By Matt Doiron
Millennium Management was founded by Israel Englander in 1989 and currently has about $13 billion in assets under management allocated to various strategies run by Millennium team members. In the fund's latest 13F it had a number of energy stocks at the top places of its portfolio (see other stocks in Millennium's portfolio), so we decided to also look at the 13F for T. Boone Pickens's own fund. Pickens is an oilman turned investor, so his favorite stocks trend towards the energy sector as well (see the full list of stocks that Pickens owns in BP Capital). We picked out a few stocks that both Millennium and Pickens like:
Pickens initiated a position of about 70,000 shares in EOG Resources (EOG), and Millennium increased its position by 58% to about 790,000 shares. This made the $29 billion market cap exploration and production company a top consensus pick between the two funds. EOG operates globally and has a strong position in Texas's Eagle Ford shale. Thanks to the shale boom in the U.S., the company reported a strong quarter with revenue rising 18% and earnings rising 34% compared to the same quarter in 2011. This earnings report also beat analyst expectations. At the moment the stock trades at 21 times trailing earnings and 20 times forward earnings estimates. If the company continues growing at double-digit rates, which is what Pickens and Millennium seem to believe, it will prove underpriced.
Southwestern Energy (SWN) was another stock that both funds owned at the end of June. BP Capital initiated a position of about 260,000 shares while Millennium more than doubled its holdings to about 2 million. Southwestern's E&P segment is focused on a shale gas play known as the Arkoma Basin, though it also has onshore interests across the U.S. and Canada. The company also has a midstream operation that gathers and transports natural gas. Southwestern's earnings have been declining recently- revenue was down 22% in its most recent quarter compared to a year ago- and it has been burning through cash, but if natural gas prices turn around it could prove to be in a good position. The sell-side consensus for 2013 earnings implies a forward P/E of 21.
Pickens and Millennium also liked Occidental Petroleum (OXY). BP Capital reported a position of about 40,000 shares, down a bit from the first quarter, while Millennium increased its position to about 750,000 shares. Occidental, with a market capitalization of about $70 billion, is a major oil company which also produces some oil-based chemicals. Its dividend yield based on current prices is 2.4% and its trailing price-to-earnings ratio is 11, so this pick seems to be value oriented. The company's business is struggling, and so the forward P/E is 12, but it still is probably a decent investment for the energy sector (though perhaps not as wise as larger oil companies).
Another pick from both groups was Valero Energy (VLO). Valero is a refining and marketing company and also produces ethanol additives for use in gasoline. Valero looks even cheaper than Occidental: it matches the oil major's dividend yield, its business is growing at double digit rates compared to a year ago in terms of revenue and earnings, it trades at book value, and its trailing P/E is 10. Based on analyst expectations for next year, the forward P/E is only 7. Millennium substantially increased its position in Valero to 2.4 million shares, and Pickens also added shares for a total of about 240,000.
We're attracted to Valero as a value stock, and would also like Occidental if larger oil companies such as BP and Exxon Mobil didn't tend to trade at better valuation multiples. Southwestern and EOG are both focused on unconventional plays, which isn't particularly a problem but it is more difficult to gauge the companies' growth prospects (particularly Southwestern's as natural gas prices remain fairly low compared to the price of oil).