Energy stocks are a subset of stocks in the basic materials sector of the market. The energy market in the U.S. has undergone changes in recent years, with natural gas likely having passed coal as the #1 source of electricity in the U.S. in the past couple of months as a result of dramatically increased domestic production. One of the best places to look for investment ideas in this sector is hedge funds’ portfolios. According to Insider Monkey’s database of 13F filings, here are the 10 most popular energy stocks among hedge funds:
1. El Paso (EP): El Paso was one of the U.S.’s top producers of natural gas, and was poised for growth given the growing role of natural gas in U.S. electricity generation. As a result, Kinder Morgan Partners announced an acquisition of the company in late 2011. 59 hedge funds owned shares of EP at the end of March, likely because merger arbitrage- in which a fund buys shares of a company that is being acquired and exploits the spread between the market price and the acquisition price- is one of the most common hedge fund strategies as it tends to produce returns uncorrelated with those of the stock market (learn more about merger arbitrage strategies).
2. BP (BP): The second most common energy stock held by hedge funds was BP. Partly due to poor investor and media sentiment the oil company trades at a trailing P/E of 5.4, which has likely caused value investors at hedge funds to pile in to the company’s shares. Most notably, BP was the second largest holding of Seth Klarman’s Baupost Group, making up 14% of its 13F portfolio (see some of Seth Klarman’s other stock picks). 54 other hedge funds owned shares of BP at the end of the first quarter for a total of 55, though this was down from 58 at the beginning of the year.
3. Anadarko Petroleum (APC): APC would not be expected to be a top pick for a hedge fund portfolio: it is a $35 billion market cap company with negative trailing net earnings. Its strong role in exploration and production of natural gas as well as oil, however, have given it a captivating growth story and its forward P/E clocks in at under 16. John Paulson’s Paulson & Co. was among the 52 funds to own APC at the end of March, with 6 million shares; however, this was down from 21.2 million shares a year ago (review the rest of Paulson’s portfolio). Year to date the stock has slumped about 11%, generally in line with oil prices.
4. Schlumberger (SLB): Schlumberger is the market leader in providing oilfield equipment and services, with a $88 billion market cap. Forty hedge funds had positions in SLB at the end of December, but three months later this number had surged to 49 as it became clear that the new technology of hydraulic fracturing has enabled SLB and other similar companies the prospect of generating high profits from U.S. oil and gas activity. One of these new entrants was Dmitry Balyasny’s Balyasny Asset Management (see other stock picks from Balyasny), which bought 1.7 million shares in the first three months of 2012 to become the company’s largest hedge fund shareholder.
5. Exxon Mobil (XOM): While Exxon Mobil is the largest public energy company in the U.S. it was only the fifth most commonly found in hedge fund portfolios, with 48 funds having a position. Cliff Asness’s AQR Capital Management owned 2.5 million shares of XOM at the end of March, making it their second largest holding (research more of Cliff Asness’s favorite stocks). AQR had owned the stock for some time and had increased its position substantially in summer 2011. Exxon Mobil has a P/E of just over 10 despite its leadership role in the production of oil and gas as well as its 2.7% dividend yield.
6. Halliburton (HAL): Halliburton lost a few hedge fund holders in the first few months of 2012 but still managed to have 47 at the end of March, down from 51 at the start of the year. Ken Griffin’s Citadel Investment Group cut their position but still held 3.3 million shares of the company (see Citadel’s other holdings), which like Schlumberger focuses on oilfield equipment and services. Halliburton trades at a trailing P/E of 9 and its earnings are expected to grow enough this year to push its forward multiple close to 8. Year to date the company is down 15%.
7. Devon Energy (DVN): Devon saw one of the largest increases in hedge fund holdings among energy stocks, from 35 to 45. The company produces oil, natural gas, and natural gas liquids; like many of these other companies it has fallen about 15% this year as the price of oil has declined. Its trailing P/E is under 5, with the expected fall in earnings over the next year raising its forward P/E to 10. Doug Silverman’s Senator Investment Group bought 1.5 million shares of DVN in the first quarter (see more stocks owned by Senator Investment Group), a new position for the fund.
8. Occidental Petroleum (OXY): Occidental is a $69 billion market cap oil and gas exploration and production company. Billionaire Ken Fisher’s Fisher Asset Management owned 4.9 million shares of the company at the end of March, and has consistently been one of the largest holders of OXY’s stock (find more stock picks from Ken Fisher). Occidental trades at a similar multiple to many of the other top energy stocks among hedge fund companies, at about 10, and also pays a 2.5% dividend yield. Its stock price implies an enterprise value of just less than five times trailing EBITDA.
9. Valero Energy (VLO): Valero, which primarily refines oil into petroleum products such as gasoline and jet fuel, takes ninth place among energy stocks held by hedge funds at 43, up from 30 in December. Valero is rare among the companies on this list in that its stock price has risen so far in 2012, up about 20%; low crude oil prices mean lower costs, even if some of those lower costs generally get passed on to consumers. Appaloosa Management, managed by David Tepper, owned 2.6 million shares after nearly tripling his position in the stock (see billionaire Tepper’s portfolio).
10. National Oilwell Varco (NOV): NOV is an equipment and services provider, similar to HAL and SLB, with a $29 billion market cap. 42 hedge funds had positions in the stock at the end of March. It was the fifth largest position in Ken Heebner’s Capital Growth Management, which owned 1.9 million shares. NOV trades at a trailing P/E of about 13, and a forward P/E of about 10, and reported very impressive revenue and earnings growth in the first quarter of 2012 compared to the first quarter of 2011.