This is the Third Quarter 2008 edition of our ongoing hedge fund tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F's here. We've already covered:

• Timothy Barakett's Atticus Capital
• Whitney Tilson's T2 Partners
• Peter Thiel's Clarium Capital
• Bill Ackman's Pershing Square
• Bret Barakett's Tremblant Capital
• John Paulson's Paulson & Co.
• David Einhorn's Greenlight Capital
• Dan Loeb's Third Point
• Paul Tudor Jones' Tudor Investment Corp.
• Louis Bacon's Moore Capital Management
• Bruce Kovner's Caxton Associates
  

Next up is Soros Fund Management ran by George Soros. Soros is famous for his stellar returns with partner Jim Rogers when they ran their Quantum fund. Soros' fund is a switch from some of the more value oriented funds we've been covering, like the 'Tiger Cub' funds including Stephen Mandel's Lone Pine Capital, Lee Ainslie's Maverick Capital, John Griffin's Blue Ridge Capital, and Andreas Halvorsen's Viking Global. Soros is more of a global macro player, seeking investments in whatever market it can gain an edge, whether it be equities, bonds, currencies, debt, commodities, and more. So, keep in mind that these equity positions only represent a portion of the fund's overall holdings. It is not required to disclose holdings outside of equities, notes, and stock options.

An article in the Wall Street Journal last month mentioned that Boone Pickens' hedge funds had lost nearly $1 billion for the year through August 31st.  One fund was down nearly 30% through 8/31 and another smaller commodity-focused fund was down 84%.  The Boone Pickens funds are energy specific, and the S&P 500 Energy sector is down another 34% since the end of August. 

While the BP Capital holdings have not been released yet for the end of the third quarter, the holdings as they stood at the end of the second quarter indicate that performance has most likely gotten much worse since the end of August unless serious hedging strategies were put in place. 

If you are unfamiliar with T. Boone Pickens, he is an energy maverick and his fund returned 300% in 2005. He is a big advocate of Peak Oil Theory and runs an energy-centric hedge fund (BP Capital) based in Dallas, Texas. His energy stock fund has a compounded annual return of 37% over seven years. Although he typically holds numerous positions in oil, he is also big on alternative energy (except ethanol) and has numerous holdings there as well. He most recently advocated a large natural gas position and has additionally made a big bet on wind energy. Some of his thoughts can be found  here. And, if you live under a rock, he's pushing for energy independence with his Pickens Plan.

But, it seems as if the maverick himself has had a rough last few months. We already knew that BP Capital had a rough July, where he was down almost 35%. And, it gets even worse. His hedge fund that focuses on energy stocks is down 30% through August. Additionally, his commodity fund is down 84% and is a poster child of leverage gone bad. (His commodity fund relies heavily on leverage, hence the larger losses). Ouch. All things considered, he has lost around $1 billion this year, $270 million of which is his own money.

Judging by the performance of T. Boone Pickens' stock holdings at the end of the second quarter, it hasn't been a good couple of months.  While there's no telling yet what Pickens has done in his BP Capital fund this quarter, if he has simply done nothing, the fund's equity holdings would be down 32.26% since the end of June.  That's what happens when you run an energy fund and oil loses a third of its value in two months. 

As shown, SD is down the most at 62%, followed by BZP, FWLT and KBR (all down more than 50% in the second half of the year).  Only one of BP Capital's holdings at the end of the second quarter is up this quarter, and it was the fund's smallest position (CLNE).  As we wrote earlier, who knows what Pickens has done with his holdings this quarter, but it's hard to imagine that he's not suffering some big losses.

The holdings in T. Boone Pickens' hedge fund at the end of Q2 aren't doing so well this quarter.  Based on the 13-F released by BP Capital yesterday, the fund's holdings are collectively down 19.7% since the start of July.  (This doesn't reflect the fund's cash position, short positions, or changes in the holdings since the end of the 2nd quarter.)  As shown, 26 out of 27 positions are down this quarter, with SandRidge Energy (SD), BPZ Resources (BZP), Foster Wheeler (FWLT) and Denbury Resources (DNR) down the most.  The one position that is up this quarter is Clean Energy Fuels (CLNE), which is also the fund's smallest position.  Interestingly, the fund added to all but two positions from Q1 to Q2, and took new positions in Chesapeake Energy (CHK), Devon Energy (DVN), Tenaris (TS), EOG Resources (EOG) and BZP.

