I may be committing investing heresy by saying this, but following Warren Buffett in the energy space is not the way to go.
Yes, Warren Buffett is head and shoulders above the rest in the investing community and has a few decent energy investments the Berkshire Hathaway portfolio. If you are looking for possible investments in the energy space, though, you should look at another investor: T. Boone Pickens. He's been in the energy industry for more than 60 years, and his hedge fund, BP Capital, is dedicated almost exclusively to energy investments. Let's take a deeper look into BP Capital's portfolio and see if there are any themes that can help us with our own investment decisions
Don't be afraid of natural gas
While getting into the natural gas market only last year might have seemed like a losing proposition, today several companies are selling at pretty deep discounts to their underlying assets. Pickens and his team have a portfolio with more than 60% of of their exploration and production assets centered almost exclusively on natural gas. Both Southwestern Energy (NYSE: SWN ) and Range Resources (NYSE: RRC ) , two almost pure natural gas plays, make up more than 18% of BP Capital's total holdings.
Anyone who has followed Pickens shouldn't be surprised. Aside from his holdings with BP Capital, he also has a 20% personal stake in Clean Energy Fuels (NASDAQ: CLNE ) and has for several years been advocating for increased natural gas use through his Pickens Plan. It's comforting to see that he and his partners at BP Capital are putting their money where their mouths are when it comes to natural gas.
Diversity is the spice of life
According to a recent energy report by Barclays, capital expenditures for exploration and production are set to reach a record $644 billion in 2013. With so much money pouring into the oil service industry, it would almost seem foolish to not be a part of it. Clearly, BP Capital sees a great opportunity in this sector, because it has bumped its holdings of National Oilwell Varco (NYSE: NOV ) by 74% and picked up a considerable amount of shares in Weatherford International (NYSE: WFT ) . Overall, BP Capital increased its total exposure to the oil services industry from 12% to 21%.
The big jump in oil services was part of a transition for BP Capital. Over the past quarter, it reduced its exposure to the E&P space from almost 75% to just under 60%. The bulk of that change was a transition toward services companies, but the group also picked up a pretty large share in Freeport McMoRan (NYSE: FCX ) , the only company in the group's holdings that isn't considered a pure energy play.
No love for midstream
Probably the most glaring omission from BP Capital's portfolio is midstream and pipeline companies. There are two possible reasons:
- Much of the midstream business is in a mad scramble to build out pipeline networks across the United States, and the massive buildout to accommodate the boom in domestic energy production has these companies hurting, with so much capital tied up in new projects.
- BP Capital may be averse to investing in a partnership company. All of its current holdings are in common shares, and a majority of midstream companies in the U.S. and Canada are master limited partnerships. This is pure speculation; however, MLPs such as Vanguard Natural Resources (NASDAQ: VNR ) have stated during conference calls that they've seen institutional investors shy away from the partnership structure.
What a Fool believes
There are few investors who know the energy space better than Pickens, and those looking for investment ideas in the energy space would be wise to check out what BP Capital is buying from time to time. Is there's anything investors shouldn't do that Pickens does, it's to move assets as much as he does. From the previous quarter to this one, BP Capital jettisoned 22% of its holdings in four companies and picked up five new ones. Shuffling your own portfolio around like that will eat into your gains. Sometimes it's just better to stick to your guns, the way Buffett does, and hold for the long term.
Buffett's and Pickens' portfolios don't have much in common, but there is one stock at the heart of both of these superinvestors' investments: National Oilwell Varco. Not only does this oil-services giant pass the Buffett test of having an almost insurmountable economic moat, but it is also one company that has the most to gain from the unconventional oil and gas boom. To help determine if it could be a good fit for your portfolio, you're invited to check out The Motley Fool's premium research report featuring in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.