By Larry Gellar,
One of the more notorious corporate raiders during the 1980s, T. Boone Pickens is now the chairman of BP Capital Management. He is particularly known for making his fortune from oil company acquisitions. Let’s take a look at his 5 of his latest buys.
EOG Resources, Inc. (EOG) – Although EOG is up year-to-date, the stock is not quite trading at the $110 to $120 range it was earlier in the spring. Regardless, the company still has had a number of positive headlines. The company predicts strong growth for 2011, and dividends were increased for the 12th time in 12 years. Financial success aside, EOG Resources was also named one of Fortune’s 100 Best Companies to Work For. Of course though, EOG’s future prospects will be highly dependent on the price of oil. Oil prices have been shaky as of late due to uncertainty surrounding the U.S. debt ceiling and the eurozone’s fiscal problems, but it is hard to imagine oil prices going much lower. With Saudi Arabia increasing production and the International Energy Agency having already put out some strategic reserves, it seems unlikely that supply can go up further. Keep in mind that EOG’s focus on oil over natural gas has been increasing recently, and this change looks like it will be beneficial.
There have also been some company-specific headlines that have investors excited. The company’s share of Kitimat LNG, a natural gas export facility in Canada, should be highly profitable – more information about that can be found here. Additionally, EOG Resources has 120,000 acres in Texas’s Permian Basin, which is increasingly believed to have quite a bit of oil shale. In fact, some speculate that EOG’s position in the Permian Basin could make it a takeover target similar to the way that Petrohawk’s (HK) position in the Eagle Ford Shale made it attractive to BHP Billiton (BHP). In fact, EOG Resources too has holdings in the Eagle Ford Shale as well as another important area known as the Bakken. The Eagle Ford Shale is particularly important because the premium that BHP was willing to pay for Petrohawk would also portend good things for EOG.
Noble Corp. (NE) – Year-to-date Noble Corp. hasn’t appreciated much, but the stock has traded as high as $46. Perhaps the most exciting headlines for this company came a year ago when it announced that it was buying Frontier Drilling. This was a tremendously important deal that significantly increased Noble’s number of offshore drilling units. Through Noble’s acquisition of Frontier Driling, the company also operates the FPSO Seillean, which has played an important role in helping with the Deepwater Horizon oil spill. Many analysts are excited about this stock – of those who cover it, 56% recommend buy and 37% recommend hold. Furthermore, a poll by Bloomberg showed that on average analysts believe the stock could increase over 30% in the next year. Noble will release earnings on July 20th, so look for this to play an important role in the stock’s near-term performance.
Zacks is also reporting some strong news for the company – specifically that Pemex will be contracting two of Noble’s rigs for use near Mexico. In fact, Noble seems to be quite optimistic about its future, citing increases in tender activity and expected demand for jackup rigs. At the same time, there are a couple of words of caution that should be mentioned in regard to Noble. Its business in supplying rigs is one that many believe could be easily replaced by the bigger oil companies in the future. Also, some investors are predicting a slowdown in the Gulf of Mexico recovery during the second half of the year. Despite all this, the things that will really affect Noble are the more macro trends – specifically whether the economic recovery can move forward. Without an improvement in the U.S. unemployment rate, it is difficult to predict how much Noble’s value will really appreciate.
