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Why Do Billionaires Like Anadarko?

FISHER ASSET MANAGEMENTAnadarko Petroleum Corporation (NYSE:APC) led our list of the ten most popular energy stocks among hedge funds for the second quarter of 2012, as a total of 54 funds and other large investors in our 13F database reported positions in the stock. Anadarko’s $35 billion market capitalization is large, but not nearly as large as many other companies in the energy sector (for example, it is less than a tenth the size of Exxon-Mobil Corporation (NYSE:XOM), the world’s largest supermajor). Anadarko produces oil, natural gas, and natural gas liquids, with a smaller part of its business carrying out midstream operations such as processing and marketing.

Billionaire Ken Fisher’s Fisher Asset Management owned 8.6 million shares of Anadarko at the end of June, up slightly from three months earlier (see more stock picks from Ken Fisher). Other billionaires and their hedge fund teams increased their stake in Anadarko during the second quarter, including D.E. Shaw (research more stocks in D.E. Shaw’s portfolio), Ken Griffin’s Citadel Investment Group, and SAC Capital Advisors, managed by Steve Cohen (see Cohen’s top picks).

In the second quarter of 2012, Anadarko Petroleum Corporation’s revenue fell 12% compared to the same period a year ago. The decline was led by natural gas sales, which plummeted 43%, as sales of oil and condensate (Anadarko’s largest source of revenue) was unchanged. For the first half of 2012, oil and condensate sales are up 10% but this has not been enough to compensate for declines in Anadarko’s other businesses; total revenue is down 4% compared to the first half of 2011. The company reported a net loss in the second quarter, compared to a $560 million gain in the same period of the previous year. Net income was higher for the first half, but this was entirely due to a tax settlement; this settlement of $1.8 billion helped fuel a $2.1 billion half compared to $800 million in net income a year ago.

Anadarko Petroleum Corporation’s business is dependent on oil and gas prices, and the stock is highly correlated with movements in these commodities. Oil and gas prices in turn depend on the broader economy which gives the stock a beta of 2.2- however, so far this year, the stock is down 12% as falling oil prices have trumped a rising S&P 500. Sell-side analysts expect earnings per share of $3.44 this year and $4.31 next year, a prediction which seems to incorporate a bullish outlook on oil prices in 2013. At current prices around $69, these earnings projections imply P/E multiples of 20 for 2012 and 16 for 2013. We think that the stock is pricy at this level, and we’re not as confident in a rise in oil prices next year.

For this reason we would expect hedge funds to show more favor to oil supermajors such as BP plc (NYSE:BP), ConocoPhillips (NYSE:COP), and Exxon Mobil Corporation (NYSE:XOM). These fellow oil and gas companies are larger and more integrated, pay high dividend yields (Exxon Mobil’s is 2.6%, and the other companies’ are 4.6%, compared to Anadarko’s 0.5%), and they trade between 7 and 9 times trailing earnings (and between 8 and 11 times forward earnings estimates for next year). Anadarko has to achieve higher growth than these comparable companies going forward in order to justify its considerably higher multiple, and at least last quarter its revenue declines were on par with theirs. Large independent oil and gas producer Apache Corporation (NYSE:APA) is another peer, but it is also cheaper at P/E multiples of 10 and 8 on a trailing and forward basis, respectively. Anadarko does have a considerable position in the emerging Utica shale play, but we would like to see prices for natural gas and natural gas liquids climb higher before we are as optimistic on that point as we are for its peers in general. Exxon Mobil and BP are also on our list of the ten most popular energy stocks among hedge funds, so investors should be in good company in those stocks as well at better valuations.

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