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3 Ways to Invest Like T. Boone Pickens, and 1 Reason You Can't

By Tyler Crowe - Jan 19, 2014 at 3:41PM

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T. Boone Pickens has been a staple in the U.S. energy landscape for decades. Here are some ways you can invest like him.

Image Source: www.flickr.com/jurvetson.

T. Boone Pickens made his name through acquisition wheeling and dealing across the American energy landscape. Today he is a major advocate of American energy policy through the "Pickens Plan" and one of the top investors in Clean Energy Fuels (NASDAQ: CLNE). He also happens to have his own hedge fund, BP Capital, that deals almost exclusively in oil and gas. Energy investors can learn a lot by knowing what BP Capital invests in. However, there is one major reason that you and I should never invest like BP Capital. Let's take a look at what we can learn from the Pickens portfolio and why you shouldn't follow his portfolio to the letter. 

3 investing ideas from BP Capital
BP Capital's investment strategy is rather eclectic. Investments vary from independent oil and gas companies with market caps slightly more than $300 million, to ExxonMobil, an energy giant nearly 1,400 times that size. There are a few themes, though, that could be insightful for some energy investors.

  • Invest in the small, quiet companies: A number of oil and gas companies have garnered lots of media attention lately, but many of those that BP Capital owns fly under the radar. These are mostly small, independent oil and gas producers that focus on a single shale formation. One example is BP Capital's investment in Gastar Exploration (NYSEMKT: GST). This small company has mostly focused on drilling in the Marcellus shale, and has grown production by 55% year over year. Gastar is looking to start developing some assets in the midcontinent region it bought from Chesapeake Energy back in June. Small companies like this can go unnoticed from time to time, and picking them up in their infancy can lead to large returns. 
  • Refining is a good place to be right now: The refining industry can go through long periods of feast or and famine. Based on the boom in American oil production, though, it is very likely these companies are preparing for a feast. West Texas Intermediate, the domestic oil price benchmark, is trading at a $13 discount to international price benchmarks. This means domestic refiners are getting cheap feedstocks. For Valero (VLO 1.33%) and Phillips 66 (PSX 0.05%)-- two positions in BP Capital's portfolio -- this could lead to some fantastic returns as they both export large portions of their production to premium markets such as Latin America and Europe. 
  • Sell picks and shovels, don't dig for gold: Nearly 19% of BP Capital's portfolio is invested in oil-services companies. Weatherford International (NYSE: WFT) and Halliburton (HAL 0.76%) were two of the three largest pickups over the past quarter, with total invested increasing by 44% and 61%, respectively. Some may question these moves since both Weatherford and Halliburton have seen EBITDA decreases of 7.7% and 10.2%, respectively, over the past year or so. However, both of these companies generate much of their revenue from the North American market, which has been extremely competitive over the past year as companies drill less for natural gas. This could change, though, as companies start to ramp up for LNG facilities coming online in 2015

Following these trends much like Pickens has done with BP Capital could lead to some strong returns over the next couple of years as the fast-paced boom in oil and gas production in the U.S. unfolds. 

What Pickens does that you shouldn't
Having hundreds of millions of dollars to throw around in a hedge fund provides certain luxuries that you and I simply don't have as individual investors. One of those advantages is that Pickens and his hedge fund can frequently trade in and out of stocks without incurring painful transaction fees. In the third quarter of last year, BP Capital made buys or sells on all but one of its 30 positions. The turnover on BP Capital's portfolio was so drastic that its largest position of the previous quarter, Apache, was completely sold off within 90 days. Also, disclosures to the SEC are just a snapshot of the company's positions at two points of time; there is no telling how much buying and selling happened between them.

Unless you have your own seat on the exchange, it would be extremely costly to trade in and out of positions so frequently. Sure, you may be able to catch the headwinds of a few overperforming energy stocks from time to time, but the fees you would incur going in and out of positions will more than likely eat a large chunk of those returns. 

What a Fool believes
Everyone out there has a different investing style, and normally that style will work for that person and that person alone. Looking at the portfolios of people like T. Boone Pickens can be a great way to get investment ideas in the energy space, but keep in mind that your time horizon for investing may be wildly different than that of BP Capital.

Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter @TylerCroweFool.

The Motley Fool recommends Clean Energy Fuels and Halliburton. 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. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Valero Energy Corporation Stock Quote
Valero Energy Corporation
VLO
$106.39 (1.33%) $1.40
Phillips 66 Stock Quote
Phillips 66
PSX
$83.80 (0.05%) $0.04
Halliburton Company Stock Quote
Halliburton Company
HAL
$28.00 (0.76%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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