Hedge Funds Move Away from Oil Stocks

Big oil used to be a solid investment. The stocks trade like utilities – they tend to offer stable growth with decent dividends. But, things have been starting to change.

There was the Deepwater Horizon and the tragedy in the Gulf. Since then, the three companies most directly involved – BP Plc (BP), Halliburton (HAL) and Transocean (RIG) have been in court, a lot. The Financial Times wrote on October 13, “BP, Transocean and Halliburton, the three companies at the heart of the Deepwater Horizon disaster last year, have been formally charged by the US government with breaches of offshore regulations, in a move that could lead to the first official penalties arising from the accident.”

They were collectively accused of breaching regulations 15 times. Transocean filed suit in late October “to force BP PLC to indemnify it against damages related to the Deepwater Horizon oil spill,” reports the Wall Street Journal. More importantly, they set a precedent.

Recently, when Chevron (CVX) and RIG were involved in an oilspill off the coast of Brazil, federal prosecutors there filed suit, seeking R$20B ($10.6B) in damages and demanded the companies discontinue their operations in the country (Financial Times). “Prosecutors late on Wednesday said the companies had shown ‘a lack of planning and environmental management’ in their attempts to control the spill, asking that both Chevron and Transocean be banned from Brazil or face daily fines of R$500m.” The New York Times reports that China will sue ConocoPhillips (COP) over two oil spills in June.

The point is that oil is not as stable an investment as it used to be. It is riskier and hedge fund managers are becoming notably bearish. In the third quarter, Ken Heebner’s Capital Growth Management and David Dreman’s Dreman Value Management both sold out of their positions in CVX. Heebner also sold his stake in HAL in the third quarter. Ken Fisher’s Fisher Asset Management reduced its stake in RIG by almost 50 percent in the third quarter. Ray Dalio’s Bridgewater Associates and Joel Greenblatt’s Gotham Asset Management sold out of their respective positions in COP during the third quarter. David Einhorn’s Greenlight Capital, Whitney Tilson’s T2 Partners and Dan Loeb’s Third Point each sold out of its position in BP during the third quarter.