“In 1949 my dad told me ‘you better get a plan,’” Pickens later recalled. “He said ‘a fool with a plan can beat a genius with no plan. Your mother and I think we have a fool with no plan.’” (Investopedia)
He has been accused of many things, including corporate raiding and greenmail, but T Boone Pickens (Trades, Portfolio) has outlasted his critics; no doubt because he had plans, ambitious plans.
Pickens is best known for being a pioneer for shareholder value and natural gas, but he has also been a hedge fund manager since 1997. While we do not have specific results, he apparently enjoyed success—at least until recently.
In early 2018, he decided to convert his hedge funds into “family offices” because of poor recent results and several health challenges.
Who is Pickens?
Born in 1928 to an oil landman and enterprising mother, Pickens spent his early years in Holdenville, Oklahoma. Investopedia reports the family moved, in late 1930s, to Amarillo, Texas, where his father had another oil job. Pickens became an entrepreneur as a 12-year old; he started with one paper route, saved his money and bought routes from other paper boys. The guru calls this his introduction to expanding quickly by acquisition.
He graduated college with a geology degree in 1951, and then spent three years at Phillips Petroleum (now Phillips 66 (PSX)). According to his website, Pickens then borrowed $2,500 to create Petroleum Exploration Inc. and Altair Oil & Gas. In 1956, he merged the two firms to create Mesa Petroleum, and its stock began trading on the American Stock Exchange in 1967.
It was not long after, just a year, when Pickens began applying the lesson he learned from his paper delivery days. Pickens thought Hugoton Production Company, an oil and gas company 30 times bigger than Mesa, was being badly run and not getting enough for its natural gas. He was initially rejected and began a hostile takeover bid. Ultimately, he succeeded, made other acquisitions and Mesa became one of the biggest independents in the world by the early 1980s.
As he continued his campaign to take over poorly-run companies, he began to voice the shareholder value mantra. At the time, it was considered a radical idea, but by the 1990s the idea that companies belonged to shareholders, not management, had become firmly entrenched among investors.
Pickens made several mistakes in the early and mid-1990s and ended up selling Mesa in 1996. He bounced back in 1997 by starting two energy-oriented hedge funds.
Plans were obviously well advanced when he set out on his own in 1954, created Mesa in 1956, became an activist investor and by taking up the financial side after retiring from the exploration and production side of the industry.
Current operations
Under the banner of BP Energy Advisors (formerly BP Capital Management), Pickens launched the Capital Commodity and Capital Equity funds.
The company and its holdings evolved, and in recent years had two operations. BP Capital Energy Advisors LLC was set up 2013 as a registered investment advisor. It provided this service to BP Natural Gas Partners LP. The Form ADV Part 2A lists it as a private equity fund focused on middle-market (including pipelines), natural gas-related investments in North America. It was fully owned by BP Energy Partners LLC. As of March 31, the fund had about $239 million in discretionary assets under management.
The other entity that filed a Form ADV Part 2A brochure in 2017 was BP Capital Fund Advisors LLC. It too was a registered investment advisor. It offered, to pooled investment vehicles and separately managed accounts, two mutual funds:
- BP Capital TwinLine Energy A (BPEAX), which was also available as an institutional fund. Its inception was December 2013.
- BP Capital TwinLine MLP A (BPMAX) was also available as an institutional fund. Its inception was also December 2013.
Almost all of that is gone now. On Jan. 12, the Wall Street Journal reported Pickens was converting BP Capital into a family office structure. The 89-year-old Pickens cited poor health and financial setbacks, and announced key employees would be going out on their own.
Strategies
In the BP Capital Advisors Brochure, the firm sets out its Energy Value Chain Strategy, which is appropriate because Pickens is a lifelong energy investor.
The first section of the strategy deals with philosophy and context. Specifically, the firm looks for total return from capital appreciation through investments in upstream, middle and downstream oil and gas companies. More specifically, it favors companies that match its “American Energy and Industrial Renaissance” paradigm. That refers to companies able to unlock oil and gas sources with new technologies, but technologies that also have the potential to offer an enduring competitive advantage.
The second section deals with its investment process. This involves fundamental and quantitative analysis of macroeconomic and commodity factors. It seeks companies with strong balance sheets, free cash flow generation, earnings and revenue growth, pricing power and a sustainable competitive advantage.
Third is portfolio construction; it starts with a target of 80% equity and debt securities. It operates with no capitalization restrictions; it may also invest in energy-related MLPs and junk bonds.
As to the “chain” in Energy Value Chain, that refers to the types of companies it follows. The major players are:
- Energy companies (on the supply side).
