This Week in Energy: Freeport-McMoRan Inc (FCX), Exxon Mobil Corporation (XOM), and More

Given that crude is generally more volatile than the major equity indexes, there seems to never be a dull moment in the energy sector. This week is no exception, as several major events have occurred.

In this article, we examine more in depth the latest events surrounding Freeport-McMoRan Inc (NYSE:FCX), Anadarko Petroleum Corporation (NYSE:APC), Exxon Mobil Corporation (NYSE:XOM), Transocean LTD (NYSE:RIG), and Seadrill Ltd (NYSE:SDRL) and we use the latest hedge fund data to see how the smart money is positioned towards the five stocks.

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 700 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

Freeport-McMoRan Inc (NYSE:FCX) reduced its debt by $2 billion in a single move this week, by agreeing to sell its deepwater assets in the Gulf of Mexico to Anadarko Petroleum Corporation (NYSE:APC) on Monday. Although traders initially cheered the move on Freeport-McMoRan Inc (NYSE:FCX)’s part and sold Anadarko Petroleum Corporation (NYSE:APC) due to the company’s need to issue some equity to finance the deal, the prevailing sentiment shortly reversed, and Anadarko shares ended up being almost break-even for the week while Freeport-McMoRan stock retreated by over 3%. Traders ultimately thought Anadarko got the better end of the deal because the acquisition would be immediately accretive and generate an estimated $3 billion of incremental Gulf of of Mexico free cash flow over the next five years at current strip prices.

As for Freeport-McMoRan, analysts thought that the company could have potentially gotten more for the deal as some on Wall Street had the assets worth $2.9 billion in their models. Carl Icahn’s Icahn Capital LP, which owned 104 million shares of Freeport-McMoRan at the end of June, isn’t complaining however. The move will deleverage the company further and help Freeport-McMoRan focus more on lower-risk onshore plays. Of the around 750 funds we track, 30 had long positions in Freeport-McMoRan Inc (NYSE:FCX) amounting to $1.52 billion in aggregate, representing 10.90% of the float on June 30, while 48 funds owned $2.15 billion worth of Anadarko Petroleum Corporation (NYSE:APC)’s stock, which accounted for 7.90% of Anadarko’s float.

Exxon Mobil Corporation (NYSE:XOM) retreated by 3.2% this week as lower oil prices (down by around 5%) and an investigation weighed on sentiment. Regarding the investigation, news broke that New York Attorney General Eric Schneiderman is investigating why Exxon is the only major energy company that hasn’t taken a write-down on its asset values despite the over 50% drop in crude prices. The Attorney General is also investigating Exxon for the firm’s previous knowledge of the negative impacts of carbon emissions on climate change. Exxon has defended itself by saying that it has followed all relevant regulations and rules. The firm also added that the company is usually extremely conservative in terms of appraising the book value for its new projects (and thus doesn’t need to write them down as much as its more aggressive competitors). The hedge fund sentiment towards Exxon Mobil Corporation (NYSE:XOM) has been stable, as 60 funds from our database were long Exxon Mobil Corporation (NYSE:XOM) at the end of the second quarter, unchanged from the previous quarter.

On the next page, we examine the events that occurred to Transocean LTD and Seadrill Ltd.

Shares of Transocean LTD (NYSE:RIG) and Seadrill Ltd (NYSE:SDRL) retreated by 6.8% and 9.15% this week mainly due to lower crude prices (which fell around 5%) and a less-than-optimistic Bloomberg article. According to Bloomberg’s Mikael Holter, although many in the industry expect utilization rates to bottom by the middle of the next year, those rates “could be stuck there for a long time” (as the IEA doesn’t expect the oil market to balance out until the middle of next year and Iraq/Iran could continue to ramp up low-cost production beyond that). In addition, rig rates might not rebound as quickly as crude prices. Senior consultant at IHS Tom Kellock was quoted as saying that “rates are going to come back more slowly than oil prices because of the overhang and the degree of competition and the oversupply of rigs, which is not at this stage being tackled”. Various analysts think that the utilization rate needs to reach 70-85% in order for rig rates to start moving up again. For the utilization rate to increase meaningfully, Transocean estimates that the number of working rigs needs to fall to 120 from 160 currently operating.

For a broad-based fundamental recovery to occur, either the current operators need to bite the bullet and remove some of the supply on the market place, or OPEC needs to get its act together and agree with Russia to ‘freeze’ production during their September 26-28 informal meeting in Algeria. However, given the recent joint Russia and Saudi Arabia communique, and the previous announcements from past OPEC meetings, many traders aren’t that optimistic.

Some smart money funds chose to leave the offshore sector in the second quarter. According to our data, the number of funds with holdings in Transocean LTD (NYSE:RIG) fell by seven quarter-over-quarter to 32 at the end of June. Likewise, the number of investors long Seadrill Ltd (NYSE:SDRL) retreated by five to 17 during the second quarter.

Disclosure: None