Edited by Kate Boehme
The circumstances of T. Boone Pickens's career contributed massively to the success of this geologist turned financial magnate. Born in 1928 in Holdenville, Oklahoma, Pickens was the son of oil and mineral land man and a mother who worked in the local Office of Price Administration. In 1951, he earned his Bachelors in Geology at Oklahoma A&M (now Oklahoma State University). Immediately after graduation, Pickens went to work for Phillips Petroleum, where he stayed until 1954.
In 1956, Pickens founded Mesa Petroleum. He expanded the company quickly during the 1980s, with a series of rapid takeovers and corporate raids. In 1997, he also founded the Pickens Fuel Corporation, and began pushing natural gas as the top vehicular fuel option, since it emits up to 30 percent fewer pollutants than gasoline or diesel, as well as reducing foreign oil consumption. Reincorporated as Clean Energy Fuels Corp in 2001, the company now owns and operates natural gas fueling stations from British Columbia to the Mexican border. Currently, Pickens is Chairman and CEO of BP Capital, an energy-intensive commodity and equity fund, based in Dallas, Texas. Recently, Forbes named Pickens the 330th richest person in America, with an estimated net worth of $1.4 billion.
BP Capital recently filed its second quarter 13F with SEC, reporting twelve new purchases, one additional stock, reduced holdings in twelve stocks, and seven sold out stocks. According to Whale Wisdom, BP Capital has an estimated market value of $130 million. Pickens is extremely bullish about oil so, for the purposes of this assessment, I will examine his top three energy stocks using fundamental analysis methods. It is also worth analyzing the two notable exits.
Transocean Ltd. (RIG)
Pickens's top stock for the quarter is Transocean, one of the world's largest offshore drilling contractors, based in Switzerland. BP Capital owns 228,721 shares or 7.83 percent of RIG stock in its portfolio. Transocean has a market capitalization of $17.60 billion. RIG reported a recent quarterly loss of $304 million, primarily due to a $750 provision for the coverage of litigation relating to the 2010 oil spill.
Due to the recent quarterly loss, RIG's profit figures suffered a setback. EPS experienced a sharp decline this year, but is set to rise to 61.90 percent next year. Once the gulf oil spill issue is settled, analysts expect RIG to grow at a rate of 17.83 percent over the next five years. RIG's 11.34 percent gross margin speaks volumes in favor of the company's valuation in substance. This high gross profit reflects the amount not directly affected by the designated litigation provision. Furthermore, fleet utilization rose to 66 percent in Q2 compared to 61 percent in Q1. I think this increase in operations and efficiency contributed to RIG's revenue bump this quarter.
Despite these setbacks, RIG is trading north of its 52-week low. I think RIG is coping with crisis situations productively and effectively. However, investing in RIG is risky due to the uncertainty of litigation involved. RIG maintained an upward trend in revenue and price despite a huge reported loss. This means that once the present litigation is behind them, RIG will not be held back from recovery and growth. I am therefore going long on RIG.
Pioneer Natural Resources Co. (PXD)
Pioneer Natural Resources is a large independent exploration and production company focused on the delivery of competitive and sustainable results, based in Irving, Texas. PXD has a market capitalization of $12.14 billion. Analysts expect PXD to trade near $121.19 this year. BP Capital owns 101,485 shares, or 6.85 percent, of PXD stock in its portfolio. This is a new major position for BP Capital this quarter.
For this quarter, Pioneer has a cash dividend of 0.08 and a dividend yield of 0.08 percent. However, earnings next year are set to pick up to 36.32 percent, while an annualized growth rate of 15.28 percent is expected over the next five years. For the quarter in question, the company reported a net loss attributable to common stockholders of $70 million or $0.57 per diluted share.
Regardless of the yield, PXD is a good stock mainly because of its potential for price appreciation. PXD is particularly invested in Wolfcamp Shale. Spanning numerous counties across West Texas, the Wolfcamp formation is located below the long-plied Spraberry field, which helped to make Midland, Texas a center of oil exploration the early 1950s. PXD is increasing the efficiency and quantity of their operations and research activities, which has contributed to higher overall productivity this quarter. It is also notable that this stock is backed by a large capital oil fund, which balances out its cash flow and stock valuation numbers. I am therefore going long on Pioneer Natural Resources Co.
McMoRan Exploration Co. (MMR)
McMoRan Exploration Company, based in New Orleans, Louisiana, is engaged in the exploration, development and production of oil and natural gas in the shallow waters of the Gulf of Mexico and onshore in the Gulf Coast area of the United States. BP Capital owns 678,421 shares, or 6.58 percent, of the portfolio. It has a market capitalization of $2.10 billion. Analysts expect MMR to hit $14.17, so at present there is certainly more room for the stock to continue its current growth.
McMoRan reported a net loss (for common stock) of $75.5 million, or $0.47 per share, for the second quarter of 2012, compared with a net loss of $50.2 million, or $0.32 per share, for the same period last year. However, the EPS has also increased to 84.79 percent compared to the first quarter. Gross margin is showing positive results at 61.46 percent, whereas the operating and profit margins are at -1.98 percent and -1.94 percent, respectively.
MMR is an undervalued stock. With eyes set on Davy Jones, and an exploration program scheduled for one of the deepest wells in the world, MMR is poised for exponential growth. With such high future prospects, it is easy to understand why Pickens favors these oil stocks despite interim losses. These short-term losses are of little concern to Pickens, who is invested for the long-term. McMoRan is certainly a good long-term bet.
It is worth mentioning some of Pickens's more noteworthy exists in the last quarter. Perhaps most significantly, Pickens opted to exit BP plc (BP), a reasonably priced energy stock with a dividend yield of 4.55 percent. BP is trading at a forward P/E of 8.16 and recovered well from the oil spill to now pay out 29.72 percent of its earnings. I think BP is on the road to recovery after striking a settlement with the Feds. The company is a good long-term investment because of its steady stream of dividends.
In addition, Pickens also chose to exit Chesapeake Energy Corporation (CHK) this quarter. CHK's dividend yield is 1.81 percent and is presently trading at a forward P/E of 14.36. Chesapeake is known for its natural gas. However, natural gas production recently fell due to production closures in the Gulf of Mexico as a result of Tropical Storm Isaac.
I think selling CHK was a wrong move by T. Boone Pickens. The stock has gained almost 20% since the end of second quarter. Surely, CHK is suffering from the downturn of natural gas, but it is still paying out some dividends to its stockholders. The trailing P/E ratio of 6.4 is also well below market average. I have a bullish stance on the Chesapeake. The stock is not only a cheap one, but it is also a potential take-over candidate. There are speculations that cash rich Chevron (CVX) might be interested in the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.