We compiled our list of the ten most popular energy stocks among hedge funds recently, going through our database of 13F filings for the second quarter and seeing which stocks in the energy sector were the most frequently owned. The top spot went to Anadarko Petroleum Corporation (NYSE:APC) (read our analysis of Anadarko Petroleum), but filling the second slot was Exxon Mobil Corporation (NYSE:XOM). The $420 billion market cap supermajor, which until recently had the largest market capitalization of any American public company, acts as an integrated oil and gas company, with activities ranging from exploration and production all the way down the value chain to franchising gas stations. Exxon Mobil also has a strong position in natural gas thanks to its acquisition of XTO a couple years ago. While natural gas prices remain low, demand is moving up as the fuel continues to displace coal as a source of electricity. While supply has also risen as new hydraulic fracturing techniques have unlocked shale gas across the U.S. and potentially around the world, we think that Exxon Mobil has at least a chance at a substantial upside here as well as in oil.
As we’ve mentioned, 48 hedge funds owned Exxon Mobil Corporation at the end of June. The largest of these positions, according to our database, belonged to Adage Capital Management. Adage was founded in 2001 by two former employees of Harvard Management Company, which is known to be a major investor in natural resources. Adage, which Harvard invested $1.8 billion in when it launched, owned 6.2 million shares of Exxon Mobil at the end of the quarter (see more of Adage’s stock picks). Cliff Asness’s AQR Capital Management and billionaire D.E. Shaw’s hedge fund D.E. Shaw each increased their position during the second quarter. Find more stocks owned by Cliff Asness and D.E. Shaw.
Exxon Mobil’s second quarter went well. The company’s revenue edged up slightly compared to a year ago, and it actually cut its costs. As a result, earnings increased by 49%- certainly not a sustainable growth rate, but it is good to see any growth at all from such a large company. Combined with a first quarter that was about flat versus the same period in 2011, Exxon Mobil was able to generate $5.41 in earnings per share in the first half of 2012 compared to $4.32 for the first six months of last year.
Despite its market leadership, the potential upside from natural gas we have discussed earlier, and a moderate dividend yield of 2.5%, Exxon Mobil Corporation trades at 10 times trailing earnings. Forward estimates for next year are for earnings per share of $8.09, which implies a forward earnings multiple of 11. These figures seem a bit low to us. And while Exxon Mobil clearly has a good deal of exposure to oil prices, its correlation to the broader market is not outrageously strong: its beta is 0.8.
There are a number of large-cap integrated oil and gas companies which serve as good peers for Exxon Mobil. BP plc (NYSE:BP) is still recovering from poor consumer (and investor) sentiment following the Deepwater Horizon incident, though so far it has been successful in selling off assets at reasonable prices in order to build up a cash base. Chevron Corporation (NYSE:CVX) is another obvious peer. Both of these companies are even cheaper than Exxon Mobil relative to their earnings: Chevron’s trailing P/E is 9 and BP’s is 8. They also pay higher dividend yields, with BP’s being 4.5%. We would also compare Exxon Mobil to Royal Dutch Shell plc (NYSE:RDS.B). Shell is in the same range as the other three companies, trading at 9 times trailing earnings and offering a strong dividend yield of 5.3%. It and BP might actually be better buys if the dividend is a significant factor for investors. We do think that Exxon Mobil should trade at a higher earnings multiple due to its market positioning, and so it might otherwise be a good pick; hedge funds are likely seizing on the market leadership factor and natural gas potential as well.