Here’s How Hedge Funds’ Favorite Energy Stocks Performed in Q2

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.

#3. Anadarko Petroleum Corporation (NYSE:APC)

 – Hedge Funds with Long Positions (as of March 31): 59

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $1.84 Billion

Moving on, Anadarko Petroleum Corporation (NYSE:APC) suffered a drop in its popularity in the first quarter. During the January-to-March period, ownership of the company among the funds we track inched down by two, while the aggregate value of their Anadarko holdings fell by almost 40%. Though Anadarko Petroleum Corporation (NYSE:APC)’s stock managed to outperform the S&P 500 Energy (Sector) Index during the second quarter, rallying by 14.34% during that period, it underperformed the index during the first half of 2016, gaining 9.61% during that time frame. Since Anadarko has reported lower than expected revenue for the past three quarters and the liquidity profile of the company is in shambles, some analysts are skeptical about the company’s ability to perform well going forward. At best, they believe the stock can hold on to its current price if oil prices continue to rally, but will tank if crude oil prices retreat below $40 per barrel. Vince Maddi and Shawn Brennan’s SIR Capital Management initiated a stake in Anadarko during the first quarter, purchasing 490,500 shares of the company.

#2. Exxon Mobil Corporation (NYSE:XOM)

 – Hedge Funds with Long Positions (as of March 31): 60

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $2.5 Billion

Shares of Exxon Mobil Corporation (NYSE:XOM) have been on a gradual rise since the beginning of 2016, ending the first quarter up by 7.24% and gaining another 12.14% in the second quarter. However, the first quarter rally didn’t help the stock gain popularity among the hedge funds in our database, as there were eight fewer of them long Exxon Mobil Corporation (NYSE:XOM) by the end of the first quarter. Over the past few quarters, Exxon Mobil has been increasing its focus towards liquefied natural gas (LNG), the demand for which is expected to overtake supply by 2020. According to analysts, this transition will help the company improve its growth prospects in the long run and make it less vulnerable to the volatility in crude oil prices. Recently, some Australian newspapers reported that Exxon Mobil has made a bid for Papua New Guinea-focused gas explorer InterOil Corporation (USA) (NYSE:IOC), but both companies have refrained from commenting on the matter. Billionaire Ken Fisher‘s Fisher Asset Management lowered its stake in Exxon Mobil by 16% to 4.54 million shares during the first quarter.

#1. Pioneer Natural Resources (NYSE:PXD)

 – Hedge Funds with Long Positions (as of March 31): 61

 – Aggregate Value of Hedge Funds’ Holdings (as of March 31): $3.17 Billion

Pioneer Natural Resources (NYSE:PXD) was not only the favorite energy stock of the hedge funds tracked by Insider Monkey at the end of first quarter, but also emerged as the best performing stock among those featured in this list during the first-half of 2016, registering a gain of 20.60%. However, unlike most other energy stocks, shares of Pioneer Natural Resources (NYSE:PXD) have yet to recover from the Brexit shock at the end of June, which was one of the reasons why it ended the second quarter with a modest gain of 7.4%. Nevertheless, with the company recently raising its production guidance for fiscal years 2016 and 2017, most analysts continue to remain extremely bullish on the stock, which sports an average rating of ‘Buy’ and an average price target of $189.38 from the 45 leading analysts and research firms on Wall Street who cover it. Brazilian billionaire Jorge Paulo Lemann‘s 3G capital initiated a stake in Pioneer Natural Resources during the first quarter, purchasing 600,000 shares of the company.

Disclosure: None