Five Very Cheap Energy Stocks That Hedge Funds Are Piling On

Most U.S.-listed energy stocks, which are closely linked to the Chinse demand for commodities, continued their disappointing performance during the third quarter. According to the U.S. Energy Information Administration, North Sea Brent crude oil prices averaged approximately $48 per barrel in September, which marked an increase of $1 per barrel from the average of the previous month. At the same time, EIA anticipates that crude oil prices will average $54 per barrel this year and $59 per barrel in 2016, which might suggest that the downside for the energy sector is limited. The low-oil-price environment has created significant problems for emerging-market countries and for overleveraged small and medium energy companies. The current price level of crude oil is not sustainable for oil-export dependent countries and for the companies activating in this industry, so one should expect a rebound in the months ahead. Having this in mind, we will lay out a list of five low-priced energy stocks that might achieve a turnaround in the near future. It is worth mentioning that we are not compiling this list based on our instincts or “Vanga-type” predictions, we solely rely on hedge fund sentiment.

Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 102% over the last 3 years and outperformed the S&P 500 Index by 53 percentage points (see more details here).

5. Oasis Petroleum Inc. (NYSE:OAS)

Investors with Long Positions (as of June 30): 28

Aggregate Value of Investors’ Holdings (as of June 30): $868.21 Million

Oasis Petroleum Inc. (NYSE:OAS) lost some of its appeal among hedge funds during the second quarter, as the number of top money managers invested in the stock decreased by four quarter-over-quarter. Even so, the hedge funds monitored by Insider Monkey stockpiled 39.30% of the company’s shares on June 30. The company had a disastrous third quarter in terms of stock performance, as its shares lost 45% during the three-month period. However, the stock has gained more than 27% since the end of September. Earlier this month, the company announced that its lenders completed their regular semi-annual re-determination of the borrowing base, which resulted in a borrowing base of nearly $1.53 billion. Considering that Oasis Petroleum borrowed only a small portion of its available capacity, the company is not likely to face any major financial problems in the upcoming year. John H. Scully’s SPO Advisory Corp reported ownership of 20.37 million shares of Oasis Petroleum Inc. (NYSE:OAS) as of June 30.

4. Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR)

Investors with Long Positions (as of June 30): 31

Aggregate Value of Investors’ Holdings (as of June 30): $760.06 million

Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) did not have a great third quarter either, with its shares declining by nearly 52% during the three-month period. The number of hedge funds tracked by our team with stakes in the company decreased by four during the second quarter, amassing only 1.30% of its outstanding shares. Recently, a long list of plaintiffs have filed complaints against the state-oil company, stating that Petrobas failed to disclose the scope or scale of a corruption scandal at the company, which includes money-laundering bribery scheme and overstatement of its property, plant, and equipment figure on its balance sheet. Ken Fisher’s Fisher Asset Management increased its position in Petroleo Brasileiro SA – Petrobras (ADR) (NYSE:PBR) by roughly 1.11 million shares during the September quarter to 9.64 million shares.

3. Chesapeake Energy Corporation (NYSE:CHK)

Investors with Long Positions (as of June 30): 33

Aggregate Value of Investors’ Holdings (as of June 30): $1.74 Billion

Chesapeake Energy Corporation (NYSE:CHK) also failed to convince the hedge funds tracked by Insider Monkey to invest in its stock. The number of top money managers with positions in the second-largest U.S. producer of natural gas decreased by four during the second quarter. These hedge funds owned 23.40% of the company’s shares on June 30. The shares of Chesapeake declined slightly more than 34% during the third quarter and are now 61% in the red year-to-date. The company’s weak balance sheet and high exposure to the low-priced natural gas have put serious weight on the stock this year. Chesapeake Energy Corporation is set to release its third-quarter earnings report on November 4, which will surely shed some light on its ability to endure the current energy environment. Carl Icahn of Icahn Capital LP owns 73.05 million shares of Chesapeake Energy Corporation (NYSE:CHK) as of June 30.

2. Weatherford International Plc (NYSE:WFT)

Investors with Long Positions (as of June 30): 37

Aggregate Value of Investors’ Holdings (as of June 30): $840.96 Million

Expectedly, the shares of Weatherford International Plc (NYSE:WFT) lost more than 30% during the third quarter, but have gained 20% since the end of the three-month period. The number of hedge funds within our database with long positions on the stock decreased by three during the second quarter, accumulating 8.80% of its outstanding shares. Earlier this week, Weatherford International released its financial results for the third quarter, posting revenues of $2.24 billion, compared to $2.39 billion in the previous quarter and $3.88 billion in the third quarter a year ago. The company managed to narrow down its non-GAAP net loss to $42 million from $77 million reported in the second quarter of 2015. At the same time, Weatherford reduced its net debt by $28 million during the recent quarter. Ken Griffin’s Citadel Advisors LLC reported owning 7.76 million shares of Weatherford International Plc (NYSE:WFT) through its 13F filing for the June quarter.

1. California Resources Corp (NYSE:CRC)

Investors with Long Positions (as of June 30): 37

Aggregate Value of Investors’ Holdings (as of June 30): $703.87 Million

California Resources Corp (NYSE:CRC) received some attention from the hedge funds observed by our team during the second quarter, as the number of investment firms with long positions in the stock increased by six quarter-over-quarter. These hedge funds owned 30.20% of the company’s outstanding shares on June 30. California Resources is doing way greater in terms of stock performance at the beginning of the fourth quarter compared to the third quarter (the stock lost 56%), with its shares advancing 53% since the beginning of October. The company will reveal its financial results for the third quarter on November 5 after the market close, so current and potential insiders will get the chance to assess the potential of its operations and activities. Mason Hawkins’ Southeastern Asset Management trimmed its stake in California Resources Corp (NYSE:CRC) by half during the second quarter, ending it with 13.54 million shares.

Disclosure: None