Kinder Morgan, Anadarko, and More: Ten Energy Stocks Hedge Funds Love

There weren’t any energy stocks in our rankings of the most popular stocks among hedge funds for the third quarter of 2012, but that didn’t mean that top investors were sour on the sector. Companies in a variety of industries, including exploration and production, pipelines, and energy services, saw some hedge fund interest but just not as wide interest as top technology and financial stocks. According to our database of 13F filings, here are the most popular energy stocks among hedge funds and other notable investors:

The most popular energy stock was Kinder Morgan Inc (NYSE:KMI), with 59 hedge funds reporting a position. Kinder Morgan is primarily an oil and gas pipeline operator, and therefore has the potential to benefit from increased demand for energy infrastructure as energy companies develop their onshore U.S. acreage. At 25 times consensus 2013 earnings, its valuation is dependent on high growth.

SAC CAPITAL ADVISORS

Anadarko Petroleum Corporation (NYSE:APC) fell just short of the #1 slot as 58 filers in our database of 13F filings owned the stock (up from 55 last quarter). It is an exploration and production company that has long been a popular pick among hedge funds. Billionaire Steve Cohen’s SAC Capital Advisors increased its stake by 27% during the third quarter and closed September with a total of 3 million shares in its portfolio (see more of Cohen’s stock picks).

Hedge funds poured into takeover target Nexen Inc. (NYSE:NXY), an oil and gas company which is notable for its position in the Alberta tar sands. Chinese oil company CNOOC is pursuing an acquisition of the company, but the deal is controversial and the government has subjected it to further review. Hedge funds like to invest in merger arbitrage because the returns tend to be uncorrelated with the overall markets.

51 funds owned shares of $93 billion market cap energy services provider Schlumberger Limited. (NYSE:SLB), up from 48 at the end of June. Schlumberger trades at 17 times trailing earnings and in the third quarter reported a 10% rise in net income compared to a year earlier. The stock has lagged the market over the last year, as even services companies tend to be roughly correlated with oil prices.

The other large energy services company, Halliburton Company (NYSE:HAL), finished right behind Schlumberger with 50 hedge funds owning shares at the end of the quarter. Its trailing P/E multiple is 10, and its five-year PEG ratio comes in lower than that of its larger peer as well. Even though its earnings were actually down last quarter versus Q3 2011, it might be a better value.

Supermajor Exxon Mobil Corporation (NYSE:XOM) wasn’t forgotten as 50 hedge funds reported owning that stock. Exxon Mobil’s forward P/E is 11; that sounds low, but actually represents a premium over many other oil majors. We think that given its market leadership and its strong position in natural gas the company is a good long-term pick.

Valero Energy Corporation (NYSE:VLO), a refining and marketing company, was another popular pick. Its earnings dropped 44% last quarter compared to the same period in 2011, but the stock price has surged 51% over the last year as strong growth is expected in the next year. Even with that gain in the stock price, Valero trades at only 7 times forward earnings estimates.

$61 billion market cap oil major Occidental Petroleum Corporation (NYSE:OXY) had hedge fund interest stay constant at 46 filers. Occidental- as we’d implied in our discussion of Exxon Mobil- has a lower forward P/E than that company at 10, but the difference is not particularly great and Occidental has been experiencing a greater decline in earnings.

North America-focused exploration and production company Devon Energy Corporation (NYSE:DVN) had 45 hedge funds and other notable investors report a position in the stock. With the company’s revenue down, and with a high trailing P/E multiple, it looks to us like the stock is dependent on a rebound in Devon’s operations.

BP plc (NYSE:BP)- which not so long ago was one of hedge funds’ very favorite energy stocks- was forced to cling to the #10 slot in this quarter’s rankings even as it has made good progress in selling assets, as hedge funds showed an increase in interest in other stocks on the current list. BP trades at 8 times earnings- on either a trailing or a forward basis- and at such a low valuation it’s another possible long-term pick.

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