T. Boone Pickens Has Picked Chesapeake

This is clearly not the week to let on that, of the two Buffetts, I'd occasionally rather hear about Jimmy than about Warren.

After all, we're in the week following the publication of Warren Buffett's eagerly awaited annual letter to shareholders, which is tantamount to a holy week in the investment community. As such, my Foolish colleague Morgan Housel has done a yeoman's job of distilling the results of the Oracle of Omaha's latest cogitations.

From my perspective, which matters far less than Warren's -- as it clearly should -- given the dicey circumstances in much of our world today, investors must focus on energy as a sine qua non for their portfolios. However, Warren Buffett hasn't always had the best of luck with companies in the sector.

The Oracle's error
For instance, he admits to having made a mistake in buying so much of ConocoPhillips (NYSE: COP  ) in that Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) ultimately became its biggest shareholder as crude prices headed for $150 a barrel in 2008. As you know, however, those prices abruptly rolled over and beat a hasty retreat to near $30, dragging untold companies' share prices with them.

But I'm also not capable of claiming prescience on energy prices. My primary contention these days is that, simply looking at global supply and demand trends, along with our world's current geopolitical difficulties, it's unlikely that crude prices will head south appreciably.

Help with the picks
Given energy's historic volatility, I try to keep tabs on the pulse of several others who concentrate on the group. For instance, you likely know that T. Boone Pickens runs a Dallas-based energy fund, BP Capital, and is apt to seem omnipresent on your TV when oil is making news. Pickens is an octogenarian who's made more money from his fund since his 70th birthday than he did earlier in a long career as a geologist and energy company honcho.

Like many of us, he's concerned about the mounting turmoil in the Middle East -- "It's on fire" -- and about our nation's inability to develop an energy plan, despite the four decades that have passed since the first Arab oil embargo in the '70s. But beyond that, given his lifelong concentration on oil and gas, what energy names are closest to Pickens' heart these days?

The most accurate response resides in BP Capital's holdings. Reports filed by the likes of BP -- the fund, not the British member of Big Oil -- provide the names included in its portfolio, along with the rate at which its mangers bought and sold shares during the quarter. In BP Capital's case, you likely won't be surprised to learn that its biggest holding as of Dec. 31 was Chesapeake Energy (NYSE: CHK  ) , which happens to have a five-star Motley Fool CAPS ranking.

Next in line was BP (NYSE: BP  ) -- this time I'm referring to the London-based oil and gas behemoth -- which the fund's managers obviously believe will continue to claw its way back from its horrendous experiences in 2010. Immediately in line behind the top two names was McMoRan Exploration (NYSE: MMR  ) , the New Orleans-based producer.

And the winner is ...
Looking specifically at the top holding, however, it's hard to have any association with the U.S. energy industry without gaining a familiarity with Chesapeake. For starters, you probably know that the Oklahoma company is the nation's second-largest natural gas producer. It owes that position to its early entry into most of the major unconventional plays, including the Barnett, the Haynesville, and the Marcellus shale plays.

More recently, with oil-related activity in the Gulf of Mexico having declined, a host of producers have increasingly targeted unconventional plays that yield oil and other liquids, frequently along with gas. I'm referring here to the likes of the Eagle Ford play and the Permian Basin, both of which lie mostly in Texas, along with the Bakken formation in North Dakota and Montana. Chesapeake leads the parade in the increasingly active Eagle Ford, with a healthy 550,000-acre position.

A gaseous awakening
But despite his company's quest for liquids, its CEO, Aubrey McClendon, is among a sizable contingent (including yours truly) who believe that relegating gas to a perpetual third-class status behind oil and coal might lead to a rude awakening.

Indeed, McClendon would gladly tell you that our country's shale reserves likely contain in excess of 2 quadrillion cubic feet of natural gas, a nearly 200-year supply at today's usage rates. He also notes that those gas reserves are capable of providing more energy over time than Saudi Arabia's vast oil reserves. As such, he's somewhat chagrinned that only a handful of people realize that the U.S. passed Russia in 2009 as the world's biggest natural gas producer.

But beyond those macro trends, Chesapeake enjoys a bevy of operating and financial positives of its own. For instance, its production volumes were up 12% in the most recent quarter. And amazingly, the company's all-in drilling success rate (including both company-operated and non-operated wells) was a whopping 98% in 2010.

The bottom line
A "25/25 Plan" has been put in place with an eye toward reducing Chesapeake's long-term debt by 25% by the end of 2012. A big part of the plan involves monetizing assets, as it's done with the sale of its stake in the Niobrara shale project to China's CNOOC (NYSE: CEO  ) and its recently announced sale of its Fayetteville shale assets to BHP Billiton (NYSE: BHP  ) , the big Australian miner.

You'll discover other compelling aspects of Chesapeake if you're at all new to the story. For now, however, you're undoubtedly beginning to understand why the company plays so well with the likes of BP Capital and more than 170,000 Motley Fool CAPS players.  

Chesapeake Energy and Berkshire Hathaway are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor pick. CNOOC is a Motley Fool Global Gains recommendation. Motley Fool Alpha owns shares of Chesapeake Energy and Berkshire Hathaway. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies named in this article. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (11)

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  • Report this Comment On March 03, 2011, at 12:16 PM, RRobertsmith wrote:

    old and tired news...

  • Report this Comment On March 03, 2011, at 10:26 PM, Timerline wrote:

    I had a position in CHK but got out due to the probable future controversy/possible law suits over the waste water injections. BHP could back out of the deal, IMHO, due to this 'waxing' problem in Arkansas, possibly others.

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