Shorts go against the longs in U.S. Energy

The U.S. Energy sector recorded the largest number of stocks reaching new annual highs in short interest over the last week. This included almost 9% of the 250 constituents within the GICS Energy Industry Group. Although many of these are small cap’ stocks, the list includes a number of large firms including Diamond Offshore Drilling, Inc (NYSE:DO). In summary, we highlight contrasting investor sentiment, with rising short interest accompanied by rising institutional ownership by long only funds who lend their shares.

Top short

Northern Oil and Gas, Inc. (AMEX:NOG) is the most shorted stock in the sector. This year the energy company has been the subject of heightened securities lending activity with average trading volumes having more than doubled. Historically, short interest has been below 10% of total shares outstanding, but has surged from 7% in March to a staggering high of 40% of the company, while the share price has tumbled and since rebounded. With almost all the lendable supply out on loan, this stock is now hard to borrow. However, this bearish sentiment is not shared by the institutional investors, as large funds who lend have increased their holdings by 80% since last November.

Rising shorts and longs

Diamond Offshore Drilling (NYSE:DO), Gulfport Energy Corporation (NASDAQ:GPOR) and Oasis Petroleum, Inc. (NYSE:OAS) all reached new annual short interest highs last week of 10%, 9% and 8% respectively. Meanwhile, all three of these stocks are subject to positive sentiment for institutional investors which have been increasing holdings over the year.

Diamond Offshore Drilling was caught up in the BP oil spill scandal last year and is expected to report second quarter earnings next week. Short interest has increased from 6% to an annual high of over 10% of the company over the second quarter. The percentage of stock on loan could be inflated as a result of convertible arbitrage. Institutional investors have been increasingly bullish, having increased their holding by 60% over the past year to reach a new annual high.

Short interest in Gulfport Energy Corporation surged over the second quarter, rising from 1% to 9% of total shares outstanding on loan. Institutional investors have been positive towards this stock, increasing holdings by 55% over the year to new annual highs.

Similarly, Oasis Petroleum has seen short interest quadruple over the past quarter to 8% of total shares outstanding on loan. And holdings by institutional investors have doubled over the past year to 16 million shares, which is also an annual high.