Billionaire T. Boone Pickens' Top Energy Picks

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Includes: APA, BCEI, GDPM, SU, WLL
by: Insider Monkey

By Matt Doiron

BP Capital is managed by T. Boone Pickens, who became a billionaire through his success in the oilfield and is also known as a leading advocate for a larger role for natural gas in the U.S.'s energy mix. His quarterly 13F filings are often watched as a sign for what this investor- who does primarily invest in energy related securities including futures and energy stocks- is thinking about the sector. At Insider Monkey, we track quarterly 13F filings from hundreds of hedge funds including BP Capital as part of our work developing investment strategies. This research has resulted in us concluding, among other things, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average (learn more about our small cap strategy). We've put this theory into practice and our resulting portfolio earned an excess return of 33 percentage points compared to the index in the last 11 months. We have gone through Pickens' most recent filing (see his stock picks from the SEC website) and here are his five largest stock positions in the energy sector (or compare these to his picks over time):

BP Capital reported a position of a little over 110,000 shares in Apache (NYSE:APA). Apache's total production was up slightly last quarter compared to the second quarter of 2012, with increased oil output in North America offsetting declines in Egypt and Australia; oil makes up a little less than half of production by energy equivalent, and therefore a majority of revenue given conditions in the natural gas market. Apache is valued at 12 times its trailing earnings, with Wall Street analysts expecting increases in EPS next year, and may be worth a look.

A smaller oil and gas company, $820 million market cap Goodrich Petroleum (GDP) (over 1 million shares of the stock are traded per day), was another of Pickens' energy picks. Goodrich has been more of a development stage company with negative profitability for the past several quarters, and in fact the sell-side is still forecasting losses of $1.56 per share in 2014. Since depreciation is a major cost, Goodrich is actually cash flow positive despite these losses although recent reports show that cash flow from operations has declined in the last year.

The fund initiated a position of nearly 150,000 shares in Whiting Petroleum (NYSE:WLL) between April and June. While higher production has pushed Whiting's oil and gas sales up, it has also resulted in higher costs leading to a significant decrease in pretax income. However, cash flow from operations has improved this year; as with Goodrich, non-cash expenses play a role although we'd note that CFO has still been less than the amount of cash Whiting uses on drilling capex. The company has chosen to increase its debt load as a result. Currently it trades at a trailing P/E of 15.

Another Pickens buy last quarter was Suncor Energy (NYSE:SU), which is notable for two reasons. One, it has a significant position in the Canadian oil sands, seen as a rich source of particularly high carbon unconventional oil. Two, Suncor had actually been one of Warren Buffett's new positions for Q2 as well. Analyst expectations for next year are high enough that the forward earnings multiple is only 10, though we'd note that production in the oil sands has risen enough that takeaway capacity is becoming a challenge, particularly as environmentalists try to block pipelines from the region.

The 13F shows BP Capital buying about 180,000 shares of Bonanza Creek Energy (NYSE:BCEI), another small-cap independent oil and gas company. The stock is up over 150% since shortly after becoming publicly traded in December 2011. High costs and soaring interest expenses have held back growth in Bonanza Creek's earnings, but the sell-side is bullish: expectations for bottom-line growth over the next several years imply a five-year PEG ratio of 0.5. That's certainly appealing, but we think that we would want to wait for better reported profits before considering the stock on a growth basis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Matt Doiron, and edited by Meena Krishnamsetty. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.