Mr. Pickens has been front and center in the news recently for his Pickens Plan to end the United States' dependency on foreign oil by developing alternative fuel sources.  Based on the performance of Pickens' holdings this quarter, BP Capital investors might want him to just be quiet.

Q2 2008 Earnings Call Transcript

August 12, 2008 10:00 am ET

For most oil & gas investors, South American oil is Petrobras (PBR) and Petrobras is South American oil.  Since Petrobras was one of the largest and most successful investor-owned oil companies in the world even before announcing the gigantic Carioca and Tupi discoveries, this focus on PBR is understandable. 

It is also shortsighted.  With the recent pullback in oil equities, several little known but high growth South American oil stories are also now value stories, especially Gran Tierra (AMEX: GTE), Pacific Rubiales [TSX: PEG], and BPZ (AMEX: BZP).  What these three companies have in common are:

Anyone who closely analyzed BPZ’s (AMEX: BZP) rise from obscurity to a $2 billion market cap over the past year saw the same two things: 1) world-class oil and gas resource potential, and 2) insufficient technical and financial capabilities to develop that potential.

While BPZ’s drilling results over this period confirmed the oil and gas reserves and production levels in one small part of its vast resource base (Corvina field, one mapped structure on one block) and helped validate the company’s aggressive estimates of future results on a larger part of the resource base (Corvina complex and Albacora field, four mapped structures on one block), it was obvious that BPZ in its current configuration could not carry out the required development work across the total resource base (50 mapped structures and counting on four blocks) in any realistic time-frame.

Peruvian Wildcat: BPZ Energy (BZP)

Now that BPZ Energy (AMEX: BZP) has received the certified reserve report for its Corvina field, one can estimate forward-looking metrics for FD&A, recycle ratios, and capital efficiency.

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Earlier in the week, we published a list of the best and worst performing Russell 3,000 stocks in the first quarter. Below we highlight price charts of four of the top five on the list.

The top stock on the list, BPZ Resources (BZP), was up 94% in the first quarter. As shown below, the stock has declined in the first two days of the second quarter, however, and has broken its short-term uptrend.

BPZ Energy (AMEX: BZP) came under heavy selling pressure Tuesday in yet another example of the market mistakenly focusing on a minor operational issue rather than a huge long-term success.

The two key takeaways from yesterday's press release are first that the 18XD well has tested 5,350 barrels per day with only three drill stem tests and that the testing is not yet complete. The use of heavy drilling mud (overbalanced drilling) is common in the region for well control. However, it also caused formation damage and made testing difficult. The important point is that these are typical operational issues for this type of well and formation, not indicators of poor reserves or production rates.

Below we highlight the 30 best and worst performing stocks in the Russell 3,000 in the first quarter (>$5). Throughout the rest of the week, we'll be highlighting charts and descriptions of some of these companies.

As shown, the top stock for the quarter was BZP Resources (BZP), a production and exploration company that focuses on oil and natural gas in Peru and Ecuador. BZP was up 94.37% in Q1 and was trailed by IDIX, CAO and EBS. Walter Industries (WLT) ranks 5th at 74.31%. Two key homebuilders made the top 30 -- MHO and HOV.

The average stock in the Russell 3,000 is down 15.93% since the market peaked on October 9th. Since October 9th, 17% of the stocks in the index are higher and 83% are lower.

Below we highlight the best and worst performing stocks in the Russell 3,000 since the 10/9 top. As shown, RIGL is up the most at 128.26%, followed by SDTH (110%), IDIX (96.43%), MOS (80%) and BZP (76%). If these stocks can register these kind of gains during this downturn, what will they do if the market actually goes higher?

