By Guan Wang
Energy is an extremely attractive sector. Energy stocks are undervalued as a whole. They also enable investors to gain exposure to oil prices, protecting them from dollar depreciation risks. One of the most practical ways to pick energy stocks is to focus on those stocks that are favored by hedge fund managers experienced in the energy industry, such as T. Boone Pickens and Andrew Hall. BP Capital's founder Pickens has spent over half a century in the oil industry (check out T. Boone Pickens top holdings), while Hall had traded oil and natural gas products at Phibro LLC before founding Astenbeck Capital Management.
In this article, we are going to take a closer look at some of the energy stocks favored by both Pickens and Hall. Both managers reported owning these stocks in their 13F portfolios as of March 31, 2012.
Company Name | Ticker | Pickens ($*1000) | Pickens Activity | Hall ($*1000) | Hall Activity |
B P PLC | 20345 | 12% | 23761 | -4% | |
SCHLUMBERGER | 3560 | 0% | 32855 | -4% | |
NATIONAL OILWELL VARCO INC | 14262 | 0% | 14494 | -52% | |
DEVON ENERGY | 13513 | 36% | 13475 | -4% | |
HALLIBURTON | 4199 | 0% | 19653 | -7% | |
SUNCOR ENERGY | 7063 | 0% | 8659 | -4% | |
CANADIAN NATURAL RESOURCES LTD | 6181 | 0% | 6478 | 65% |
Both Pickens and Hall had over $20 million invested in BP Plc at the end of the first quarter. Pickens increased his stake in the company by 12%, while Hall slightly reduced his position in BP by 4% during the first quarter. BP is the second most popular energy stock amongst the hedge funds we track. [The most popular one was El Paso Corp (EP) but it was a merge arbitrage play, and was acquired by Kinder Morgan Inc (KMI) in late May]. At the end of March, 55 hedge funds reported owning BP in their 13F portfolios. Besides Pickens and Hall, Seth Klarman, Eric Mindich, Bill Miller, David Dreman, and Jim Simons were also bullish about BP (check out Jim Simons' top stock picks).
The Gulf of Mexico incident has negatively impacted BP's share price and reputation, but the company is making good progress in recovering from the accident. It has been selling its non-core assets to pay for the charges related to the incident. It has also been modernizing some of its outdated assets and making several promising acquisitions, which are expected to strengthen its presence in the oil market. We think BP is strong enough financially to clean up the Gulf of Mexico charges. Its debt-to-capital ratio is 17% and the management plans to further lower the number. It also has $14 billion in cash and equivalents on its balance sheet.
With regard to valuation, BP is currently trading at 5X its 2011 earnings, well below its industry's average of 15. We believe investors will benefit by investing in this stock for the long-term as the company recovers from the incident. BP is also an ideal dividend play. It has a dividend yield of 5.22%, versus 2% for 10-year Treasury bonds. Its low payout ratio of 23% also indicates its ability to further increase its dividend payments in the future.
Another stock both Pickens and Hall like is Devon Energy Corp . They both had over $13 million invested in this stock at the end of March; Pickens had boosted his stakes in this position by 36% over the first quarter. Hedge funds are demonstrating an increasing interest in Devon. At the end of March, there were 45 hedge funds with Devon positions in their 13F portfolios, up from 35 hedge funds at the end of December. Dan Loeb's Third Point initiated a new $71 million position in Devon during the first quarter (see Dan Loeb's favorite stock picks here). Doug Silverman, Richard Chilton, Martin Witman, and Joe DiMenna also opened positions in Devon during the first quarter.
For the first quarter of 2012, Devon reported revenue of $2.50 billion, up 16.3% from $2.15 billion for the same quarter last year, beating the industry's average revenue growth of 11.8%. Its gross margin was high at 62.3% and its net profit margin of 15.7% is also higher than its industry's average. The growing revenue and strong margins boosted Devon's first-quarter EPS by 13.2% compared with the same period last year, but Wall Street was not very bullish about Devon's EPS in 2012. Analysts expect the company will make $5.05 per share this year, down from $5.13 in 2011. However, we do not think such decline is going to last for long time. In fact, Devon is expected to earn $6.56 per share in 2013, indicating a 2013 P/E ratio of only 8.74.
Pickens and Hall also like Schlumberger Ltd , National Oilwell Varco Inc , and Halliburton Company . Together, they had over $20 million invested in each of these stocks at the end of March. These three picks were each quite popular amongst the hedge funds we track. There were 49, 42, and 47 hedge funds, respectively, that disclosed owning positions in these stocks at the end of the first quarter. They also each have attractive valuation levels. All of them have forward P/E ratios of below 15 and double-digit expected earnings growth rates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
