T. Boone clearly has a knack for picking energy stocks. We took a look at his portfolio and decided to dig a little deeper into five of his holdings:
Halliburton (HAL): Pickens increased his holdings in Halliburton during the most recent reporting period at the average price of around $36 per share. Halliburton provides products and services for energy development, exploration and production. The company currently sports a beta of 1.57, and Halliburton’s profit and operating margins stand at 10.2% and 16.7%. Given the recent surge in oil prices, shares have been on the rise, most recently approaching $50.50 apiece. While we like Halliburton’s prospects, especially outside North America, and the oil and gas industry in general, we think investors should wait for a dip in oil prices before purchasing shares of Halliburton.
At the time of writing, we believe the market is fairly valuing the company. We advise adding shares in the low $40 range to ensure a 20% margin of safety. The main risks we see are twofold: Political and commodity price driven. The company is well diversified outside the North American market. However, it is present in politically unstable regions such as Libya (where the company is already being affected by recent sanctions) and Venezuela. We think these risks are mostly mitigated by proper geographic diversification into markets like Brazil, Mexico and Russia. The more pressing risk is commodity price driven, especially prices of oil. Oil has shot up recently to seemingly unsustainable levels in the near term, given the economic malaise felt around the world. Should oil prices fall, expect HAL shares to fall with them.
SandRidge Energy (SD) This company announced on April 4 last year that it will acquire Arena Resources for $40 per share or $6.2 billion. This represented a 17% premium for Arena shareholders. This also positioned SandRidge as one of the largest producers of West Texas conventional oil and gas.
The oil opportunities will come primarily from drilling and development of shallow, low risk reservoirs located on the Central Basin Platform, a part of the Permian Basin in West Texas. The combined company will have over 200,000 net acres in the Permian Basin and 5,700 identified locations, to drill primarily in the shallow San Andres and the Clear Fork formations. Additional upside exists with down spacing and future secondary and tertiary potential. SandRidge also owns low risk natural gas properties in the Pinon Field, and significant exploration opportunities in the West Texas Overthrust.
As for business relationships, the company has a good history with Occidental Petroleum (OXY), which processes SD's oil, liquid gases and other production at its Century Plant. The company reports that almost two-thirds of SD's Permian Basin production is crude oil, with 20% natural gas and the remainder natural gas liquids. Currently, 17 of 23 rigs are operating in the Permian, with five at Mid-Continent and one at the Overthrust (Pinon).
CEO Tom Ward, a co-founder of Chesapeake (NYSE:CHK) and its COO through 2006, sold shares recently but retains a significant stake. Further, the CFO departed following losses on derivatives contracts related to oil and gas hedging. Notably, Prem Watsa of Fairfax Financial (OTCPK:FRFHF) holds a large stake in the company. We think Occidental is interested in SD's assets and it is simply a matter of price and timing before buyout talks develop.
More recently, the company sold its Wolfberry assets in the Permian basin for $155 million on January 6, 2011. The divested properties are producing ~1,600 Boe/d, and had estimated proved reserves of 2.37 MMBoe, as of December 31, 2009. The proceeds will be used to pay down outstanding borrowings under the company's credit facility. The company is aiming to raise $600 to $800 million in additional capital by the end of 2011.
The company sold its assets in Bone Spring for $110 million on December 10, 2010. With these and the initial public offering of its royalty trust, the company expects to have raised between $500 and $550 million. You can read more of our explanation of why it’s a buyout target here. Due to oil’s recent price appreciation, we believe shares of SandRidge are approaching fair value. Investors would be wise to take some money off the table at the time of writing and wait for a pullback in oil prices before picking up shares.
Chesapeake Energy Corporation (CHK): Chesapeake Energy Corporation focuses on developing conventional and unconventional natural gas reserves onshore in the U.S. Along with Pickens, Carl Icahn was also a buyer during the most recent reporting period. The company sports a beta of 1.33, a trailing P/E of 13.35, and a forward P/E of 11.22. Profit and operating margins currently stand at 18.94% and 28.71%, respectively. Recently, BHP Billiton (BHP) paid $4.75 billion for Chesapeake Energy Corporation’s gas assets in the Fayetteville shale formation.
So what do we think is store for the rest of the year? Chesapeake appears to be a bad pony to bet against. The company has 21 years of production growth, is the second largest producer of natural gas in the United States, and has invested significantly recently in developing natural gas liquids (a savvy move in our opinion given the negative short term prospects of U.S. natural gas prices). Depressed NG prices have hurt many drillers, but we’re bullish on natural gas prospects over the long term. Oil’s recent surge and the disaster in Japan has only reaffirmed this sentiment.
Of all drillers, Chesapeake maintains a dominant position and has a solid plan to reduce its long term debt and further increase production. We think shares could fetch upwards of $47, giving investors a good entry point at the time of writing. Even in a period of longer term depressed NG prices, companies like Chesapeake will continue moving toward oil and production of unconventional resources, all while selling off NG acerage to shore up their balance sheets.
BP p.l.c. (BP): BP is still recovering from the April 2010 oil spill. However, the company agreed to acquire an 83% interest in Companhia Nacional de Açúcar e Álcool (CNAA), which will be BP’s largest deal in alternative energy.
We think in the near term, the costs of the Gulf spill will continue to drag on margins, even in the face of oil’s recent surge. Shares of BP have recently gotten ahead of themselves and any downward oil price movement will depress BP shares, despite renewed production in the Gulf of Mexico. That should drag shares down to a level tolerable to value investors seeking a margin of safety. Our fair value estimate for BP is $45 on a discounted cash flow basis.
Devon Energy Corporation (DVN): Pickens owns 148,413 shares of DVN. Devon Energy has a good mix of growth-oriented oil and gas assets with natural gas making up 69% of production and 60% of reserves. That mix of oil and liquids has allowed it to weather the current gas over-supply. Devon boasts a strong balance sheet and technicals at the time of writing, but the multiple seems too rich for an investor interested in buying right now.
We regard the company’s recent move to North American onshore as a positive. Like Chesapeake, we expect DVN to continue to aggressively (and profitably) develop natural gas liquids, especially in its Barnett and Cana Woodford acreage. Continuing the point we made earlier, we’re bullish on natural gas because it will, in our opinion, become a much more widely used energy source in the long term.
Eventually, the U.S. will have to define an energy policy. Once the large players in the oil market have bought up significant U.S. NG acreage, the lobbying money will start flowing towards an energy policy that favors NG. We recognize that NG isn’t a perfect fuel source and that the recent headlines around fraccing will put political pressure in favor of subsidizing green energy. But economics are economics and developing a policy that favors natural gas is the path of least resistance. Shares of Devon trade at $88.18, roughly inline with our fair value estimate of $90 per share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.