By Matt Doiron
T. Boone Pickens became a billionaire largely due to his operations in the oil and gas industry, and now invests primarily in the energy sector through BP Capital. BP Capital submits quarterly 13F filings to the SEC, and we have gone through its most recent filing to see what energy stocks Pickens likes right now. Read on for our quick take on the five largest positions reported in the filing and see his full 13F portfolio.
Pickens' top pick was Valero Energy Corporation (VLO), with about 350,000 shares in his portfolio (a 45% increase from the end of the second quarter). It is a refining and marketing company which produces a variety of transportation fuels. Earnings were down 44% at the company's last quarter compared to the third quarter of 2011, though Wall Street analysts expect a rebound in 2013. While the current market cap represents a valuation of 15 times trailing earnings, the forward P/E based on their consensus estimates is only 7. Fellow billionaire Stanley Druckenmiller initiated a position in Valero during the third quarter. We think that we'd want to watch the stock and wait to see some improvement in the business.
Southwestern Energy Company (SWN) was another of Pickens' favorite stocks as he reported a position of about 310,000 shares. Southwestern is a natural gas-focused exploration and production company operating in the onshore U.S.; its best known locations are the Marcellus and Fayetteville shale plays. As such the company has good growth prospects related to the development of shale gas, but is also exposed to natural gas prices (which remain low thanks to a supply glut). It's actually expected to see a decline in earnings next year, and we'd want to look at Apache (APA) and Chesapeake (CHK) more closely to see if those peers are better buys.
Pickens owned about 100,000 shares of Pioneer Natural Resources (PXD), which is another U.S. exploration and production company (though it seems less focused on natural gas than Southwestern is). Pioneer's earnings were much lower last quarter than a year earlier, though revenue was up, and the most recent data shows that close to 10% of the shares outstanding are held short. At 20 times forward earnings estimates- and those estimates are based on strong improvement at the company- we wouldn't recommend buying the stock.
$32 billion market cap global oil and gas exploration and production company EOG Resources, Inc. (EOG) was another top pick. Citadel Investment Group, which is managed by billionaire Ken Griffin, was another investor in the company; it cut its stake over the course of the quarter but still owned 1.1 million shares at the end of September. EOG's sales came in 24% higher in its most recent quarter compared to the same period in the previous year, but higher costs pulled its net income down at an even greater rate. We could review the company more closely, but it's likely that we'd end up preferring the larger oil majors (which, we'd note, are conspicuously absent from Pickens' list).
Devon Energy Corporation (DVN), another Pickens favorite with a position of about 120,000 shares, is a more integrated energy company as it balances exploration and production activities in the U.S. and Canada with midstream operations. It's another company with a high trailing P/E- 33 in this case- and a business that has weakened over the last year. Also like many of the stocks we've discussed, the sell-side is bullish with their forward estimates implying a P/E multiple of 12. And we would avoid this stock as well.
The only Pickens top pick that looks intriguing to us is Valero. Even there we're a bit wary of the company's recent performance and would like to see better earnings numbers come in before buying.