Hedge Funds Like These 5 Cheap Energy Stocks

Most retail investors already know that the nominal share price of a stock does not matter for the most part, what really matters is the quality of the business behind each stock. Nonetheless, small investors usually tend to focus on low-priced stocks simply because they are more affordable. In fact, the share prices of some blue chip stocks may actually hinder some smaller-scale investors from investing in those stocks, with Priceline Group Inc (NASDAQ:PCLN), which trades at over $1,345 per share being an extreme example. Investors of all types should bear in mind that many low-priced stocks have low prices for a reason, so each stock priced under $10 or $5 per share should be closely examined before committing to them. In terms of energy stocks, the U.S. oil benchmark reached the $40 level on Thursday for the first time in 2016, as crude oil prices have quickly rebounded by more than 50% from their lowest level in the past decade or so, which had been reached earlier this year. This means that most low-priced energy stocks have limited downside and vast upside potential at the moment, should crude oil prices continue their recovery path. With that in mind, let’s lay out a list of energy stocks priced under $10 which are the most favored by the hedge funds tracked by Insider Monkey.

At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).

#5 California Resources Corp (NYSE:CRC)

– Hedge Funds with Long Positions (as of December 31): 29

– Value of Hedge Funds’ Holdings (as of December 31): $237.28 Million

The number of hedge funds in our system with stakes in California Resources Corp (NYSE:CRC) declined to 29 from 31 during the December quarter, while the value of those stakes shrank to $237.28 million from $293.19 million quarter-over-quarter. The funds invested in CRC had amassed approximately 26% of the company’s outstanding common stock as of December 31. The independent oil and natural gas exploration and production company, which operates properties solely within the State of California, has seen its shares gain 245% over the past month, thanks to recovering crude oil prices and the company’s freshly-revealed plan to tackle the depressed (but now improving) market conditions. Nonetheless, the stock is down by 74% over the past 12 months and is still down by 23% in 2016. California Resources Corp entered the fourth quarter with three drilling rigs running and finished the quarter with none running. The company plans to spend only $50 million on capital investments in 2016, which is down from the 2015 capital program of $401 million. Just recently, CRC executed an amendment to its credit facilities that is anticipated to offer adequate liquidity and covenant relief throughout 2016. The recent surge in energy stocks mainly reflects two key aspects: recovering crude oil prices and banks’ willingness to relax some debt covenants and obligations, which may allow energy companies to avoid near-term bankruptcies. George Soros’ Soros Fund Management cut its stake in California Resources Corp (NYSE:CRC) by 1.12 million shares in the fourth quarter, ending the year with 8.00 million shares.

#4 Southwestern Energy Company (NYSE:SWN)

– Hedge Funds with Long Positions (as of December 31): 32

– Value of Hedge Funds’ Holdings (as of December 31): $468.82 Million

The hedge fund sentiment towards Southwestern Energy Company (NYSE:SWN) declined significantly in the fourth quarter of 2015, as the number of money managers with stakes in the company dropped to 32 from 38 quarter-over-quarter. Similarly, the value of those funds’ stakes decreased to $468.82 million from $569.33 million quarter-over-quarter. Southwestern Energy Company is an independent natural gas and oil company with operations primarily in the Appalachian Basin and Fayetteville Shale. Just recently, Fitch Investor Services cut its credit rating on the oil and gas producer to non-investment grade B+ from BBB-, while Moody’s cut its rating on the company to B1 from Baa3. These credit ratings cuts seem to reflect the company’s December 2014 acquisition of certain oil and natural gas assets in Southwest Appalachia from Chesapeake Energy Corporation, which weakened its balance sheet. Another reason for concern over the company’s future is that Southwestern’s 2016 planned capital investments are significantly lower relative to 2015, which will most likely have a negative impact on production. Earlier this month, analysts at Barclays downgraded Southwestern Energy to ‘Underweight’ from ‘Equal Weight’ and cut their price target on the stock to $4 from $7, citing low energy prices and the company’s levered balance sheet. Let’s not forget to mention that the shares of Southwestern Energy are up by 13% year-to-date. Andreas Halvorsen’s Viking Global acquired a new stake of 11.67 million shares in Southwestern Energy Company (NYSE:SWN) during the December quarter.

