By Nico Gayle
T. Boone Pickens is one of the most well known investors in the energy space. He has years of experience in the oil and gas industry, and founded his investment fund BP Capital in 1997. T.Boone is the man behind The Pickens Plan, a vision for reducing America’s dependence on foreign energy. Pickens has high hopes for natural gas as well as other alternative energy sources. Nonetheless, many of his investments remain in the traditional oil industry. We decided to take a look at Pickens’ latest buys and largest holdings:
Apache Corp. (APA): The biggest new buy for BP Capital in Q1 of 2011, Apache suddenly accounts for 5.6% of Pickens’ entire portfolio. Apache is one of the largest independent oil and gas exploration and production companies in the world, with a diverse set of assets both on- and offshore in numerous countries around the world. The company has a market cap of $45B and offers a 0.50% dividend. From a fundamental standpoint, Apache looks like an outstanding stock: It is trading at a P/E of 12.7, with an operating margin over 43% and nearly $10B in EBITDA. All of these numbers are very strong compared to the competition. The company does have a decent amount of debt, with a current ratio right at 1, but otherwise appears strong.
Apache has strong natural gas positions, true to Pickens’ views for the future, and has some valuable holdings in the Gulf of Mexico in a field right next to Exxon’s (XOM) major discovery. EPS growth projections for Apache are very positive, with forward P/E around 9. Overall, we think Apache is a good buy. It is a leading independent oil and gas company with valuable holdings, and despite its strength, the valuation is very cheap compared to its competitors.
Canadian Natural Resources (CNQ): Another independent oil and gas company, another large new buy for Pickens in Q1 of 2011. This time, it’s Canadian Natural Resources, whose market cap of $44.14B makes it similar to Apache. It also offers a 0.9% dividend. Pickens bought almost 300,000 shares in Canadian Natural Resources, bringing the holding up to over 4% of his portfolio. As you would expect, this Calgary-based company has lots of assets in Canada, but also in the North Sea and off the coast of West Africa. Unfortunately for Canadian Natural Resources, its Q1 profits fell 94% in 2011, mainly due to a fire at the Horizon oil sands and a higher tax rate in the U.K. Forest fires in the area have also pushed back repairs at the Horizon site, meaning that a restart will be pushed back to August. Canadian Natural Resources is only down a little for the 2011, but is down almost 20% since April.
The stock is trading at a fairly high P/E of 42.6, but the forward P/E of 10.73 is much better. Its operating margin of 20% is not bad, but the current ratio of .53 is a little risky. While the Horizon fire may have caused an overselling in Canadian Natural Resources, we still have worries about how quickly the firm can turn around its performance. Over the long run, we think Canadian Natural Resources will recover well, and the forward P/E is attractive. However, short run concerns give us reason for pause. All things considered, Canadian Natural Resources is not a bad stock, and we are fairly neutral on it. We believe though, that a stock like Apache may be a slightly better play.
Noble Corporation (NE): Noble Corp., not to be confused with Noble Energy (NBL), is Pickens’ largest holding, at over 8.83% of the portfolio after he increased his shares by 106% in Q1. Noble Corp. is one of the largest offshore drillers in the world, smaller than only Transocean (RIG) and the new combination of Ensco (ESV) and Pride International.
When you combine the numerous new offshore reserve discoveries with the gradual increase in Gulf drilling permit issuances, this appears to be a great time to look at offshore drillers, especially as their prices remain somewhat subdued from the BP (BP) spill. While offshore drillers are still a little tricky to value thanks to the drilling moratorium’s impact on TTM earnings, Noble is certainly one of the industry leaders.
First off, Noble has one of the cleanest safety records in the industry, and has established relationships with practically all of the major oil companies, including Exxon (XOM) and Petrobras (PBR), both of whom will soon be looking for drillers to tap into their enormous new discoveries in the Gulf of Mexico and off the coast of Brazil, respectively. Noble’s safety record will be especially important with Exxon’s 700M barrel Gulf discovery as the government remains cautious in issuing permits. In addition, Noble has consistently been one of the most efficient and profitable performers out there. Its current TTM-operating margin of 22% is good, but not great, compared to the industry, but the 2009 pre-moratorium operating margin was over 55%, an incredible number that we think Noble will return near as the moratorium’s effects wane. Again, debt/equity increased significantly during the moratorium, but it remains at .44, along with a current ratio of 1.86. These are very manageable amounts. The increase in debt also reflects the company’s decision to focus on building up its fleet instead of paying off debt, which will help it grow amidst all of the new discoveries.
Finally, Noble’s P/E of 21.1 is also good for the industry, even though it is extremely bloated from pre-moratorium levels in the low teens. With earnings expected to double in the next year or so, the forward P/E is only at 9.47, a very low number that represents great value. In the end, we think that offshore drilling is poised for a rebound. And after its recent pullback, Noble is available for less than the average price of Pickens’ new shares. We think Noble’s track record makes it a good buy as long as the price of oil doesn’t fall dramatically.
Weatherford International (WFT): Another one of Pickens’ largest holdings at 6.14% of his portfolio, Weatherford is an oil services company providing equipment and services to the oil and gas industry. T. Boone increased his shares by 11% in Q1 at an average price of $22.66. That's well above the current price level. Weatherford’s competitors include other industry leaders such as Schlumberger (SLB), Baker Hughes (BHI), and Halliburton (HAL), although Weatherford’s market cap of $13B makes it smaller than those firms. Weatherford has been pummeled lately, falling over 30% since late February, in contrast to its main competitors, who have remained mostly even. While earnings have been weak ($0.03 TTM EPS), they are an improvement from the negative EPS of 2010. The balance sheet is not as strong as its peers either, although it still doesn’t demonstrate dire problems.
Nonetheless, there are reasons that Weatherford is attractive. First of all, earnings are almost certain to grow substantially. This is a company that has historically been very successful, and a renewed commitment to its strengths, as indicated in this week’s announced sale of $1B in peripheral assets, should return it to bigger profits pretty quickly. The firm has a very strong international presence, which means that it should benefit from new drilling regardless of the location.
In fact, recent oil auctions in Iraq, which some people are valuing at $60B, have already given Weatherford (and its competitors) a big influx of work. These projects, needed to rebuild the entire aging/destroyed Iraqi energy infrastructure, could provide an extra billion dollars in revenue to Weatherford per year for the next six years. Needless to say, this is a substantial amount for a company of Weatherford’s size. Furthermore, with oil and gas being drilled from increasingly difficult sources, oil service companies like Weatherford will see their revenues rise across the board.
Finally, while Weatherford’s valuation is expensive according to the trailing P/E due to the weak earnings, the valuation is overall pretty attractive. The forward P/E of 11.5 is lower than its peers, and the current price/book of 1.4 and price/sales of 1.2 are far below the competition. So, although Weatherford has struggled and must recover from its problems, it is still a leading firm in the industry, and we think that it is a good buy right now.
Disclosure: I am long NE.