Why T. Boone Pickens Loves These 2 Energy Stocks
As the U.S. economy underwent a heady boom in the 1950s, our nation’s energy needs grew at a rapid pace. Seizing an opening, legendary oilman T. Boone Pickens used his geology degree to become one of the energy industry’s most aggressive wildcatters. (These are folks who seek oil gushers in fields not necessarily known to hold any oil wells.)
He eventually sought a less risky path, founding in 1959 what later became Mesa Petroleum. Mesa bought or leased land that had proven oil reserves, delivering steady gains to his investors in the 1960s and 1970s.
By the early 1980s, Pickens changed tack again: His Mesa Petroleum pulled off a series of acquisitions of much larger firms, helping to create one of the nation’s largest independent energy producers. Instead of buying undervalued real estate and searching for oil, he sought undervalued companies that were already active drillers.
Fast forward to today, and Pickens’ approach has changed yet again. In recent years, his investment firm, BP Capital, has been content to buy and sell large chunks of other companies for his investment fund, without dealing with the messy actions of buyouts and mergers.
One thing has remained constant: Pickens likes to buy low and sell high. And of the numerous stock purchases that his BP Capital has made in recent months, two stand out as especially-deep value plays.
1. Marathon Oil |
Pickens’ BP Capital established an initial 185,000-share position in Marathon Oil (NYSE: MRO) in the fourth quarter of 2012 at an average price of $30.44. Though the stock had already been on the rise when he bought at about $30.40, it’s rallied further. Judging by the still-cheap valuation for Marathon Oil, Pickens may be able to secure 30% or 40% more upside in the stock’s value. Roughly a year ago, I wrote about this company, and though Marathon would go through unexpected developmental pains in 2012, the investment case in that article stands. Marathon possesses a strong base of real estate in the U.S. and elsewhere, and management shows a stronger hand when reining in costs and boosting cash flow. [See also: “The Latest Major Energy Discovery Could “Dwarf North Dakota”] |
2. Occidental Petroleum |
Just as Marathon’s nascent push into shale gas regions was initially poorly received by investors, Occidental Petroleum (NYSE: OXY) also recently fell out of favor. Goldman Sachs’ analysts note that 2012 was “one of Oxy’s more challenging years, arguably since the 1990s.” They note that a ramp-up in shale drilling and profits lagged forecasts throughout the year. Goldman has a $95 price target on the stock. Yet there’s a wildcard in play, which may be the reason why Pickens decided to establish a 63,000-share position (at an average price of $78 a share). The company known as Oxy Pete is sitting on massive Californian acreage. And signs are emerging that the Golden State may become the next major new shale region as regulations coalesce to support fracking (the deep-earth extraction of energy sources) in that state. [See also: “2 Top Ways to Profit from American Energy Independence”] |
Risks to Consider: Pickens’ energy picks are dependent on energy prices, and these two companies have made an increasingly aggressive shift toward natural gas in recent years.
Action to Take –> Pickens’ approach is simple. Marathon Oil and Occidental Petroleum possess a strong base of global drilling acreage, have been making increasing investments in U.S. shale gas plays, generate solid cash flow, and are trading at valuations slightly below the peer group. Pickens clearly prefers these over smaller, more speculative drillers.
P.S. — The abundance of natural gas in the U.S. could lead to a third industrial revolution. One analyst is predicting a stock could rise 1,566%. Another stock has already jumped more than 1,000% and is expected to keep going. To learn more about investing in the natural gas boom, click here.