#3 Chesapeake Energy Corporation (NYSE:CHK)

– Hedge Funds with Long Positions (as of December 31): 32

– Value of Hedge Funds’ Holdings (as of December 31): $716.44 Million

There were 32 hedge funds monitored by Insider Monkey with long positions in Chesapeake Energy Corporation (NYSE:CHK) at the end of December 2015, compared to 34 registered at the end of the previous quarter. What’s more, the value of those positions shrank to a mere $716.44 million from $1.21 billion quarter-over-quarter. Those 32 funds invested in Chesapeake held nearly 24% of the company’s outstanding shares on December 31. The second-largest producer of natural gas and the 14th-largest producer of oil and natural gas liquids (NGL) in the United States has seen its stock advance by 6% since the beginning of 2016. The struggling oil and gas company has implemented a series of actions to improve its liquidity in the past year or so, including the elimination of quarterly cash dividend payments on its common stock and the suspension of dividend payments on convertible preferred stock. In December 2015, Chesapeake Energy completed private exchanges of roughly $3.9 billion in long-term debt for approximately $2.4 billion of newly-issued 8.00% Senior Secured Second Lien Notes due 2022. According to a fresh report by Reuters, the company is currently considering exchanging a portion of its existing debt for new 1.5-lien debt. At the end of December 2015, Chesapeake had roughly $9.71 billion of long-term debt outstanding, of which $381 million matures in March. Carl Icahn’s Icahn Capital LP owns 73.05 million shares of Chesapeake Energy Corporation (NYSE:CHK) as of December 31.

#2 WPX Energy Inc. (NYSE:WPX)

– Hedge Funds with Long Positions (as of December 31): 34

– Value of Hedge Funds’ Holdings (as of December 31): $420.15 Million

The number of hedge fund managers bullish on WPX Energy Inc. (NYSE:WPX) declined to 34 from 37 during the October-to-December period, while the value of their positions in the company dropped to $420.15 million from $529.72 million during that period. The funds tracked by Insider Monkey which remained bullish on WPX owned almost 27% of its outstanding shares at the end of 2015. WPX Energy is an independent oil and natural gas exploration and production company that relies on oil positions in the Williston Basin in North Dakota and the Permian and San Juan Basins in the southwestern United States. North Dakota’s Bakken formation has received massive attention from exploration and production companies in recent years, but numerous companies are turning their attention to more efficient assets in other regions as crude oil prices remain at deflated levels. WPX’s planned capital expenditures for 2016 are estimated to be in the range of $350 million to $370 million, most of which will be channeled towards its operations in the Permian Basin ($175 million-to-$225 million). Nonetheless, the company still plans to spend $100 million-to-$125 million in the Bakken formation throughout 2016. The sustained softness in commodity prices has pushed WPX’s stock price down by 41% in the past 12 months, though the stock is 11% in the green year-to-date. Steven Cohen’s Point72 Asset Management trimmed its position in WPX Energy Inc. (NYSE:WPX) by 32% in the December quarter to 9.10 million shares.

#1 Whiting Petroleum Corp (NYSE:WLL)

– Hedge Funds with Long Positions (as of December 31): 40

– Value of Hedge Funds’ Holdings (as of December 31): $427.70 Million

Whiting Petroleum Corp (NYSE:WLL) was the most-loved low-priced energy stock among top investors at the end of December 2015, with 40 hedge funds in our database being invested in the company. That total was down slightly from 42 funds at the end of the third quarter, while the value of their positions in Whiting Petroleum dropped to $427.70 million from $767.20 million quarter-over-quarter. It should also be mentioned that the group of funds bullish on Whiting had ownership of approximately 22% of its outstanding common stock. The shares of Whiting Petroleum have recovered from their multi-year lows reached in February, but are still down by 3% since the beginning of the year. Whiting Petroleum is an independent oil and gas company whose production and exploration activities are mainly conducted in the Rocky Mountains and Permian Basin regions. The company’s exploration and development budget for 2016 stands at $500 million, a vast decrease from the $2.3 billion spent on E&D in 2015. Whiting Petroleum’s management anticipates that its 2016 capital budget will be funded with net cash from operating activities, proceeds from divestitures, and cash on hand. It should be noted that the company plans to suspend completion operations starting in the second quarter, which simply means Whiting Petroleum will not add new working oil wells after the first quarter ends. However, Whiting management suggested during the company’s fourth-quarter earnings call that it may start to complete a portion of its uncompleted wells should crude oil prices reach $45 per barrel. Israel Englander’s Millennium Management had 8.86 million shares of Whiting Petroleum Corp (NYSE:WLL) in its portfolio at the end of 2015.

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