T. Boone Pickens is one of the best known oil man in the world. During the 1980s, Pickens was well-known as a takeover operator and corporate raider. Now, instead of taking risks in the oil fields, he takes risks in the financial markets. He is the chairman of BP Capital, an energy-focused hedge fund. When we are looking for energy stock picks Pickens’ 13F portfolio is where we start looking for candidates. According to Forbes, T. Boone Pickens is the 309th richest person in the United States with a net worth of about $1.45 billion.
Recently BP Capital released its latest holdings in a 13F filing. In this article, we are going to take a closer look at the most bullish bets of Pickens and decide whether it makes sense to imitate some of these stock picks.
BP Plc (BP): BP is the largest position in T. Boone Pickens’ portfolio. At the end of last year, the fund had $17.2 million invested in the stock. BP is also quite popular among other hedge funds. At the end of the third quarter, there were 53 hedge funds with BP positions in their 13F portfolios. Besides Pickens, Seth Klarman and Eric Mindich were also bullish about BP. Klarman’s Baupost Group had nearly $500 million invested in BP and Mindich’s Eton Park Capital had over $200 million invested in the stock.
We agree with these hedge fund managers. The company is financially and operationally sound. It has robust revenue growth, growing net income, and strong cash flow from operations. It also has attractive valuation levels. BP has a forward P/E ratio of 6.63 and its EPS is expected to grow at 4.23% per year over the next five years, which means that its P/E ratio for 2014 is about 6.1. The main competitors of BP include Chevron Corp (CVX) and Exxon Mobile (XOM). CVX’s 2014 P/E ratio is 7.3 and XOM’s is 8.2. BP seems to be slightly undervalued compared with its peers, which are also trading at attractive multiples. We also like BP’s 4.1% dividend yield. The stock pays us twice as much as the 10-year Treasuries while we wait for its multiple to expand significantly.
Chesapeake Energy Corp (CHK): BP Capital also had over $10 million invested in CHK. The fund reported owning $13 million worth of CHK shares at the end of last year. John W. Rogers was also bullish about CHK. Rogers’ Ariel Investments had $47 million invested in the stock at the end of September. The company’s focus has been switched to liquids from gas, as the gas fundamentals have weakened while the liquids fundamentals were strengthened. CHK is exposed to relatively high risks as the company has an aggressive strategy and is an active acquirer in the industry. But we think this is offset by its strong cash flows and attractive valuation levels. CHK has a forward P/E ratio of 11.35 and is expected to grow at 8.41% on the average in the next five years. These estimates might not be very accurate though. Chesapeake’s fate is tied to natural gas prices and CHK is inherently a risky bet. We think natural gas prices will increase in the future and that’s why we have a position in the stock but we don’t recommend this stock to conservative investors.
A few other large positions in BP Capital’s portfolio are McMoRan Exploration Co (MMR), National Oilwell Varco Inc (NOV), and Dawson Geophysical Co (DWSN). All three stocks have low valuations, especially NOV. NOV’s forward P/E ratio is 12.2 and its EPS is estimated to grow at 15.55% per year over the next five years. Therefore, its P/E ratio for 2014 is only around 9. Overall we like Pickens’ stock picks. Energy stocks are undervalued as a sector and we see great potential in this sector. Conservative investors can buy mega-cap oil producers, while risk lovers can buy smaller but faster growing energy stocks.
