’s disappointing news for Whiting Petroleum Corp (NYSE:WLL), Oasis Petroleum Inc. (NYSE:OAS), and Denbury Resources Inc. (NYSE:DNR), which are trading lower by 6%, 4.5%, and 4.4%, respectively, today. Each stock depends on WTI for a big part of their revenues and EBITDA. As crude remains volatile, look for each stock to remain a high beta of crude prices.
Of the 730 elite funds that we track, 42 funds owned Whiting Petroleum Corp (NYSE:WLL) shares, 26 funds were long Oasis Petroleum Inc. (NYSE:OAS), and 19 were bullish on Denbury Resources Inc. (NYSE:DNR).
Disclosure: none