On Wednesday the stock in BPZ (BZP) was sharply lower on news that a Peruvian Navy tanker used to transport its crude oil caught fire and sank. Fifteen sailors were injured, some critically. The ship contained 1,300 barrels of crude oil, most of which burned before the ship sank but there are some oil spill issues. Production and testing operations at BPZ’s single production platform in the Corvina field were suspended pending an investigation and inspection of the other Navy tanker used to transport crude.

This was a serious accident and deserves the serious attention it is getting. For investors, the longer-term question is whether the market overreacted to the event.

On Wednesday, BPZ Resources' (BZP) stock was sharply lower on news that a Peruvian Navy tanker used to transport its crude oil caught fire and sank. Fifteen sailors were injured, some critically. The ship contained 1,300 barrels of crude oil, most of which burned before the ship sank but there are some oil spill issues. Production and testing operations at BPZ’s single production platform in the Corvina field were suspended pending an investigation and inspection of the other Navy tanker used to transport crude.

BPZ Energy (Amex: BZP) is up more than 50% in the past two months. The reasons are not hard to find. Consider the following very recent developments:

• The CX11-14D well in the Corvina field, announced preliminarily in September at 25 million cubic feet per day, tested in October at 104 mmcf/d, i.e., equivalent to 17,300 barrels of oil per day.
• The first Corvina oil production for sales, previously planned for the end of December via an FPSO, began November 1st via leased tankers at 2,500 b/d. Full-scale FPSO loading and commercial sales starting at 4,000 b/d will begin around the end of the year.
• The first tranche of debt financing from the World Bank’s International Finance Corporation ($15.5M) to fund the gas-to-power project, previously expected to be signed by the end of the year, was signed in October and has been disbursed. BPZ is negotiating to increase the entire package from the previously announced $100.5M to $165M. The IFC is BPZ’s second largest shareholder and a strong supporter of its energy and local development projects.
• The final contracts with the Peruvian government for rights to two large exploration blocks (bringing BPZ’s total to four), previously expected to be signed by the end of the year, will be signed any day now. One of these blocks has internally estimated reserve potential of 170M bbl and 1.7 Tcf. The other block is on trend with several nearby producers. Adding these blocks to the existing blocks will permit development of the very large Mancora gas play.

BPZ has begun to generate cash flow from oil sales, with a very sharp projected ramp-up rate. Production from the Corvina field in the Z-1 block is 2,500 b/d, limited only by the capacity of the tankers to offload the oil. Current plans are to produce 4,000 b/d when the FPSO becomes available around the end of 2007, 6,000 b/d in the spring, and 8,000 b/d in the summer. And this is only from the first four oil wells in a small part of the Corvina field.

Small-cap oil investors should look at Houston-based BPZ Energy (AMEX: BZP). BPZ has recently had three major drilling successes at its very large oil and gas prospects in Peru. Exploration work in the 1970s by other companies confirmed the presence of hydrocarbons but low oil and gas prices and challenging production requirements made the wells non-commercial. Today commodity prices are much higher, production is much more straightforward, and BPZ has just started to capitalize on this potential. Of its first three wells, completed over the past six months in the offshore Corvina field, two tested oil at a combined 8,300 barrels per day (b/d) and no water; and the three tested natural gas at a combined 105 million cubic feet per day. The company expects the two oil wells to be tied in for commercial sales at 4,000 b/d in December 2007, with additional oil wells in the field taking production to 6,000 b/d in April 2008 and 8,000 b/d in July.

Natural gas from Corvina will be transported via a to-be-constructed pipeline to a dedicated electric generation facility onshore. Debt funding for the pipeline and powerplant is scheduled to be provided by the World Bank's International Finance Corporation [IFC], a major holder of BPZ stock. With its drilling success, BPZ has met the IFC's key supply requirement for the project (three gas wells, each capable of delivering more than 20 million per day to a 40 million per day power plant). Extra gas could be used to expand the power plant, used elsewhere in Peru, or shipped overland to Ecuador. Demand for gas is strong locally.