T. Boone Pickens, a oil trader and guru, is shutting his hedge-fund focused on energy. He revealed to the WSJ his health is declining and returns have not been great. This is only the last among a number of high profile (value) investors shutting funds. Richard Perry (Trades, Portfolio) shut down a fund after 26 years in 2016. Hugh Henry shut his fund in 2017. The move from passive towards active is taking a toll on value minded managers. Pickens built his entire and remarkable career on energy business & trading:
In 2006, Pickens earned $990 million from his equity in the two funds and $120 million from his share of the 20% fees applied to fund profits.[15] In 2007, Pickens earned $2.7 billion, as BP Capital Equity Fund grew by 24% after fees, and the then $590 million Capital Commodity fund grew 40%, thanks to, among others, large positions in the stocks of Suncor Energy, ExxonMobil and Occidental Petroleum.[16]
Pickens' most recent recognition comes from The Franklin Institute in Philadelphia. T. Boone Pickens received the 2009 Bower Award for Business Leadership for 50 years of visionary leadership in oil and other types of energy production, including domestic renewable energy, and for his philanthropic leadership contributing to education, medical research, and wildlife conservation. [17]
Pickens is known for his volatile returns and ability to make big bets. I've been looking at his portfolio for the past few years looking for great energy ideas to research. With that opportunity fleeting I wanted to research and highlight his current portfolio as tracked by GuruFocus:
If we look at his current portfolio the big bet isn't immediately obvious. If you look through the names among his top 20 positions you will find in excess of 30% of his portfolio is actually invested in midstream aka pipeline companies.
Enterprise Product Partners (EPD, Financial) is his largest position. This is a company with an extremely valuable network of midstream assets in oil & gas. Natural gas is very important to the firm. In addition it has a really terrific management team who own quite a bit of equity in the operation. There's a good reason for it being undervalued as it recently lowered its guidance for forward distributions. These midstream firms are often bought as yield plays and income investors tend to react poorly to distribution cuts.
Pipelines in general are terrific assets because they hold a competitive cost advantage over other forms of transportation. Even transport by rail is signficantly more expensive. Generally a competitor won't build another pipeline to serve the exact same route as that's very expensive but there's isn't always enough demand to support both pipelines. If demand grows the original pipeline can usually be expanded at lower cost. Anyone who ever turns on business radio is aware of the difficulties and cost of building a pipeline. The NIMBY attitude is strong and it is generally fought tooth and nail. Usually customers are locked into very long term contracts up to two decades which prevents them from switching to a competitor even IF a competing pipeline got built.
From a historical perspective the pipelines still look rather cheap and perhaps Pickens is closing his fund prematurely. Ironically, fund closings
Ideas that look particularly attractive to me include Enterprise Product Partners (EPD, Financial), Williams Partners (WPZ, Financial) and Energy Transfer Partners (ETP, Financial) because of their attractive high value asset base, great management teams and low valuations.
Disclosure: Author is long WPZ.
