From being one of the biggest industry laggards last year, the energy sector is emerging as one of the best performers in 2016, helped by the bounce-back in crude oil and natural gas prices. A large amount of the gain that the sector saw during the first half of 2016 came in the second quarter, when crude oil prices rallied by over 25% and natural gas prices jumped by an astonishing 42.8%. These terrific gains in energy commodities translated well for the S&P 500 Energy (Sector) Index, which ended the second quarter up by 10.8% versus the S&P 500’s gain of just under 2%. So far in 2016, the S&P 500 has generated a meager return of 1.22%, whereas the S&P 500 Energy (Sector) is up by 13.5%.
Interestingly, the gains that the energy sector has seen this year have come despite a deterioration in the global macro environment, including growing weakness in the Chinese economy, which is the largest consumer of energy in the world, and Britain’s decision to leave the European Union. Moreover, the gains were also unaffected by the changing dynamics in the energy landscape. Recently, the Financial Times reported that the U.S now holds more oil reserves than chief oil exporting nations like Russia and Saudi Arabia, which means that bodies like OPEC will have even less control over energy prices going forward. Considering the remarkable performance of the energy sector in the first half of 2016, in this article we’ll take a look at the five most popular energy stocks among the hedge funds that we track and analyze those equities’ performances in the second quarter.
At Insider Monkey, we track around 765 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).
#5. Schlumberger Limited. (NYSE:SLB)
– Hedge Funds with Long Positions (as of March 31): 56
– Aggregate Value of Hedge Funds’ Holdings (as of March 31): $1.30 Billion
Let’s begin with Schlumberger Limited. (NYSE:SLB), which was the fifth-most popular energy stock at the end of the first quarter among the hedge funds that we track. Schlumberger Limited. (NYSE:SLB) underperformed the energy sector during the second quarter, rising by 7.23% during that period, however, it ended the first half of 2016 with nearly the same gains as the S&P 500 Energy (Sector) Index. Despite the gains this year, shares are trading at a considerable discount to what they traded at two years ago. Several analysts believe that Schlumberger hit rock bottom in the first quarter of 2016, when its quarterly revenue dropped to the lowest level in several years at $6.5 billion and that the company is currently in the process of a turnaround thanks to the business environment and an increase in drilling activity. On July 5, analysts at Goldman Sachs reiterated their ‘Conviction Buy’ rating on the stock. D.E. Shaw, founded by billionaire David E. Shaw, lowered its stake in Schlumberger by 45% to 3.52 million shares during the first quarter.
#4. Devon Energy Corp (NYSE:DVN)
– Hedge Funds with Long Positions (as of March 31): 58
– Aggregate Value of Hedge Funds’ Holdings (as of March 31): $1.41 Billion
It seems a lot of hedge funds anticipated Devon Energy Corp (NYSE:DVN) doing well in the second quarter, as the number of hedge funds in our system with long positions in the stock increased by 11 during the first quarter, while the aggregate value of their Devon Energy holdings increased by $41 million. Shares of Devon Energy Corp (NYSE:DVN) are currently trading 16.61% in the green this year, thanks to a 32.11% rally during the second quarter. In the past few months the company has raised over $2 billion through divestitures, which experts think will help improve its financial health. Devon Energy will use those proceeds to reduce its debt load, cover its CAPEX and improve its liquidity profile. On July 5, analysts at Deutsche Bank reiterated their ‘Buy’ rating on the stock, while upping their price target on it to $45 from $41, citing the quality of the company’s assets, which they believe are better than most of its peers in the E&P space. Billionaire Israel Englander‘s Millennium Management upped its stake in Devon Energy by 187% to 5 million shares during the first quarter.
We’ll check out the performance of hedge funds’ three favorite energy picks on the next page.