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Pickens Still Bullish on Oil Stocks

By Michael Carr   |   Wednesday, 05 Nov 2008 02:10 PM

Billionaire investor T. Boone Pickens made his fortune in oil and gas. He then deployed his wealth as a corporate raider in the 1980s, targeting companies he considered undervalued.

These days, through his hedge fund BP Capital Management, Pickens occasionally reprises his role as an activist investor. For instance, he recently sided with Carl Icahn in what turned out to be an unsuccessful attempt to force Yahoo! to sell itself to Microsoft.

If you watch TV at all, you also know that Pickens has serious alternative energy plans. The billionaire took out millions in ad time to promote his ideas about how to wean America off foreign oil, which he has fashioned as the Pickens Plan.

Using his own money (his worth is $3 billion, according to Forbes), combined with a large amount of government funds, Pickens will oversee investments totaling $6 billion to $10 billion in wind farms.

By 2012, Pickens expects to build 2,700 wind turbines that would supply enough electricity to power 1 million homes.

Despite his recent, widely publicized push for alternative energy, Pickens is still bullish on oil, both in his public outlook and in his investing activities. Lately, he has been taking stakes in undervalued, dividend-paying energy companies.

Sure, his fund has taken a big hit lately. The scramble for the exits on redemptions reached nearly half his investors. But that doesn’t mean that Pickens has forgotten how to make money in oil, and he has vowed to spring back.

For this week's screen, I used the common characteristics of these purchases and identified the following screening criteria:

• Only energy stocks that pay a dividend were considered. Additionally, the dividend payout ratio needs to be less than half of current earnings. This provides a margin of safety to the investment and cushions the dividend against an earnings downturn.

• The price-to-book ratio should be below the average ratio for all stocks, indicating the company may be undervalued by the market.

• The company should have positive earnings estimates for this year and next year.

• The stock price should be outperforming at least half of all stocks over the past six months, indicating that it has performed better than average during the grueling bear market. Stocks which go down the least in market declines are often among the biggest gainers after a bottom is in.

There are 10 stocks on this week's list, offering a portfolio yield of 2.9 percent and an average P/E ratio of 7. These values compare with the current market yield of 2.3 percent and a P/E ratio of 13, as measured by the S&P 500.

Here is the result, a Pickens plan for oil investing:

Apache (APA) is an oil and natural gas exploration and development company which operates in six countries. Most of its efforts are centered in North America. With almost $2 billion in cash on hand, APA is well positioned to boost growth by acquiring competitors in a weak oil market. Recent price: 83.20.

BP (BP) offers investors a 6.8 percent dividend yield at its recent price of 51.26. Its P/E ratio is only 6, half of its five-year average of 12.

Chevron (CVX) was recently trading at 78.19. The company earned $7.9 billion last quarter on higher oil prices, but will see earnings decline as the price of oil slides lower. CVX trades at a P/E ratio of 8.

Cimarex Energy (XEC) produces gas in Texas, Oklahoma, New Mexico, Kansas, Louisiana, and Wyoming. The company expects to be able to grow earnings by at least 10 percent a year even with lower oil prices. Being nearly debt-free will help XEC remain profitable. The stock recently closed at 38.75.

Devon Energy (DVN) owns oil and gas properties in the U.S. and Canada. It also is involved in exploration in riskier emerging markets, such as Azerbaijan, Brazil, China, and several West African countries. Last month, JPMorgan included DVN, which closed recently at 83, in "The Franchise 16," a group of companies that it thinks may outperform the U.S. and global stock markets over the next 12 to 18 months.

Occidental Petroleum (OXY) is an oil and gas company which also has a subsidiary that manufactures and markets chemicals such as chlorine, caustic soda, and PVC. At a recent price of 58.08, OXY has a P/E ratio of 6 and a history of growing earning per share by an average of 40 percent a year over the past five years.

Royal Dutch Shell (RDS) at a recent price of 59.53, RDS pays a 5.8 percent dividend yield and has a P/E ratio of only 5. This giant company has a return on equity of more than 28 percent, twice the average of companies in its sector.

RPC (RES) is an oilfield services provider. Companies controlled by famed value investor Mario Gabelli own about 7 percent of RES. Recent price: 10.83.

Tidewater (TDW) owns and operates a fleet of offshore supply boats that provide supplies to offshore oil and gas facilities. Analysts are forecasting earnings per share growth of 57 percent a year for the next five years. At the recent price of 45.87, this high growth rate comes with a 2.3 percent dividend yield.

Total (TOT) is a French integrated international oil and gas company with operations in more than 130 countries. In Russia, TOT is partnering with Gazprom to develop the giant Shtokman offshore gas field. The company yields almost 5 percent at the recent price of 58.

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MichaelCarr
Billionaire investor T. Boone Pickens made his fortune in oil and gas. He then deployed his wealth as a corporate raider in the 1980s, targeting companies he considered undervalued. These days, through his hedge fund BP Capital Management, Pickens occasionally reprises his...
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