T. Boone Pickens' Favorite Oil Stocks: 4 To Buy, 1 To Avoid

Includes: BP, OXY, RIG, WFTIQ, XOM
by: Rash Menaria

BP Capital Management is a private investment firm focused on investments in energy futures and stocks of public companies in various energy sectors. The firm was founded by T. Boone Pickens. Mr. Boone Pickens has vast experience in the oil & gas business. He was the founder of Mesa Petroleum in its various forms, beginning in 1956. Mr. Pickens' career at Mesa spanned four decades. Under his leadership, Mesa grew to become one of the largest and best-known independent exploration and production companies in the U.S.

The following is a list of some of the top stocks that BP Capital is holding, according to its latest 13F filing with SEC.



Shares Held - 12/31/2011

BP Plc



Exxon Mobil Corp.



Weatherford International Ltd.



Transocean Ltd.



Occidental Petroleum Corp.



I am bullish on oil stocks in general, primarily due to the money-printing binge of the U.S. government that is fueling inflation across the globe, with commodities being the likely beneficiaries. Since oil and gas stocks directionally trade in line with crude oil prices, I see good upside for the stocks. In terms of company-specific ideas, I like Transocean, BP, Weatherford and Occidental. However, I am not too positive on Exxon Mobil.

Transocean Limited is the world's largest offshore drilling contractor with a fleet of 141 mobile offshore rigs. The company recently issued its March fleet status update, which highlights the tightness of the ultra-deepwater rig market in the near term. The Deepwater Expedition, whose contract had been cancelled for non-performance, received a new two-year contract starting in November at a day-rate of $650,000, better than the previous rate of $640,000. This is the highest day-rate seen in the current upcycle, and is particularly encouraging as the Expedition's recent BOP issues resulted in the termination of its prior contract. This also indicates that the three ultra-deep water rigs with contracts ending in 2012 may also get higher day-rates and better contract terms. In addition to the ultra-deepwater trends, jack-ups also remains strong in mid-water.

There is a good likelihood of upward revision of Transocean's EPS estimates as day-rates in the rig market continue to trend higher and are better than what consensus is modeling. In addition to the business trends, any favorable developments towards the settlement of the Macondo liability will also act as a positive catalyst for the stock.

BP Plc should also benefit from the settlement of Macondo liability. BP is trading at very attractive levels at less than 7x forward PE, and Macondo has been a headwind for the stock for last two years. As the settlement nears, I see good potential upside for the stock price.

Weatherford International's operational and financial leverage to international growth makes it a good buy. Weatherford reported strong operational results in Q4 and provided a strong outlook for 2012. Going forward, one can expect higher revenue and profitability levels in North America in 2012 vs 2011. Latin America is also expected to post revenue growth in the high-20s, with activity improvements in Mexico, Colombia, Venezuela and Argentina. Growth rate in the Eastern Hemisphere is expected to accelerate, given growth in Europe and Russia, as also stronger activity levels in Iraq, Kuwait, Saudi Arabia, Australia and China.

Weatherford's stock is also seeing some headwinds because of the tax issues it is facing. However, the company is taking the right steps by recently hiring the Chief Accounting Officer from RIG and bringing in outside local tax experts. I believe these tax issues will resolve in the near to medium term, which will then act as an additional catalyst for Weatherford's stock.

Occidental Petroleum Corporation is one of the most profitable of the U.S. large- cap oil companies. The company continues to report strong financial results, with cash flow from operations of $12.3 billion for FY2011 and annualized ROE of 19%. With 70% of its production linked to Brent, Occidental is expected to generate ~6% of FCF yield in 2012 at the current oil prices. In the longer term, even if we adjust for the company's capex plan of ~$7bn annually, Occidental is likely to generate ~$20bn of cash by 2016. In the near to medium term, exploration and appraisal results in CA conventional and shale plays are likely to serve as catalysts for the stock.

Exxon Mobil Corporation is the only company in the above list on which I am not positive. Exxon's exposure to natural gas is likely to result in the company underperforming the broader oil & gas sector. Exxon is the world's largest gas producer. Despite a bleak natural gas outlook in the U.S., XOM continues to be bullish on natural gas demand, as is evident from its production increase in Q4 2011, and also by its most recent acquisition of XTO Energy, a natural gas company.

At a time when its competitors Chesapeake (NYSE:CHK) and ConocoPhillips (NYSE:COP) have announced natural gas drilling cuts, XOM has continued to look for growth in natural gas production. While this move clearly points to the company's approach towards developing a long-term resource, it is expected to affect the near-term earnings potential.

Given the fact that XOM trades at a premium to its peers and its near-term headwinds, I expect its stock to see a correction in the near term, and have recently written a fairly detailed article on "Why You Should Avoid Exxon Despite Surging Oil Prices".

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.