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Energy Stock Favorites of Hedge Fund Managers (Update 1)

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  • After a year of huge deals in the oil and gas pipeline space, midstream stocks remain on the radar screen of hedge fund managers
  • With the Kinder Morgan-El Paso deal, as well as the takeover battle between Energy Transfer Equity (ETE) and Williams Cos. (WMB) over Southern Union (SUG), playing the midstream pipeline stocks still figures in the hedge fund manager bets.

    Rose Rock Midstream (RRMS) was one of Pickens' biggest increased positions in the fourth quarter.

  • Beaten up Exco Resources, which is selling its midstream assets, continues to attract hedge fund interest
  • Distressed investing titan Wilbur Ross has been building a big stake in natural gas exploration and production company Exco Resources (XCO) over the past year. Shares have fallen more than 60% in the past year as natural gas prices have declined and made drilling uneconomic for many companies.

    In the fourth quarter, Harbinger Capital took a new position in Exco Resources, and it was a buy that placed Exco among the hedge fund's top 10 holdings at No. 5 overall. Harbinger, run by billionaire Phillip Falcone, saw its value tumble by 50% last year and has been abused in the press for its fall from grace after making the correct call on the subprime mortgage disaster.

    If Harbinger hasn't been as smart with its picks since the housing bubble, is it part of the smart money expecting a takeout of Exco? Ross has done it in many sectors before, most recently in the coal sector where he sold International Coal to Arch Coal (ACI) last year.

    It seems unlikely in the short-term: With natural gas prices so depressed, the dry gas E&Ps can't expect to fetch much of a premium in a deal, even if bigger companies with big balance sheets and big bets on natural gas, like an Exxon Mobil (XOM) or BG Group (BRGYY) could have the patience to wait for a better day.

    Activist fund Oaktree Capital is the top hedge fund holder of Exco shares, which is something that analysts who cover Exco point to, alongside the Ross holding, about the potential pressure that can ultimately be applied to the company.

    It's possible that Ross and Harbinger are waiting for a better day for the company to be taken out and buying into the depressed shares now, as opposed to expecting a quick buck in this company. Exco did announce this year that it's going to sell its midstream assets, but that is only a $400 million deal.

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