BALTIMORE (Stockpickr) -- While most investors have been transfixed on the market shift away from 2013's momentum winners, energy stocks have quietly been building strength in 2014.
Year-to-date, energy sector stocks have climbed an average of 3%. Compare that with flat performance from the S&P 500 and losses close to 4% in the momentum-heavy Russell 2000 Index. More important, on a relative strength basis, energy stocks are strengthening as we get deeper into April.
And fund managers have been piling into that strength in the last quarter. In fact, the energy sector was one of only three equity groups that actually attracted new money in the first quarter. So today, we're taking a closer look at the energy names that pro investors love this year.
To figure that out, we've got to take a closer look at 13F filings.
Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, approximately 3,700 firms file 13F forms each quarter, and by comparing one quarter's filing with another, we can see how any single fund manager is moving his or her portfolio around. While the data is generally delayed by about a quarter, that's not necessarily a bad thing. Research shows that applying a lag to institutional holdings can generate positive alpha in some cases. That's all the more reason to crack open the moves being made with pro investors' $19.3 trillion under management. It's early in 13F filing season still, and that means we're getting an early sneak peek at the few names institutional investors love right now.
Today, we'll focus on hedge funds' five favorite energy stocks.
Canadian Natural Resources
Canadian Natural Resources (CNQ) has been a perfect example of energy stock outperformance in 2014: Since the calendar flipped over to January, shares of CNQ have rallied more than 17.9%. That makes it a particularly prescient move for pro investors to pile into last quarter. All told, hedge funds picked up 3.23 million shares of CNQ, boosting their total stake in the $43 billion energy stock to $943 million.
As an independent exploration and production firm, Canadian Natural Resources holds proved and probable reserves of 7.6 billion barrels of oil equivalent, much of which is focused on oil sands assets. Those oil assets produce significant free cash flows, particularly given the fact that crude oil prices have been lingering near the top of their historic range. That makes more oil projects viable for E&Ps like CNQ. Likewise, with 87% of assets in oil, the firm has been fully exposed to oil's moves without exposure to volatile natural gas. That could become a drag if nat gas continues to run higher, but for now the strength of crude prices makes missing out on a gas move less painful.
Financially, CNQ is in solid shape, with a manageable $9.6 billion debt load and net profit margins that consistently hit double digits. Historically, this stock has kept relatively low cash levels on its balance sheet, opting instead to pay out a 2% dividend yield and re-invest the rest. But CNQ's cash generation gives it options if it suddenly needs more liquidity.
As a pure-play E&P stock, it's hard to argue with the exposure you get from Canadian Natural Resources right now.
Oil field servicer Halliburton (HAL) is another name that funds piled into in the first quarter. The pros bought 701,920 shares of Halliburton, boosting their total stake in the firm by a very material 5%. That brings hedge funds' holdings in Halliburton to $754 million at last count.
Halliburton integrated oil servicer -- the firm does oil and gas companies' dirty work, specializing in drilling, pumping, and project management. Over the last decade, Halliburton has worked hard to get more contracts on each individual oilfield it services. That's provided a margin boost, particularly as relatively high crude prices have made oil companies somewhat less price sensitive in the last several years but that ship has started turning, and oil firms are squeezing Halliburton to boost their own margins. Margin erosion is the one factor investors should watch the closest in 2014.
There are some big international growth opportunities on the deck for Halliburton right now. International oil development continues to be a growth space in the energy sector, and HAL's Halliburton's ability to snag deals with foreign, government-backed oil firms is going to be paramount to the firm's ability to keep growth rates high. Here at home, aging legacy wells spell bigger profits for oil servicers such as Halliburton and its peers, as firms must pay more to extract oil using more specialized methods. HAL's stair-step growth should continue this year.
Speaking of Halliburton's peers, Schlumberger (SLB) was another major hedge fund target from the energy sector in the first quarter -- only more so. While institutions bought more HAL on a dollar basis, they boosted their stake in SLB by more than 10%, making it a much higher conviction bet. So should you pick SLB over HAL in 2014?
Schlumberger certainly has some advantages over HAL, one of which is scale. As the biggest oil-service company in the world, SLB has operations in 85 countries and generated more than $46 billion in revenues last year. SLB focuses on helping large oil companies drill more effectively and pull more energy out of the ground; so, like HAL, the firm benefits as oil becomes pricier to produce. The firm is also in an enviable position in Russia. Despite drama in the region, Russian energy production remains massive, and SLB's expertise in the region gives it an economic moat.
Research and development are an important part of SLB's business. The firm spends more than $1 billion each year on new technology that it can deploy in the field. And that technological edge means that you're more likely to see Schlumberger's logo on an oilfield. Likewise, its size means that it can spread those huge research costs across a much larger number of work sites.
If you have to pick one oil servicer, SLB is my go-to choice, but hedge funds are clearly betting on both names in 2014.
$55 billion exploration and production firm EOG Resources (EOG) is another energy name that's been rallying nonstop in 2014. Shares of EOG are up more than 20% since January (and as it happens, they're also on our Rocket Stocks list this week). That makes EOG a stellar name from a relative strength standpoint at a time when relative strength names are few and far between.
EOG sports one of the most U.S.-centric energy portfolios out there. The firm's proven reserves are large, at 2.2 billion barrels of oil equivalent, but what's unique about EOG is the fact that 94% of those assets are located domestically. That greatly reduces the risk of EOG's operations at a time when geopolitical risk is creeping into commodity investors' portfolios. Because EOG is a pure-play exploration and production firm, it never carried the downstream assets that have been such a drag for many integrated energy stocks over the last few years. That's a big part of this firm's performance this year.
Nat gas exposure is present in EOG in a big way -- approximately 45% of this company's energy production comes from gas, not oil. While natural gas has shown an ugly chart for the last few years, it's been a very different story in 2014, with prices finally rising abruptly thanks in large part to overseas crises that don't look likely to resolve themselves anytime soon. That could materially boost the amount of money EOG can fetch at market for its natgas production.
Funds piled into EOG with a 561,350 share purchase in the first quarter. That may not sound like a large buy operation, but it's actually a 25% boost in position size. Pro investors love this stock right now.
Superior Energy Services
Last up on hedge funds' buy list is Superior Energy Services (SPN), a $5 billion oilfield servicer that's very different from the other energy names that got bought up to start the year. Despite a mid-cap size and a major earnings miss last quarter, hedge funds more than doubled their stakes in SPN, buying up 2.18 million shares.
Like the other oil service names on our list, SPN's business is built around helping oil companies drill, build-out wells, and bet more efficient production. In particular, Superior has significant exposure to subsea construction, which was a big part of February's earnings miss; the firm exited Venezuela last quarter, taking a hit on subsea work it had completed. Those one-time charges torpedoed the firm's income statement for 2013, but the market took the news in stride.
Financially, Superior's small scale makes it attractive. The firm only carries $1.6 billion in debt on its balance sheet, with more than $196 million in cash holdings to help offset it. That's a very tenable debt load for a firm with SPN's scale. Obviously, this is by far the more speculative name in the oilfield services business, but that comes with the potential for much more significant growth -- revenue has more than doubled in the last three years alone.
Hedge funds love this stock, and yes, SPN makes a nice complement to owning a bigger oilfield servicer. But investors should be more cautious than usual as volatility starts creeping back into U.S. stocks this Spring.
To see these stocks in action, check out the Institutional Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.