We like to analyze hedge fund sentiment before doing days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy league graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments (for some reason media paid a ton of attention to Ackman’s gigantic JC Penney and Valeant failures) and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Given that hedge funds have recently filed their 13F positions, we analyzed the hedge fund filings of the more than 700 elite investors that we follow and have found that Williams Companies Inc (NYSE:WMB), Kinder Morgan Inc (NYSE:KMI), Anadarko Petroleum Corporation (NYSE:APC), Cheniere Energy, Inc. (NYSE:LNG), and Schlumberger Limited. (NYSE:SLB) are the most popular energy stocks among them. Let’s see how these stocks were traded by these top investors during the third quarter.
#5 Schlumberger Limited. (NYSE:SLB)
Number of Hedge Fund Holders (as of September 30): 61
Total Value of Hedge Fund Holdings (as of September 30): $2.65 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 3.00%
Schlumberger Limited. (NYSE:SLB) is the leading oil service firm in the world. Because of the company’s fortress balance sheet and durable contracts, Schlumberger has been able to take advantage of the low crude prices by recently purchasing Cameron International Corporation (NYSE:CAM) in an accretive deal. Schlumberger is also buying back stock, having bought back 6.9 million shares for a total of $545 million in the third quarter. Among the hedge funds that increased positions in Schlumberger in the third quarter was Ken Griffin‘s Citadel Investment Group, which more than doubled its position to 8.5 million shares by the end of September.
#4 Cheniere Energy, Inc. (NYSE:LNG)
Number of Hedge Fund Holders (as of September 30): 62
Total Value of Hedge Fund Holdings (as of September 30): $7.12 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 62.30%
Low natural gas prices at Henry Hub isn’t necessarily a bad thing for Cheniere Energy, Inc. (NYSE:LNG), as it means the potential to export more American LNG to the rest of the world. Among the hedge fund believers in Cheniere Energy are Carl Icahn‘s Icahn Capital Lp, which owned 28.55 million shares of it at the end of September, and Seth Klarman‘s Baupost Group, with a stake of 22.67 million Cheniere shares at the end of the third quarter.
On the other hand, famed short investor Jim Chanos is short. Chanos estimates Cheniere will have $30 billion in debt with interest costs of $2 billion annually when all is said and done. Given a straight line depreciation of $1 billion a year, Chanos estimates Cheniere would earn just $1 billion in 2020 given analyst estimates of $4 billion in EBIDA if spot prices are as high as bulls’ estimates. If spot prices don’t rally as much as the bulls predict, Chanos believes Cheniere won’t have any free cash flow at all. Chanos said:
“Well, about half of their estimated 2020 or 2021 EBIDA of $4 billion is locked up in the take or pay about $2 billion of that. So it’s a little bit of a myth that all of it is accounted for. They still are going to be dependent on the spot market for a huge amount of the what the bulls think they’re going to make. And in fact the spot market’s in disarray already in liquefied natural gas. […] if you think all of these so-called trains, they’re expensive David. They’ll probably over $30 billion in debt Cheniere when they’re done building these things out. That will be $2 billion in interest annually. $30 billion worth of plant and equipment in the swamps of Louisiana is going to depreciate we think about $1 billion a year, 30 year life. [answering the question if LNG will be bought] I don’t think so. I mean who’s going to buy a company where again the cash flows are dependent on something happening from 2020 out. And where based on at least our numbers, there’s no free cash flow even when that happens.”
Given Cheniere Energy has substantial growth potential, we side with Icahn on this one.