Apache Corp. (APA) – APA’s stock price has more or less stagnated this year, and the company has not had too many big headlines. One recent development though was when the company found eight new oil wells in the Faghur Basin of Egypt. Apache is also having better than expected success in the Forties field of the North Sea. As discussed in this article, Charlie 4-3 is putting out 12,567 barrels per day. Apache also stands to benefit from its share in Kilimat LNG, discussed above in the EOG Resources paragraph. Additionally, Apache will be teaming up with Crosstex (XTEX) for a natural gas processing plant in Texas’s Permian Basin. More details on that development can be found here. In many ways, Apache will be affected by the same factors as EOG Resources. The future of oil prices will be significant, and there are even some investors who see the price of oil going to $150. Most notably, Barron’s recent cover story discussed this possibility. One important point that it raises is that even though IEA’s releasing of strategic reserves scared many investors, the amount of oil released was actually quite insignificant. In fact, IEA’s 60 million barrels is only a bit over two-thirds of the world’s daily oil consumption. Barron’s also cites a consistently increasing demand for oil despite the past decade’s negative economic trends. When matched up with the fact that the OPEC producers are probably the only ones with spare capacity, it is actually pretty surprising that oil is under $100 at the time of this writing. Finally from a statistical perspective, note that Apache’s PEG is pretty low at the moment – currently 1.13.
Occidental Petroleum Corp. (OXY) – OXY has been increased quite a bit in the past 12 months, and some investors believe that further moves upward are ahead. In fact, if the stock can break resistance at $108, it could move all the way up to the mid-110s. The company is already trading at 17.41 times earnings though, a far cry from P/E ratios like 11.92 and 15.16 for competitors Exxon Mobil (XOM) and DuPont (DD), respectively. Price-to-sales is even more outlandish at 4.25 for OXY compared with 1.47 for DD and 1.12 for XOM. Q2 earnings will be announced on July 26th though, so these statistics could certainly change at that time.
Like other oil companies, Occidental stands to benefit when the price of oil goes up, and there are a number of reasons to believe this will happen. Aside from the points discussed in the previous paragraph, note that the Libyan situation is also something that should cause oil prices to appreciate. Without a resolution in sight for Libya, supply will still be lower than what it is normally. Some more great analysis of Occidental can be found at this Investment Underground article. One of the key points mentioned is that Occidental will often find oil fields that are in decline, buy them from their current user, and then extract the oil at a profit. As the ability to find new oil gets more difficult, this will certainly prove beneficial to the company. Another sign of Occidental’s resourcefulness can be seen in its ability to find more than 400 million barrels of oil in Kern County, CA. Occidental’s financial statements should also be considered when making an investment decision. Net income has been on a positive trend the past few quarters, but surprisingly cash flow has not been as good. Specifically, two of the past four quarters have seen negative cash flow.
OXY processes Sandridge's liquids in West Texas. We think that at some point, OXY will mull a bid to buy out the well-positioned, upstream E&P.
BP plc (BP) – How not to handle a corporate crisis. Although this most recently applies to News Corp. (NWSA), some journalists are already making comparisons to BP’s debacle year ago. Regardless, BP has moved forward from the infamous oil spill, and investors now anxiously await July 26th’s earnings report. Before that can happen though, BP is currently being affected by a strike on the part of South African fuel workers. Unfortunately for shareholders, the company has also experienced a leak in its Prudhoe Bay (Alaska) pipeline. The pipeline was closed down for the time being, but renewed questioning of the company’s safety procedures has begun. On the other hand, this headline does not seem like it will have too much long-term impact considering all the other things that are happening in this news-filled summer. Additionally, these types of events drive up the price of oil, which will soften the impact of the news from a short-term profit perspective. As discussed in this article, there are also some things that are clearly in BP’s favor. BP has had recent success in the courts lately, getting its fraud charges thrown out as well as having claims from one-time partner Anadarko paused for the time being. Also, events like BHP’s acquisition of Petrohawk and Conoco’s (COP) spin-off of its refinery business should make assessment of BP’s value more favorable. Due to expenditures from the Deepwater Horizon oil spill, the company’s P/E ratio is currently incalculable, but price-to-sales paints an important picture. Compare a P/S ratio of 0.45 for BP compared with 1.06 and 1.12 for rivals Chevron (CVX) and Exxon Mobil, respectively. BP has also reported positive cash flows for the past three quarters, so it is clear that the impact of the oil spill is greatly diminished at this point. In fact, damage from the spill is much less than what was originally predicted.