This Week In Oil: Petrobras, Kinder Morgan & More

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Earlier this week, several fundamental events took place in the energy sector, which is most likely to affect not just some individual stocks, but the performance of the whole sector in the short- to medium-run. Therefore, in this article we are going to take a closer look at some of the latest developments surrounding Petroleo Brasileiro SA Petrobras (ADR) (NYSE:PBR)Teekay Corporation (NYSE:TK), Kinder Morgan Inc (NYSE:KMI)Halliburton Company (NYSE:HAL), and Baker Hughes Incorporated (NYSE:BHI).

Moreover, we will also examine relevant hedge fund sentiment toward the equities. But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 53 percentage points over the 36 month period beginning from September 2012 (see the details here).

Crude futures continued their downward path this week, as WTI futures fell substantially on Wednesday after the EIA reported that U.S. crude inventories rose by 4.8 million barrels last week versus the expectation of a 1.4 million barrel drawdown. Because of the build-up, the U.S. has 490.7 million barrels of crude inventory, one of the highest levels registered this time of the year in decades. A part of the reason for the buildup is the unseasonably warm weather, which decreases the demand for heating oil.

Because of the record U.S. inventories and Iran’s new supply hitting the market, analysts at Goldman Sachs think crude inventories could run out by next spring and OPEC production could be as much as 32 million barrels a day. If that occurs, the analysts think crude could trade for the cash cost of highly-leveraged, high-cost shale producers, or about $20 per barrel.

Compounding Brent’s troubles is the fact that the U.S. government has lifted its 40-year crude export ban, which means WTI will likely not trade for more than $4 below Brent at any time ($4/barrel is the cost to export WTI to foreign locations).

If that occurs, companies like Petroleo Brasileiro SA Petrobras (ADR), whose stock is already down by 40% year-to-date, might have more downside before recovering. Petroleo Brasileiro SA Petrobras (ADR) revenues and cash flows will come in lower if Brent trades lower (although any sustained crude rally could prompt a substantial short squeeze in the stock). According to our data, 24 funds amassed around 0.7% of Petrobras’ float at the end of the third quarter.

Although they are less exposed to commodity price fluctuations than E&P’s, many midstream companies haven’t been spared from the carnage either. On Thursday, Teekay Corporation (NYSE:TK) shares fell by almost 60% after the company announced that it was cutting its quarterly dividend by 90% to $0.055 per share in a surprise move that caught many dividend investors off guard. Teekay Corporation (NYSE:TK) cut its dividend distribution because the company needs to use the cash dividend flow to pay down debt and to fund future profitable capital expenditures. Teekay’s high cost of equity has made financing difficult for the company in the challenging energy environment.

It was the same story for Kinder Morgan Inc (NYSE:KMI) a week earlier, when the midstream giant cut its quarterly dividend by 75% to $0.125 per share. Kinder Morgan Inc (NYSE:KMI) management also cut its dividend to funds its growth capex programs. Shares of Kinder Morgan Inc (NYSE:KMI) haven’t recovered this week and the stock will need crude prices to bounce back for the equity to do well. A total of 72 funds from our database owned 3% of Kinder Morgan, while 19 funds were long 13.4% of Teekay at the end of September

On the next page, we examine Halliburton Company and Baker Hughes Incorporated.

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