- Industrial companies that are expected to benefit from growing U.S. energy production.
- Infrastructure companies that provide services or products that enable the connectivity of energy supply and demand.
- Transportation and logistics companies, providing transportation and logistics to the U.S. manufacturing industry.
Pickens is also well known for his natural gas advocacy. In a 2015 Time article, he wrote: “More than ever, we need to move our heavy-duty trucks from diesel to natural gas,” arguing “It will improve our balance of trade, it will improve our environment, and it will remove the last marked card from OPEC’s poker hand over our national security.”
The guru did his part to encourage use of natural gas in the trucking industry. In 1996, Pickens and Andrew Littlefair, who was to become CEO of the new entity, spun off Mesa’s natural gas fueling business. First named Pickens Fuel Corp., the company later adopted the name Clean Energy Fuels (CLNE, Financial)Â and went public on the Nasdaq in 2007.
In 2008, he launched the Pickens Plan, a self-funded, $100 million campaign to reduce America's dependence on OPEC oil. The plan has four pillars:
- Use natural gas to replace imported oil for fleets and heavy trucks.
- Build a "21st century backbone electrical transmission grid."
- Develop renewable energy sources such as wind and solar power.
- Increase energy efficiency in homes and commercial buildings; this can be done with technological improvements and upgraded insulation.
Many plans come through in reviewing Pickens’ strategy: specialization in the petroleum industry, laying out the “chain” as a tool for consistent investing, stimulating the natural gas industry and, of course, the Pickens Plan.
Holdings
Before BP Capital/Energy was wound down in early January, it had this sectoral profile:
This profile, from the end of the third quarter of 2017, shows how heavily Pickens and his firm had invested in energy. That’s also reflected in his top 10 equity holdings:
- Enterprise Products Partners LP (EPD, Financial): 4.54%
- Phillips 66 Partners LP (PSXP, Financial): 4.28%
- Williams Partners LP (WPZ, Financial): 4.2%
- MPLX LP Partnership Units (MPLX, Financial): 3.4%
- Energy Transfer Partners LP (ETP, Financial): 3.39%
- Buckeye Partners LP (BPL, Financial): 3.09%
- Targa Resources Corp (TRGP, Financial): 3.08%
- Western Gas Partners LP (WES, Financial): 2.77%
- Diamondback Energy Inc. (FANG, Financial): 2.51%
- RSP Permian Inc. (RSPP, Financial): 2.42%
One might wonder why Pickens would shutter his fund when oil seems to be clawing its way back from the depths it hit a couple of years ago. However, charts of the first five holdings are not encouraging, despite increasing oil prices. This five-year chart for Energy Transfer Partners is typical:
As others have noted about the industry in general, a recovery in oil prices does not necessarily lead to a recovery in oil company share prices.
Performance
Over a 61-year career, Pickens has been up and down; not only because of the volatility of the petroleum industry, but also because of his proclivity for big bets. When they worked, the rewards were very high. And when they didn’t work, the penalties were just as high.
Overall, though, he built Mesa Petroleum into a huge industry player, notwithstanding the weak final years. That growth, along with the willingness of major investors to invest in his later ventures, suggest strong success in creating shareholder and client value.
Results are available for the TwinLine Funds, which launched four years ago. They paint a bleak picture despite those recent increases in the price of oil. This table, from the BP Capital Funds website, shows the results for the TwinLine Energy Fund to Dec. 31, 2017:
The TwinLine MLP Fund shows similar results: down 1.67% since inception.
Bottom line: If you were fortunate enough to invest with him at the right times, you might do very well. However, market-timing and guru-timing are unforeseeable, so expect as many losses as wins and hope the wins are big enough to compensate for the losses.
Conclusion
Pickens has often said that a fool with a plan will beat a genius without a plan. Obviously, it has worked well for him. He has not had just a plan, he has had several plans. The most ambitious and successful of them was Mesa Petroleum.
For value investors, a couple of takeaways: First, pick a field or limited number of fields and focus on it or them. Really know the companies in which you plan to become an owner. That's how Pickens was able to grow Mesa so quickly.
Second, do your fundamental analysis after you have created a short list of suitable companies. Know what makes each candidate company strong or weak, and then look for quality in the fundamentals.
Third, persist. Oil may enjoy a sudden rebound soon, so perhaps Pickens would have stayed the course had he not suffered serious health problems. He has certainly been persistent through multiple oil cycles, as an advocate for shareholder rights and for enhancing national security through the use of natural gas.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
