Oil Stocks in Spotlight Amid Slump in Crude Prices, Brexit

Although many investors, pundits, and politicians expected Britain to remain in the EU yesterday, British citizens surprised the world by voting for the ‘Leave’ side. The decision has caused substantial turmoil in the markets, and many energy companies haven’t been spared.

In this article, we take a closer look at why BP plc (ADR) (NYSE:BP), Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP), Transocean LTD (NYSE:RIG), and Seadrill Ltd (NYSE:SDRL) are trending and see how elite funds are positioned among them.

At Insider Monkey, we track around 730 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details here).

Brexit Causes Turmoil Among Super-Majors

BP plc (ADR) (NYSE:BP), Exxon Mobil Corporation (NYSE:XOM), ConocoPhillips (NYSE:COP) have lost 4%, 2%, and 4% respectively due to sinking crude prices. Although crude prices had been trending higher due to increased demand and lower supply, and WTI and Brent had been trading near $50 per barrel and higher before the vote, the Brexit decision has caused many traders to take a ‘risk-off’ approach. Although Britain might not leave the EU for another 2 years, depending on how the negotiations go, the potential ramifications of Britain leaving the EU could be disastrous for crude demand. First, Britain and the EU could enter recession and crude demand from those areas could drop. Unlike in 2008, Britain’s interest rates are already low and it will be difficult for the country’s central bank to soften any sort of shocks caused by the decision. Likewise, the ECB is in a similar position for the EU. Second, the ‘Brexit’ decision will likely cause the dollar to strengthen as investors seek safe haven in times of uncertainty. Given the historical inverse relationship between the dollar’s strength and growth in emerging countries, demand from the emerging markets could also fall. Given the double whammy, it isn’t surprising that crude futures are off around 5% from yesterday. All eyes will be on the Fed, ECB, and Bank of England to see how the central banks can creatively respond to this unprecedented situation.

Of the 766 elite funds we track, 34 funds owned $685.46 million worth of BP plc (ADR) (NYSE:BP)’s stock, 60 top funds had a bullish position in Exxon Mobil Corporation (NYSE:XOM), and 45 savvy funds held stakes in ConocoPhillips (NYSE:COP) at the end of March.

On the next page, we examine Transocean LTD, and Seadrill Ltd.
Britain’s Decision Sinks Offshore Stocks

Like their larger brethren, offshore stocks Transocean LTD (NYSE:RIG) and Seadrill Ltd (NYSE:SDRL) are also deep in the red as traders take a risk-off approach. Given that many offshore stocks need Brent prices of $60-$80 per barrel to do well, they have traditionally had higher betas than companies with lower debt and lower costs of production. If crude prices move further away from $60-$80 per barrel, some of the companies with huge debt burdens will likely need to dilute their equity more to survive. Although some traders don’t think the uptrend in crude prices is over just yet, the ‘Brexit’ decision yesterday certainly makes $60-$80 Brent look more remote and the ‘risk-off’ sentiment in the markets absent any sort of central bank stimulus makes the risk-reward of being long the offshore stocks at current price points less compelling for many short term traders.

Among the funds we track, 39 funds amassed $597.67 million worth of Transocean LTD (NYSE:RIG)’s stock, which accounted for 18.00% of the float on March 31, versus 31 funds and $578.45 million respectively on December 31. At the same time, 22 funds were long Seadrill Ltd (NYSE:SDRL) at the end of the first quarter.

Disclosure: none