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Hedge Funds’ Top Energy Picks Show Strong Gains

If one makes a list of the sectors that have underperformed in the last two years, there is no doubt that the energy sector will occupy the one of the top positions, if not the top position, in that list. The crude oil and natural gas rout that we have seen during that period had a disastrous effect on the financials of energy companies, raising fears that some of them are on the verge of bankruptcy. However, since mid-February there has been a dramatic pullback in crude oil prices, which has translated well for energy stocks, helping them to recoup some of the losses they have suffered in the past few quarters. Considering that a large number of hedge funds among the over 800 funds we cover were bullish on several energy stocks while entering 2016, in this article, we are going to focus on the five most popular energy stocks among hedge funds at that time and analyze  their individual performances so far this year.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

 #5 Halliburton Company (NYSE:HAL)

– Investors with Long Positions (as of December 31): 53

– Aggregate Value of Investors’ Holdings (as of December 31): $2.56 billion

Let’s start with Halliburton Company (NYSE:HAL), which saw its ownership among funds from our database declining by six and the aggregate value of their holdings in it falling by $1.2 billion during the fourth quarter. Billionaire Andreas Halvorsen initiated a stake in Halliburton Company (NYSE:HAL) during that period by purchasing 6.66 million shares of the company. Shares of Halliburton Company ended the first quarter with gains of 5.5% , but have soared even higher this month and currently trade with year-to-date gains of over 9%. On April 6, the U.S. Justice Department (DoJ) has filed a civil antitrust suit seeking to block the previously announced $35 billion merger between Halliburton Company and Baker Hughes (NYSE:BHI). The same day both the companies jointly issued a press release stating that they will “vigorously contest the U.S. Department of Justice’s (DoJ) effort to block their pending merger.” As per the agreement between both the companies,  if the deal fails to materialize Halliburton Company will have to pay $3.5 billion to Baker Hughes (NYSE:BHI), which analysts feel will have a severe impact on the former’s balance sheet.

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#4 Pioneer Natural Resources (NYSE:PXD)

– Investors with Long Positions (as of December 31): 57

– Aggregate Value of Investors’ Holdings (as of December 31): $4.07 billion

Pioneer Natural Resources (NYSE:PXD) saw only a slight drop in its popularity among the funds we track during the fourth quarter with the number of investors with long positions in the stock inching down by one and the aggregate value of their holdings declining marginally by 3.9%. Notable investors that boosted their stake in Pioneer Natural Resources (NYSE:PXD) substantially during the fourth quarter included billionaire Israel Englander‘s Millennium Management, which increased its holding by 78% to 2.16 million shares. Pioneer Natural Resources’ stock has been on a gradual rise since mid-February, ending the first quarter up by 12.2%. In the last few months the company has managed to improve its liquidity by selling non-core assets and through a secondary offering, which has been appreciated by analysts. On April 7, analysts at Citigroup reiterated their ‘Buy’ rating on the stock, while upping their price target on it to $165 from $145, which represents a potential upside of over 14% from the stock’s current trading price.

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#3 Macquarie Infrastructure Corp (NYSE:MIC)

– Investors with Long Positions (as of December 31): 58

– Aggregate Value of Investors’ Holdings (as of December 31): $1.32 billion

Though the ownership of Macquarie Infrastructure Corp (NYSE:MIC) among funds from our database slid by 16% during the fourth quarter, the decline of the aggregate value of their holdings stood at 10.41%. Billionaire Mario Gabelli‘s GAMCO Investors was one of the investors that upped its stake in the company during the fourth quarter, by 10% to 479,215 shares. Macquarie Infrastructure Corp (NYSE:MIC) is the only stock in this list, which is currently trading in the red for 2016, down 5.53% year-to-date. However, that decline has helped in increasing the stock’s annual dividend yield, which currently stands at nearly 7%. Furthermore, the company intends to increase its distribution per share by 16.6% this year. For its fiscal 2016 first quarter, analysts project the company to report EPS of $0.47 on revenue of $434.44 million versus the per share loss of $1.22 on revenue of $398.50 million it had reported for the same quarter last year.

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#2 Anadarko Petroleum Corporation (NYSE:APC)

– Investors with Long Positions (as of December 31): 61

– Aggregate Value of Investors’ Holdings (as of December 31): $2.57 billion

Moving on, the number of investors covered by us with long positions in Anadarko Petroleum Corporation (NYSE:APC) came down by nine and the aggregate value of their holdings in the company fell by $810 million during the fourth quarter. However, billionaire David E. Shaw‘s firm D.E. Shaw became increasingly bullish on Anadarko Petroleum Corporation (NYSE:APC) during the same period, increasing its stake in the company by 52% to 2.4 million shares. Anadarko Petroleum Corporation’s stock ended the first quarter 4% in the red, but it has moved higher this month and currently trades flat for 2016. In spite of the large amount of debt on the company’s balance sheet, some analysts consider Anadarko Petroleum as the best play in the oil and gas sector currently. Their bullishness stems from the rates of returns of 30%-100% that the company is targeting on back of tieback opportunities and its growing focus on assets with a lower cost base. On March 11, analysts at Goldman Sachs upgraded the stock to ‘Buy’ from ‘Hold’ and increased their price target on it to $58 from $50.

#1 Exxon Mobil Corporation (NYSE:XOM)

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

– Aggregate Value of Investors’ Holdings (as of December 31): $1.15 billion

Exxon Mobil Corporation (NYSE:XOM) was the favorite energy stock the investors in our database at the beginning of 2016 and is also the only stock in this list that saw an increase in its popularity among smart money investors during the fourth quarter. The ownership of the company among funds tracked by us increased by nine, whereas the aggregate value of their holdings saw a marginal decline of 3.3% during that period.  Among the funds that initiated a stake in Exxon Mobil Corporation (NYSE:XOM) during the fourth quarter was Brazilian billionaire Jorge Paulo Lemann‘s 3G Capital, which purchased 1 million shares of the company. Like most energy stocks, Exxon Mobil Corporation’s stock also appreciated during the first three months of this year and ended the first quarter up by 8.20%. The oil and natural gas giant reported is scheduled to report its first quarter numbers by the end of this month and the consensus among analysts include EPS of $0.33 on revenue of $47.05 billion. For the same quarter of the previous financial year, Exxon posted EPS of $1.17 on revenue of $67.60 billion. The 27 leading analysts on the Street who cover the stock currently have an average rating of ‘Hold’ and an average price target of $81.15.

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Disclosure: None