These 5 Energy Stocks Power the Portfolios of Elite Investors

We like to analyze hedge fund sentiment before doing days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy league graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments (for some reason media paid a ton of attention to Ackman’s gigantic JC Penney and Valeant failures) and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

Given that hedge funds have recently filed their 13F positions, we analyzed the hedge fund filings of the more than 700 elite investors that we follow and have found that Williams Companies Inc (NYSE:WMB), Kinder Morgan Inc (NYSE:KMI), Anadarko Petroleum Corporation (NYSE:APC), Cheniere Energy, Inc. (NYSE:LNG), and Schlumberger Limited. (NYSE:SLB) are the most popular energy stocks among them. Let’s see how these stocks were traded by these top investors during the third quarter.

#5 Schlumberger Limited. (NYSE:SLB)

Number of Hedge Fund Holders (as of September 30): 61
Total Value of Hedge Fund Holdings (as of September 30): $2.65 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 3.00%

Schlumberger Limited. (NYSE:SLB) is the leading oil service firm in the world. Because of the company’s fortress balance sheet and durable contracts, Schlumberger has been able to take advantage of the low crude prices by recently purchasing Cameron International Corporation (NYSE:CAM) in an accretive deal. Schlumberger is also buying back stock, having bought back 6.9 million shares for a total of $545 million in the third quarter. Among the hedge funds that increased positions in Schlumberger in the third quarter was Ken Griffin‘s Citadel Investment Group, which more than doubled its position to 8.5 million shares by the end of September.

#4 Cheniere Energy, Inc. (NYSE:LNG)

Number of Hedge Fund Holders (as of September 30): 62
Total Value of Hedge Fund Holdings (as of September 30): $7.12 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 62.30%

Low natural gas prices at Henry Hub isn’t necessarily a bad thing for Cheniere Energy, Inc. (NYSE:LNG), as it means the potential to export more American LNG to the rest of the world. Among the hedge fund believers in Cheniere Energy are Carl Icahn‘s Icahn Capital Lp, which owned 28.55 million shares of it at the end of September, and Seth Klarman‘s Baupost Group, with a stake of 22.67 million Cheniere shares at the end of the third quarter.

On the other hand, famed short investor Jim Chanos is short. Chanos estimates Cheniere will have $30 billion in debt with interest costs of $2 billion annually when all is said and done. Given a straight line depreciation of $1 billion a year, Chanos estimates Cheniere would earn just $1 billion in 2020 given analyst estimates of $4 billion in EBIDA if spot prices are as high as bulls’ estimates. If spot prices don’t rally as much as the bulls predict, Chanos believes Cheniere won’t have any free cash flow at all. Chanos said:

“Well, about half of their estimated 2020 or 2021 EBIDA of $4 billion is locked up in the take or pay about $2 billion of that. So it’s a little bit of a myth that all of it is accounted for. They still are going to be dependent on the spot market for a huge amount of the what the bulls think they’re going to make. And in fact the spot market’s in disarray already in liquefied natural gas. […] if you think all of these so-called trains, they’re expensive David. They’ll probably over $30 billion in debt Cheniere when they’re done building these things out. That will be $2 billion in interest annually. $30 billion worth of plant and equipment in the swamps of Louisiana is going to depreciate we think about $1 billion a year, 30 year life. [answering the question if LNG will be bought] I don’t think so. I mean who’s going to buy a company where again the cash flows are dependent on something happening from 2020 out. And where based on at least our numbers, there’s no free cash flow even when that happens.”

Given Cheniere Energy has substantial growth potential, we side with Icahn on this one.

#3 Anadarko Petroleum Corporation (NYSE:APC)

Number of Hedge Fund Holders (as of September 30): 70
Total Value of Hedge Fund Holdings (as of September 30): $3.38 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 11.00%

Although Anadarko Petroleum Corporation (NYSE:APC) shares are down by 24% year-to-date due to weak WTI prices, many hedge funds are bullish. Among the funds increasing their positions in the third quarter was Phill Gross and Robert Atchinson’s Adage Capital Management and Ross Margolies’ Stelliam Investment Management. Keith Meister‘s Corvex Capital also established a new stake of 1.97 million shares. Anadarko shares have been volatile in recent weeks given the M&A rumors swirling around Anadarko and Apache Corporation (NYSE:APA), but will recover once WTI prices normalize. Analysts have an $83.97 consensus price target on the stock.

#2 Kinder Morgan Inc (NYSE:KMI)

Number of Hedge Fund Holders (as of September 30): 72
Total Value of Hedge Fund Holdings (as of September 30): $1.83 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 3.00%

Although Kinder Morgan Inc (NYSE:KMI) is no longer an MLP, it is still a very attractive holding, with a dividend yield of 8.36% and durable, predictable cash flows. Because of the company’s dividend payout, 72 funds owned Kinder Morgan at the end of the third quarter, up from 64 funds long the stock at the end of June. Andy Raab’s FPR Partners raised its stake in the oil and gas midstream company by 22% during the quarter to 5.98 million shares. Look for Kinder Morgan Inc to rebound once Saudi Arabia begins cutting its production.

#1 Williams Companies Inc (NYSE:WMB)

Number of Hedge Fund Holders (as of September 30): 73
Total Value of Hedge Fund Holdings (as of September 30): $6.05 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 21.90%

Many hedge funds are bullish on Williams Companies because the company is a great play on increasing natural gas production in the United States. If natural gas production rises, more volume will flow though Williams Companies’ pipes and the company will make more in profits. Williams Companies’ financials are also holding up well in light of the industry volatility. Because of new pipelines and processing plants coming online, Williams Companies’ primary cash cow, Williams Partners L.P. (NYSE:WPZ), enjoyed an adjusted EBITDA increase of 21% year-over-year to $1.1 billion in the third quarter. Distributable cash flow more than doubled to $754 million for the quarter, up from $367 million in the third quarter of 2014. Because of the increase in cash flow, the company has a cash distribution coverage ratio of 1.04x, more than enough to cover the dividend payout. In late September, Energy Transfer Equity LP (NYSE:ETE) offered to acquire Williams Companies Inc (NYSE:WMB) in a deal that should yield $2 billion in annual EBITDA synergies by 2020. Under the terms of the merger, Williams Companies Inc (NYSE:WMB) shareholders are entitled to 1.8716 Energy Transfer Equity LP (NYSE:ETE) shares for each share of Williams that they own. Williams Companies shareholders can also elect to get cash, but on a prorated basis of $6.05 billion.

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