This Week in Energy: SM Energy, Continental Resources, Chesapeake and More

It’s been a volatile week as usual in the energy sector. In this article, we’ll take a closer look at the notable events that occurred to five energy stocks over the past week.

Those stocks are SM Energy Co (NYSE:SM), Continental Resources, Inc. (NYSE:CLR), Chesapeake Energy Corporation (NYSE:CHK), Seadrill Ltd (NYSE:SDRL), and ENSCO PLC (NYSE:ESV). We’ll also use the latest 13F data to determine how hedge funds were positioned in each stock at the end of the second quarter.

While there are many metrics that investors can assess in the investment process, the hedge fund sentiment is something that is often overlooked. However, hedge funds and other institutional investors allocate significant resources while making their bets and their long-term focus makes them the perfect investors to emulate. This is supported by our research, which determined that following the small-cap stocks that hedge funds are collectively bullish on can help a smaller investor to beat the S&P 500 by around 95 basis points per month (see the details here).

E&Ps Show Relative Strength Despite Softer Prices

Despite the fact that WTI and Brent prices trended lower until Friday, E&P’s SM Energy Co (NYSE:SM), Continental Resources, Inc. (NYSE:CLR), and Chesapeake Energy Corporation (NYSE:CHK) all showed substantial relative strength this week. Not only are SM Energy and Chesapeake Energy Corporation (NYSE:CHK) at or near highs over a period of several months, but Continental Resources, Inc. (NYSE:CLR) hit a 52-week high this week as well.

In some ways, the enthusiasm for the stocks is understandable. In terms of the overall crude prices, many experts (including many hedge funds who recently raised their long positions on U.S. crude oil futures by a record amount) are bullish after Russian President Vladimir Putin said the following:

“From the viewpoint of economic sense and logic, then it would be correct to find some sort of compromise. I am confident that everyone understands that. We believe that this is the right decision for world energy… I would very much like to hope that every participant of this market that’s interested in maintaining stable and fair global energy prices will in the end make the necessary decision.”

Given that Putin is the most powerful man in Russia and Russia is one of the largest crude exporters in the world, Putin’s words carry a lot of weight in the energy market. It wasn’t that long ago that Russia hinted that it wanted higher crude prices, and WTI rallied from the mid-$30-per-barrel mark to an eventual $50 per barrel. Given that Russia and many OPEC countries’ finances are stretched painfully thin, many bulls hope that the major oil producers will reach a ‘freeze’ consensus during the next major meeting in Algeria later this month. If that occurs, supply and demand will balance out faster, and the near-record inventories will be less of a problem. As companies with competitive production costs in the Bakken and Permian, respectively, Continental and SM Energy will benefit if oil prices go higher. Given its leverage, Chesapeake Energy is also considered a high beta way to play the rebound in both crude and natural gas.

Of the 749 hedge funds that we track which filed 13F’s for the June 30 reporting period, 44 owned shares of Continental Resources, Inc. (NYSE:CLR), 31 had a bullish position in Chesapeake Energy Corporation (NYSE:CHK), and 20 were long SM Energy Co (NYSE:SM).

On the next page we’ll examine the latest concerning Seadrill and ENSCO.

Offshore Drillers Lag Both Crude Futures and Sector

Although many E&P’s showed relative strength this week, the offshore sector woefully lagged. Seadrill Ltd (NYSE:SDRL) and ENSCO PLC (NYSE:ESV) mostly disappointed bullish investors this week, as shares of Seadrill fell by 7.3% and shares of ENSCO retreated by 4.3%. One reason for the under-performance was that WTI crude futures fell from $47 per barrel to $44 this week. Wednesday’s EIA report came in below estimates and the U.S. crude rig count increased again, this time by one to 407. Another reason is that some investors remain concerned about Seadrill’s large amount of bonds maturing over the next two years. Barring a major surge in crude prices, Seadrill might need to issue more shares or sell assets to raise enough funds to pay bond holders. Given the company’s balance sheet, ENSCO’s weakness this week is a bit surprising however.

According to our records, 17 hedge funds owned shares of Seadrill Ltd (NYSE:SDRL) at the end of the second quarter, down by five funds from the end of the previous quarter, while the number of funds with holdings in ENSCO PLC (NYSE:ESV) rose by one quarter-over-quarter to 30 at the end of June. Robert Henry Lynch‘s Aristeia Capital owned 5.27 million shares of Seadrill on June 30, up by 36% from March 30.

Disclosure: None