Bank of America (BAC) Analyst Mary Ann Bartels recently came up with a report containing most popular stocks held by top 150 hedge funds (by assets) according to their last quarter 13F filings. The following is a list of the top 10 most popular stocks among hedge funds in the energy sector.
Number of top hedge funds owning stock
ANADARKO PETROLEUM CORP
EXXON MOBIL CORP
EL PASO CORP
NATIONAL OILWELL VARCO INC
OCCIDENTAL PETROLEUM CORP
BAKER HUGHES INC
I like Anadarko, Chevron and Exxon among the above stocks and will recommend going long on them. However, I would like to avoid ConocoPhillips and Occidental Petroleum.
Anadarko Petroleum Corporation is an independent oil and natural gas exploration and production company. As of December 31, 2010, it had 2.4 billion barrels of oil equivalent of proved reserves. Anadarko's portfolio of assets includes positions in onshore resource plays in the Rocky Mountains region, the southern United States and the Appalachian basin.
Anadarko operates in three operating segments: Oil and gas exploration and production, midstream, and marketing. Anadarko's EPS forecast for the current year is $3.90 and next year is $5.02. According to consensus estimates, its top line is expected to grow 4% in the current year and 14.60% next year.
Anadarko is one of the best exploration picks among large cap U.S. oil and gas stocks. The company has lined up a multi-year backlog of exploration potential across three major provinces: the U.S. Gulf of Mexico, the West African Atlantic Transform margin and East Africa. Any single discovery in these can significantly move the needle for the stock and cause substantial upside.
In addition, the company has a robust domestic asset base and discovered resources have an associated value of around $42 per share. Current macro environment with high oil prices and low valuation of oil and gas stocks provide a unique opportunity for investors to buy good companies in the sector and Anadarko definitely has an attractive risk/reward ratio.
Exxon Mobil Corporation is an American multinational oil and gas company. It is the world's largest publicly-traded oil company. It engages in the exploration and production of crude oil and natural gas, and the manufacture of petroleum products as well as transportation and sale of crude oil, natural gas, and petroleum products.
Despite a Q4 2011 earnings miss and disappointing production numbers, I am positive on Exxon Mobil from the long-term perspective, given its history of solid and consistent shareholder returns. Exxon is characterized by world-class assets, strong cash flow generation, low leverage, low earnings volatility and leading cash distribution to its shareholders. Looking forward in 2012, it is expected to generate the highest free cash flow yield among large-cap oil majors and return ~ 7% to the shareholders in the form of dividends and share buybacks.
Looking at its medium-term prospects, there are some major capital projects lined up until 2015 (Kearl, Kashagan Phase I and Gorgon), which are expected to drive growth. Further, with the XTO acquisition and increased natural gas production, Exxon seems to be driving out marginal operators and consolidating the natural gas industry, rationalizing long-term production. Exxon is currently trading at a P/E slightly below its historical average and I would recommend buying the stock from a medium- to long-term perspective.
Chevron Corporation is engaged in petroleum operations, chemicals operations, mining operations, power generation and energy services. Recently, on its analyst day, Chevron reiterated its production growth target of 4-5% in 2014-17 which is the highest amongst major oil companies. The company's FCF yield is also likely to improve post-2014 as over 25% of capital employed in various growth projects begins to generate returns. Chevron is currently trading at the lowest EV/EBITA multiple in the group, despite more leverage to Brent than its peers, a higher net cash position and better dividend yield. Chevron's continued leading per barrel profitability and further execution on upstream projects is likely to lead to multiple expansion for the stock. I would recommend buying the stock from a long-term perspective, given its low PE multiple (~8x forward earnings), good dividend yield (3%) and better prospects of long-term growth.
ConocoPhillips is an integrated energy company. The company operates three segments: Exploration and Production, Midstream Services, and Refining and Marketing business. In July 2011, COP announced its intent to separate its upstream and downstream businesses. The spin-off is expected to be completed by Q2 2012. COP's PE multiple has expanded over the last few quarters in anticipation of the spin-off. I don't see any further chances of multiple appreciation from these levels.
In fact, once the spin-off is completed, there could be downside in the stock prices of individual entities, as COP shifts from an integrated energy business to the pure-play E&P business. E&P businesses are usually valued using cash flow multiples. COP's E&P assets seem less attractive than its pure-play peers, with expected long-term growth of 3%-4%, which is well below the large-cap E&P average of 8%-9%. Also, COP's low organic free cash flow is likely to limit its ability for share buybacks after its asset divestiture program is completed, and its dividend might be at risk as well.
Occidental Petroleum Corporation has run up significantly in just a few months. It is trading over $97 now, up 46% from its October lows of $68. The key drivers for the upside were the recovery in oil prices and improved expectations on the company's development program in California. At these levels, I believe investors are fully pricing in the positives and any potential for the further stock price appreciation looks quite bleak in the near-term. Hence, I would recommend avoiding this one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.