T. Boone Pickens, former oilman and current head of BP Capital, tends to focus on energy. So while we aren’t surprised to see a number of energy stocks reported in the fund’s 13F and won’t treat this as “Pickens is bullish on energy” we think it’s advantageous to look at the filing and try to determine which areas of the energy sector Pickens thinks are good investments, as well as pick out some specific names which he appears to be investing in and might serve as good sources of diversification in an otherwise consumer- or technology-centric portfolio. Here are some trends that we see when comparing the second quarter to previous filings:
Pure plays, not majors. BP made our list of the ten most popular energy stocks among hedge funds for the first quarter, and BP Capital reported owning about 450,000 shares of the oil major. However, the fund sold out in the second quarter and also reduced its position in Encana. Instead, Pickens put money into a number of pure-play oil and gas exploration and production companies including 100,000 shares of Pioneer Natural Resources (NYSE:PXD), 260,000 shares of Southwestern Energy (NYSE:SWN), and 70,000 shares of EOG Resources (NYSE:EOG). The specific names are good to keep in mind, but we also see that Pickens wants as much exposure to drilling as possible and that means avoiding the refining, marketing, and distribution operations of the majors. Pioneer is priced for growth with a trailing P/E of 32, though its forward P/E is 17; Southwestern is unprofitable on a trailing basis, but expected growth brings its forward P/E to 21. EOG is a more mature company with both multiples at 21, though it has delivered strong growth in its most recent quarter compared to the same period in the previous year. A number of the business for these companies comes from onshore shale plays benefitting from advances in hydraulic fracturing technologies, so we can say that Pickens believes that these activities will continue. It’s also notable that Pickens’ portfolio is light on energy services- many other funds trying to invest in U.S. oil and gas match positions in E&P companies with stakes in companies such as Schlumberger or Halliburton.
Chesapeake too hot. Chesapeake has had an interesting 2012, with concerns over corporate governance and the CEO’s activities triggering attention from short sellers. As the stock price fell, more short sellers began to argue that the company would need to sell assets in order to make cash flow, and that given Chesapeake’s tight cash position they might be forced into making these sales at fire-sale prices. Activist investor Carl Icahn (read more about Icahn's activity) bought into the stock earlier this year when he felt the stock price had gotten too far away from its fundamental value, but Pickens apparently decided not to stick around. BP Capital sold all 500,000 shares that it reported owning at the end of March during the second quarter.
Going in the water. Much of the attention in oil and gas exploration and production among American investors rests on onshore developments as new hydraulic fracturing techniques are met with cool activity in the Gulf of Mexico. Pickens, however, seems to be positioning for offshore as well. His new top holding according to the 13F is offshore drilling leader Transocean (NYSE:RIG) and new position McMoRan (NYSE:MMR), which Pickens bought about 680,000 shares of in the second quarter, also has a number of offshore operations in the Gulf. Transocean trades at 10 times forward estimates of its earnings, while McMoRan is expected to be unprofitable both this year and next year. Pickens seems to be much more optimistic than the market about a return of offshore activity.
Pickens and BP Capital are pulling out of oil majors and getting behind drillers, both onshore and offshore (with the exception of Chesapeake, which with the involvement of Icahn is developing into a different situation). We think that oilfield services are good investment opportunities, and that companies such as BP Plc (BP) offer good value, but it may be worth it for investors to take a cue from Pickens and track down an E&P company to add to their portfolio.