In late December 2014, oilman and investor T. Boone Pickens predicted the price of oil would rebound within 12 to 18 months, driven by falling production in the U.S. that should reduce supply. Part of that prediction has already come to pass: As of March 6, 600 U.S. onshore rigs have been taken out of operation:
That's a 33% reduction in the rig count, and further drops are likely before the situation stabilizes. It's also worth noting that the data above covers both oil and gas rigs. Drilling down to oil wells looks like this:
|Rig Type||3/6||Change||2/27||Last year||Change|
Furthermore, it's important to differentiate rigs from wells. Reduced rigs simply means slowing production growth, as fewer new wells will be drilled this year. However, production levels are probably going to increase to some degree before also eventually stabilizing. After all, more than 900 rigs are still drilling new oil wells today.
With that in mind, let's look at investment moves Pickens' hedge fund made last quarter, according to the company's 13F filing with the Securities and Exchange Commission, to see where this oil tycoon is putting his money.
Stocking up on dry powder?
Pickens' fund sold a lot more stocks than it bought last quarter, selling all of or reducing its stake in 22 companies while investing in shares of 19 companies. The fund's 10 largest holdings make up almost 75% of the stock portfolio; with just three exceptions, the fund reduced each position between 5% and 43% in the quarter.
The three exceptions were oil and gas producers Cimarex Energy Co. (NYSE:XEC), Concho Resources (NYSE:CXO), and Southwestern Energy Co. (NYSE:SWN), which also operates natural gas pipelines. Concho Resources and Southwestern Energy are both new positions in the portfolio, while the fund increased its stake in Cimarex Energy by 28%.
The value of the stock portfolio was more than $102 million in the prior quarter, but fell to $51 million at the end of 2014, while the fund reported more than $487 million in regulatory assets under management. Did Pickens and his portfolio managers decide to build up their cash position, expecting oil prices to continue falling in the quarter? It's possible.
Oil prices set to recover?
Here's what oil prices did during the period the most recent 13F covers, through this week:
As you probably already know, the price of both Brent (the global standard) and West Texas Intermediate crude (the domestic benchmark) dipped further over the entire fourth quarter and into January, before beginning to rebound last month. Crucially, the price of West Texas Intermediate -- which is much closer to the price at which American producers sell their oil -- still rests well below the price of Brent crude.
How did the three top 10 stocks Pickens bought last quarter hold up?
Big fat caveat
As you can see, all are still well down from the beginning of October, but we don't know when Pickens' hedge fund bought the shares. If the purchases occurred closer to the end of December, then Cimarex and Concho Resources are already profitable investments.
This brings up an important point about 13Fs: They don't give us the ability to copy a "big money" investor and expect the same results, because they are released up to six months after the quarter they cover began. This is not exactly "hot off the presses" information.
Looking for trends
This is probably a better use of 13Fs, especially those for active-trading funds such as Pickens'. With that in mind, looking at the fund's top three holdings shows a clear trend:
Marathon Petroleum Corp. (NYSE:MPC), HollyFrontier Corp. (NYSE:HFC), and Valero Energy Corp. (NYSE:VLO) made up more than 27% of the stock portfolio at the beginning of the year, and all three are refiners and marketers of oil products. Refiners are much less affected by oil prices, and can actually benefit from falling prices. Since these companies don't drill the oil, they don't have direct exposure to cheap oil and high production costs. They simply buy the crude, and then refine it into gasoline, diesel, jet fuel, and other commodities, and then sell those products.
In short, demand for refined products is much more important to these companies, whose biggest risk is falling demand and relatively high fixed costs. However, there's significant evidence that falling oil prices are increasing demand, as people will consume more if prices are low. Improving economic conditions in the U.S. are also driving up demand.
Finding the right fit for your portfolio
While refiners are a great business to invest in, especially in this cheap oil environment, their relatively moderate growth prospects could mean they are not right for your portfolio. Refining is a capital-intensive business, and outside of mergers and acquisitions, there's little organic growth to be had. With that said, they all pay a reasonable dividend, and their business models will reward investors with dividend growth over time.
But if you're looking for growth, independent producers are likely to offer the best opportunities right now, particularly since the entire industry's stocks have been hammered since last summer. The next few quarters' earnings reports will tell us a lot about which producers are best positioned to ride out the current environment, and make big profits when oil prices rebound. Is Pickens making the right calls with his bets on the producers, or will his bigger holdings in refiners be the better long-term call? Only time will tell.