After making billions in the oilfield, T. Boone Pickens began investing in the public markets (primarily in energy) and issues quarterly 13F filings through his fund BP Capital. Insider Monkey tracks his filings along with those of hundreds of other hedge funds and notable investors, using the included information to help us develop investment strategies. We have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio based on these techniques outperformed the market by 33 percentage points in the last 11 months. It can also be useful to see what investors such as Pickens have been doing in the markets and see if any of their free investment ideas are a good fit for one’s portfolio. Here are some things we noticed in BP Capital’s most recent 13F compared to the fund's previous filings:
Selling downstream oil and gas. Three of Pickens’s nine largest holdings at the end of Q1 2013 had been companies focused on refining and marketing operations: Tesoro Corporation (NYSE:TSO) and two recent spinouts from large oil and gas companies, Marathon Petroleum Corp (NYSE:MPC) and Phillips 66 (NYSE:PSX). The 13F shows that the billionaire cut his stake in all three of these companies between April and June, and replaced them with companies more oriented towards exploration and production. Markets are generally not very excited about these three companies: Tesoro Corporation (NYSE:TSO) is valued at only 11 times trailing earnings, with the P/E multiple being less than 10 in the case of its two peers. However, weaker gross margins resulted in all three of these companies experiencing double-digit declines in earnings last quarter compared to the second quarter of 2012; Phillips 66 (NYSE:PSX) disclosed a decline in sales as well. Still, these stocks are cheap enough that they might be able to see a small decrease in profits and yet still be interesting from a value perspective.
Wall Street analysts are actually bullish on downstream, with their earnings expectations for the next several years implying five-year PEG ratios a good bit less than 1 at the two recent spinouts (potentially as management improves operations now that they are independent businesses). We would note that these three downstream oil and gas companies exhibit a good deal of dependence on the overall economy, with a beta of at least 2 in each case.
Oil sands. We had reported earlier that Warren Buffett’s Berkshire Hathaway (find Buffett's favorite stocks over time) took a large position in Suncor Energy Inc. (USA) (NYSE:SU) in the second quarter of the year. The exploration and production company became Pickens’s fourth largest position by market value after a series of buys. Suncor Energy Inc. (USA) (NYSE:SU) is best known for its position in the Alberta oil sands, a growing source of unconventional energy although it is becoming harder to transport this production to refineries as development increases. It trades at 18 times trailing earnings, but at only 10 times forward earnings estimates as the sell-side expects significant increases in EPS next year.
Whiting. Pickens and his team were also buying Whiting Petroleum Corp (NYSE:WLL) making that exploration and production company one of their top picks as well. Whiting Petroleum Corp (NYSE:WLL) operates across the onshore U.S. Its reports show that high revenue growth this year from the company’s shale assets have been offset by higher costs, though cash flow from operations has been up as depreciation has been one of the leading expenses. Whiting Petroleum Corp (NYSE:WLL) carries trailing and forward P/Es of 15 and 12, respectively, which is a premium to the oil majors but not a particularly large one. Billionaire Israel Englander’s Millennium Management owned 1.1 million shares of Whiting at the end of March of this year (research more stocks Millennium owned).
Recent performance at Tesoro Corporation (NYSE:TSO), Marathon Petroleum Corp (NYSE:MPC), and Phillips 66 (NYSE:PSX) has not been good, but even if analysts are being a little too optimistic as far as future earnings growth we think that the industry has value potential if these companies can even hold their financials steady going forward. As for Suncor Energy Inc. (USA) (NYSE:SU), well, it’s not wise to blindly follow Pickens or Buffett in all they do but their consensus interest in the company would certainly make it worth a closer look.
Disclosure: I own no shares of any stocks mentioned in this article.