Russell Lucas‘ Lucas Capital, a fund with a focus on energy equities, especially in the North American market, recently filed its 13F with the SEC for the September quarter. The firm’s public equity portfolio stood at $172 million as of September 30, while it currently manages approximately $570 million across its various funds and other wealth management services. Russell Lucas founded the firm in 1996 with his father, George B. Lucas Jr, and continues to serve as its principle, alongside Ralf Sellig. Given the firm’s knowledge of the energy market, we wanted to take a look at its top picks for the fourth quarter, which are Plains GP Holdings LP (NYSE:PAGP), Western Gas Equity Partners LP (NYSE:WGP), Energy Transfer Equity LP (NYSE:ETE), ConocoPhillips (NYSE:COP) and EOG Resources Inc (NYSE:EOG).
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by 53 percentage points since the end of August 2012. These stocks returned a cumulative of 102% vs. a 48.7% gain for the S&P 500 Index (see the details here). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).
#5 ConocoPhillips (NYSE:COP)
Shares held (as of September 30): 72,236
Total Value (as of September 30): $3.46 million
Percent of Portfolio (as of September 30): 2.01%
Lucas Capital bumped up its holding in ConocoPhillips (NYSE:COP) by 11% in the third quarter to 72,236 shares, good for around 2% of its equity portfolio. While ConocoPhillips is no longer an integrated and thus doesn’t have a refining division that benefits from low oil prices, analysts still think the company will be profitable next year, with predictions of EPS of $0.89 for the year. Given ConocoPhillips’ attractive dividend yield of 5.3% and the fact that crude prices will rebound eventually as low crude prices will effectively cure low crude prices by inhibiting production, we’re optimistic on the stock. First Eagle Investment Management owned 7.65 million Conoco shares at the end of June.
#4 Energy Transfer Equity LP (NYSE:ETE)
Shares held (as of September 30): 169,160
Total Value (as of September 30): $3.52 million
Percent of Portfolio (as of September 30): 2.04%
Energy Transfer Equity LP (NYSE:ETE) shares have fallen by 27% year-to-date as sentiment has deteriorated despite the company announcing a deal to merge with Williams Companies Inc (NYSE:WMB) that should yield up to $2 billion in annualized EBITDA synergies by 2020. Because crude prices are less than half of what they were a year-and-a-half ago, investors are less optimistic on the future of U.S energy production growth. In addition, expectations of normalizing interest rates have weighed on shares. The company also reported mixed third quarter earnings, beating EPS expectations by $0.02 per share but missing revenue estimates by $1.83 billion. We’re still fans of the company, however, as the dividend yield of 5.67% is secure at the present moment.
Lucas Capital’s top three energy stock picks light up the next page.