Smart Money’s Five Favorite Energy Stocks

Given the historically cheap valuations in the energy sector, it’s not surprising that many smart money funds own shares of energy companies in their search for risk-adjusted out-performance. Although WTI has rallied over 80% since February, many analysts think there is more upside left as supply tightens and demand grows. Seeing as elite funds have recently filed their 13-F’s for the first quarter, let’s use those filings to take a closer look at the smart money’s favorite energy stocks, including Pioneer Natural Resources (NYSE:PXD), Exxon Mobil Corporation (NYSE:XOM), Anadarko Petroleum Corporation (NYSE:APC), Devon Energy Corp (NYSE:DVN), and Schlumberger Limited. (NYSE:SLB).

While there are many metrics that investors can assess in the investment process, the hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor to beat the S&P 500 by around 95 basis points per month (see the details here).

#5 Schlumberger Limited. (NYSE:SLB)

– Number of Hedge Fund Holders (as of March 31): 56
– Total Value of Hedge Fund Holdings (as of March 31): $1.31 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 1.40%

Schlumberger Limited. (NYSE:SLB) will be in prime position to benefit once crude prices rise. Due to the energy crash, the company has reduced the price of many of its services so that its customers can survive or maintain their dividends. Once crude prices come back, however, Schlumberger can raise its service prices and increase its margins. Although analyst estimate that the company will only earn $2.07 per share next year, Schlumberger’s normalized earnings potential is significantly higher than that, making the stock still cheap in the eyes of many elite funds. Billionaire Ken Fisher’s Fisher Asset Management raised its stake in Schlumberger by 1% during the first quarter to over 4.2 million shares.

#4 Devon Energy Corp (NYSE:DVN)

– Number of Hedge Fund Holders (as of March 31): 58
– Total Value of Hedge Fund Holdings (as of March 31): $1.41 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 11.70%

Although Devon Energy Corp (NYSE:DVN)’s shares are up by 13% year-to-date, analysts at Barclays are still bullish, with an ‘Overweight’ rating and a $38 per share price target, according to a recent note. The analysts like Devon’s quality assets in the Eagle Ford and STACK, and management’s attempts at improving the balance sheet by selling off non-core assets. Given the company’s quality assets, some investors think the company could be an acquisition target. Given the improving balance sheet, Devon is much more likely to survive if crude prices double dip. Billionaire Israel Englander’s Millennium Management boosted its position in the stock by nearly 190% to over 5.0 million shares during the first quarter.

#3 Anadarko Petroleum Corporation (NYSE:APC)

– Number of Hedge Fund Holders (as of March 31): 59
– Total Value of Hedge Fund Holdings (as of March 31): $1.84 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 7.80%

Anadarko Petroleum Corporation (NYSE:APC) has much to like. The company is cutting expenses, improving productivity, selling non-core assets, and focusing on higher return wells. The company’s projects in Gulf of Mexico, Mozambique, and Ghana should generate substantial returns on capital and much-needed cash flow. The company also has a strong balance sheet and like Devon, might be an acquisition target for bigger companies. A total of 59 funds from our database held the stock at the end of March, down by two quarter-over-quarter.

#2 Exxon Mobil Corporation (NYSE:XOM)

– Number of Hedge Fund Holders (as of March 31): 60
– Total Value of Hedge Fund Holdings (as of March 31): $2.5 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 0.70%

Although Exxon Mobil Corporation (NYSE:XOM) isn’t cheap with a forward P/E of 20.6, the stock’s dividend is about as safe as it can get in the energy sector. Given the quarterly payout of $0.75 per share, that translates to a dividend yield of 3.33% at current prices, or more than 70% higher than the ten year treasury yield. Exxon Mobil has been paying dividends for 33 straight years and is one of the few energy companies that is free cash flow positive. Exxon Mobil has rallied 17% year-to-date and could rally further if Brent prices pass $60-$70 per barrel.

#1 Pioneer Natural Resources (NYSE:PXD)

– Number of Hedge Fund Holders (as of March 31): 61
– Total Value of Hedge Fund Holdings (as of March 31): $3.18 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 13.80%

Pioneer Natural Resources (NYSE:PXD) reported better-than-expected results for its first quarter, with a first quarter loss of $0.64 per share versus estimates of a loss of $0.75 per share. The company’s earnings were above analyst expectations because production was 3% higher than expected for the quarter. Due to the production strength, management raised its full year 2016 production growth outlook to above 12% rather than the previous above 10%. The company will still spend the same amount of CAPEX for the year of around $2 billion. Analysts have an average price target of $183.85 per share for Pioneer Natural Resources’ stock.

Disclosure: none