The Complete User's Guide to T. Boone Pickens

T. Boone Pickens is perhaps the world's greatest oil investor. He's been drilling for oil, buying oil companies and running oil-based hedge funds since 1951 and right now he's saying oil will top last year's high of $78.80 and break through $80. "You will have to stop the demand with price," he said at a recent Milken Conference.

Pickens believe that Peak Oil, the point after world oil production reaches maximum output, will occur sooner than later. In his fund, BP Capital -- which tripled in 2005 and rose 30% in 2006 -- he picks stocks that he feels will rise dramatically due to higher oil. He likes offshore drillers, alternative energy, nuclear power, natural gas, and oil. At Stockpickr.com we keep track of all of Pickens's holdings (see link on the right).

What makes Pickens great to follow is that his investments are long-term and consistent with a single theme. He's not actively trading these but building positions for the long-term as he sees increased demand for oil from the developing global economy, overwhelming the soon-to-be limited supply.

Do You Know the Way to GlobalSantaFe?

Pickens has invested $79 million in GlobalSantaFe Corp. (GSF), his third largest holding. In the quarter ending Dec. 31, 2006, he bought 524,359 shares of the company, bringing his total to 1,351,787 shares. GSF provides offshore drilling services to the oil and gas industry and operates a fleet of rigs in the Gulf of Mexico, the North Sea, West Africa and the Middle East.

When oil was near $50 earlier this year, Pickens said it would hit bottom and rise. It did and shares of GSF followed. The share price, which was skirting $54, is now 20% higher at $65 along with the price of oil which has recovered to the mid-60s. The stock appears to have a ways to go. Analysts are projecting GSF will earn $7.14 per share this year and $9.09 next year, up from $3.77 in 2006, putting GSF's forward P/E at about just seven.

With operating earnings exceeding $1 billion and net debt of just $220 million it's an excellent takeover. In a recent analyst note, Citigroup targeted GSF as the most likely company to get taken over by Norwegian driller, Seadrill, which has been acquisitive in the space. GSF may also leverage up and buyback shares. And Pickens isn't the only super investor making this bet. George Soros has been accumulating GSF in anticipation of higher oil prices.

Here Comes the Suncor

Given his belief in $100 per barrel oil, Pickens is also looking for energy alternatives so he has invested in several natural gas companies. His largest position, worth $139 million, is Suncor Energy (SU).

Suncor's two main segments are oil sands, which recover oil from places where it's typically more expensive extract oil, like the tar sands of Canada, and natural gas. Suncor acquires, develops, and produces natural gas from reserves in western Canada.

Suncor trades at ten times cash flows but we don't yet know the full potential of this company. If and when oil hits $80 per barrel, oil companies will have to increasingly looking towards natural gas reserves and the Canadian tar sands for oil. Pickens is making a huge bet that this is the future of energy production. Morgan Stanley has Suncor in its model portfolio (see link to the right) and a $110 price-target on the stock.

EOG Looks A.O.K.

Another Pickens natural gas play is EOG Resources (EOG), which is involved in the exploration, marketing, and distribution of natural gas. The company trades for just 6.4 times cash flows and can certainly be acquired, with analysts expecting earnings per share to rise from $4.72 this year to $5.46 in 2008.

EOG has exceeded analyst expectations for the past four straight quarters. EOG is also one of the top 25 best performing stocks since the bear market began on March 20, 2000, with a return of 626% since then.

Greenbrier on Track for More Green

An interesting small cap play for Pickens is the railroad company Greenbrier (GBX). This company manufactures railcars for the transportation of everything from grain and solid waste to pressurized tank cars for transporting liquid petroleum gas, light oil, and ethanol.

As we become more dependent on fuel sources that can be transported via pipeline (like ethanol for instance), Greenbrier should enjoy greater demand. In fact, analysts already expect that Greenbrier will roughly double earnings from $1.18 per share in fiscal 2006 to $2.27 per share in fiscal 2007, ending in August, giving the stock a P/E of just 11 times forward earnings.

Pickens has investments in every aspect of what I like to call the "peak oil infrastructure." These companies are doing well now and trade at low multiples to cash flows (making them attractive buyout candidates) but also do well if and when oil prices top $80.

James Altucher is founder and CEO of Stockpickr.com, author of the book "Trade Like Warren Buffett" and partner at Formula Capital.

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