We looked under the hood of energy investing guru T. Boone Pickens' portfolio. Here's some commentary on his newest buys from the reporting period ending 3/31/11. As always, use the list below as a starting point for your own due diligence.
Apache Corporation (APA): This is a new position for Pickens. He added shares at the average price of $121.61 during the reporting period. Apache is one of the largest independent exploration and production companies in the world with plays throughout North America, and oil and gas projects in Egypt, Australia, Argentina and the U.K.
President Obama called natural gas’s potential as a vehicle fuel "enormous," and Apache has already undertaken steps to push natural gas as a fuel for vehicles. Apache announced that it would provide a compressed natural-gas fuel station at Houston’s George Bush Intercontinental Airport to serve the airport parking shuttle fleet. This move is likely just the first of many as Apache tries to expand the role of CNG-powered vehicles. Apache shares trade at $117.75 with a P/E ratio of 12.69.
Credit Suisse revised its medium-term WTI crude price forecast to $101/Bbl from $83/Bbl and long-term (2015+) price increased to $90/Bbl from $80/Bbl. We think these numbers are conservative. Higher oil prices are a good driver for continued revenue growth. The company also made $11.5B of acquisitions in 2010. Also, APA shares trade below our fair value estimate. We place a $152 price target on shares, and believe this is a great buy at current price levels.
EOG Resources (EOG): Pickens has picked up shares of EOG during the last two reporting periods. He currently holds a little than 400,000 shares. The Houston-based oil company focuses on exploration and production of oil and natural gas, primarily in North America. Shares trade at $107.67 at the time of writing, with a 52-week range from $85.03 to $121.37. With a market cap of $28.9 billion, EOG is no small company, and buyers face a high barrier to entry. However, for the 12th straight year, EOG approved an increase in its common stock dividend for 2011, which will grow 3% to $0.64 per share (or 0.60%). The company reported a net income of $160.7 million for FY 2010, down considerably from last year’s $546.6 million total, although revenue generated from liquids surpassed those from natural gas for the first time in the company’s history.
We recommend buying this stock at current prices as a valuation call; however, from a technical perspective, it would be wise to wait until we see if shares fall through high-volume support around $103. If this is the case, shares may continue to drop to the 200-day moving average around $99.00. However, the company has positioned itself well for profitability in the future. EOG has switched directions quickly, now focusing on increasing the weight of its liquids portfolio to capitalize on projected increases in demand for crude oil, condensate, and natural gas liquids. In fact, EOG’s liquid production increased by 33% in FY 2010. Also, the company’s early-moving strategy has netted it significant plots of land in some of the hottest emerging production areas (like the Eagle Ford and Bakken shale finds) at low per-acre prices. At this point in time, natural gas production and reserves still account for a majority of EOG’s total production and reserves, which could put them in a good position if natural gas prices increase in the near future.
However, as EOG continues to transition the composition of its portfolio, we are not entirely confident that natural gas proceeds will be sufficient to fuel profits next year as the company continues to increase capex on developing liquid resources. Furthermore, the resulting weak cash flow figures calls into question the sustainability of EOG’s ever-increasing dividends. We think the company may be better off allocating capital towards projects with high return on invested capital. Nonetheless, the company’s long-term prospects are bright.
Noble (NE): Pickens added to his position during the period, at the average price of $40.68 per share. The company has been around for 90 years. It performs contract drilling services with a fleet of 69 offshore drilling units and 5 pending drilling rigs, located worldwide, including in the Middle East, India, the U.S. Gulf of Mexico, Mexico, the Mediterranean, the North Sea, Brazil, West Africa and Asian Pacific. Noble also owns and operates a dynamically positioned floating production, storage, offloading vessel.
Noble shares are trading around fair value on a discounted cash flow basis. We recommend that interested buyers wait for a lower entry point or employ a put-selling strategy to acquire shares.
BP p.l.c. (BP): Pickens remains bullish on BP and added shares at the average price of $46.68 during the period. 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 be a drag on margins, even in the face of oil’s recent upward surge in price. 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. Shares trade at 43.08 at the time of writing.
For plays in the GOM, we recommend that interested investors take a look at ATP Oil and Gas (ATPG). Growth prospects and technology are better at ATPG, in our opinion, and the company has less proverbial baggage among industry operators.
Murphy Oil (MUR): Pickens added to his position in Murphy during the reporting period at the average price of $71.49. The company drew in $23.3 billion in revenues in 2010, which was an increase of 22.79%, after falling 30.9% in 2009. The EBT margins in 2010 and 2009 were 6.06% and 6.7%, respectively. The respective ROEs were 10.27% and 12.3%. The 30-day put/call ratio is 0.5. MUR is up 2.9% since December 17, 2010. Murphy Oil Corporation is a worldwide oil and gas exploration and production company with refining and marketing operations in the United States and the United Kingdom. David Wood is the CEO, president, and director. He has been president and CEO since January 2009. He was previously executive VP and President of Murphy Exploration & Production from January 2007 to December 2008, and president of Murphy Exploration & Production International from March 2003 to December 2006. Shares trade at 64.90 at the time of writing.
Occidental Petroleum Corporation (OXY): Pickens added to his position in OXY at the average price of 99.34 per share. Having built its business atop the foundation of unique, economic oil-recovery techniques, Occidental Petroleum continues to expand production by finding fields with decline rates, buying them up, and then recovering the remaining resources with said cost-effective techniques.
The ability to take advantage of these distressed assets has helped the company increase production and add to reserves at a time when other energy companies are unable to do so. In Kern County, CA, the company discovered over 400 million barrels of oil, and claims to have 50 similar prospects. This discovery will probably lead to future low-cost production in California. Shares trade at $103.39 at the time of writing.
We still think Sandridge (SD) would be an attractive acquisition target for Occidental, but only if Sandridge CEO, Tom Ward, is willing to sell the company at an attractive price.