Billionaire T. Boone Pickens's New Energy Picks

Includes: BCEI, COG, SM, SU, WLL
by: Insider Monkey

By Matt Doiron

After having become a billionaire through successful investments in oil and gas exploration and production, T. Boone Pickens began managing a hedge fund which focuses on energy related assets including energy stocks. The fund, BP Capital, recently filed its 13F with the SEC to disclose many of its long equity positions as of the end of June. We track 13Fs in a database which we use to develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, and our own portfolio following this strategy outperformed the S&P 500 by 33 percentage points since inception 11 months ago.

This database is also useful for identifying new stock picks from funds' most recent 13Fs, and then trying to dig into whether or not they are good picks for investors. Read on for our thoughts on Pickens's five largest new positions from the filing, see the full 13F on the SEC's website, or check out the fund's favorite stocks over time.

BP Capital bought nearly 150,000 shares of Whiting Petroleum (NYSE:WLL) between April and June to make the U.S. exploration and production company its third largest 13F holding. At a market capitalization of $5.9 billion, Whiting trades at 15 times trailing earnings. Higher production at Whiting- and therefore higher revenue- has been offset by costs in terms of GAAP earnings though cash flow from operations has risen somewhat year to date. As it is focused on drilling, and drilling activity is tied to oil prices, the stock is fairly dependent on macro factors with a beta of 2.3.

Pickens and his team went into Canada's oil sands by initiating a position in Suncor Energy (NYSE:SU), which has a leading position in that geography; Warren Buffett's Berkshire Hathaway was also buying Suncor last quarter. Wall Street analysts are bullish on the company as well, expecting enough of an increase in earnings per share in 2014 that the forward P/E is only 10. For Suncor to hit these targets, however, it would probably depend on an expansion of takeover capacity in Alberta which in turn likely depends on the success of proposed pipeline projects.

Bonanza Creek Energy (NYSE:BCEI) was another of the fund's new stock picks with the filing disclosing ownership of a little over 180,000 shares. Up 170% since shortly after becoming publicly traded in December 2011, Bonanza Creek is still a small cap stock with a market capitalization of $1.6 billion. Product sales have been surging, and the sell-side believes that profits are poised for massive growth: while the trailing P/E of 36 already assumes some future improvement, consensus estimates imply a forward earnings multiple of 13 and a five-year PEG ratio of 0.5.

Another of BP's picks in exploration and production is SM Energy (NYSE:SM), whose shale acreage includes significant positions in Texas's Eagle Ford and North Dakota's Bakken. It is another company where markets are pricing in high growth but analysts are even more optimistic, resulting in a five-year PEG ratio well below 1. In the second quarter of 2013, SM's revenue increased by more than 60% versus a year earlier and reported earnings roughly tripled. Obviously that pace could not continue as the company grows, but double-digit earnings growth for some time may be a possibility.

Pickens added a stake in Cabot Oil & Gas (NYSE:COG) to his portfolio last quarter. Business has also been booming at Cabot relative to a year ago, with recent reports showing large increases on both top and bottom lines. The stock has soared 84% in the last year as a result. The stock is quite expensive in terms of the company's trailing earnings and even the forward P/E seems high at 29. Therefore, while Cabot does have a good record of beating earnings expectations in recent quarters we would still avoid it for now.

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.