5 T. Boone Pickens Plays

by Aaron Levitt | October 3, 2012 6:30 am

Pickens 5 T. Boone Pickens PlaysWhen T. Boone Pickens speaks, investors should listen.

Like Bill Gross and bonds, the former oilman and current head of BP Capital is 100% focused in his core competency — energy. To that end, Pickens’ bold calls have made him a legend in oil & gas markets, as well as a billionaire.

Speaking to CNBC’s Closing Bell this past Wednesday, Pickens continued his bullish stance on long-term energy prices and equities within the sector. Overall, the legendary oilman predicts some pretty good times ahead for energy.

Pickens’ first call was that oil prices will stay elevated and probably will not fall much further — perhaps only $5 or so per barrel. That’s certainly encouraging news as slow economic growth across key regions like Europe and China have taken much of the wind out of oil’s sails. Brent crude has dropped about $10 from the highs it hit in mid-September.

Perhaps more bullish was Pickens’ prediction for natural gas. The hedge fund manager expects the fuel to trade at roughly $4 per million Btu by the end of this year. The hydraulic fracturing revolution sweeping the nation has created a glut and has sent natural gas prices toward historic lows. Currently, natural gas can be had for around $3 per million Btu.

Certainly, these are bullish calls for the energy sector given the myriad factors facing it[1]. For investors, if Pickens’ calls come to pass, it could mean some big profits — if you pick the right stocks. Here are five that investors should consider:

EnCana

Encana185 5 T. Boone Pickens PlaysFalling natural gas prices have not been kind to shareholders of EnCana (NYSE:ECA[2]). While shares of the beleaguered Canadian giant have bounced back from their lows, they still are well below historical highs.

Pickens’ bullish natural gas call — if it comes true — will be a welcome sign for EnCana, which has operations entirely in Canada and United States. Low dry-gas prices have been a yoke around the E&P firm’s neck for roughly a year. EnCana has moved into more liquids-rich plays such as Canada’s Duvernay Shale[3], but the bulk of its drilling programs still focus on dry-gas. Any rise in price will have an immediate effect on its bottom line.

InvestorPlace technician Sam Collins recently highlighted EnCana as a buy[4], as ECA shares have now exhibited a strong long-term buy signal called a “golden cross.” EnCana also is an attractive proposition for income investors, as it currently yields 3.6% in dividends.

Quicksilver Resources

Quicksilver185 5 T. Boone Pickens PlaysSmall-cap Quicksilver Resources (NYSE:KWK[5]) could be one of the best rocket-ship plays for rising natural gas and oil prices. The company focuses primarily on unconventional reservoirs[6], such as fractured shales, coal beds and tight sands, and as such, the firm is highly levered in its production — with 96% of its total coming from natural gas and NGLs.

Fallen prices caused Quicksilver to post lackluster top- and bottom-line performance during the second quarter. However, the firm’s strong financial profile, along with successful hedging programs, should keep it afloat in the short-term. Likewise, Quicksilver’s successful J.V. deals and steady progress in the Horn River Basin and Niobrara shale will be profitable in the future if Pickens’ natural gas predictions do not come true.

If they do — watch out, as the company’s shares could pop. Already, KWK has risen steadily from its lows as natural gas has regained its footing.

Chesapeake Energy

chesapeake 5 T. Boone Pickens Plays

Asset sales and scandal aside[7], Chesapeake Energy (NYSE:CHK[8]) still is the second-largest pure natural gas player in the United States — and that could make it a screaming buy if Pickens’ call turns out to be correct.

The firm’s second-quarter production increased 25% year-over-year with natural gas comprising 79% of that total volume. Chesapeake also increased its exposure to various liquids-rich plays as prices remain weak.

Perhaps more importantly, the company’s aggressive divestiture program seems to be bearing fruit as it has been able to reduce its debt burden. This high debt was mainly caused by persistently low natural gas prices and the rising capital cost of drilling. During the first half of 2012, Chesapeake sold $4.7 billion worth of assets and expects to end its third quarter with $7 billion worth of asset divestitures.

Shares of the natural gas player can be had for dirt-cheap P/E of less than 7, and CHK yields a respectable 1.9% in dividends. Given the bullish prediction for natural gas prices and the fact that it’s heavily tied to the fuel, Chesapeake finally might be a bargain for investors.

United States Natural Gas Fund

UNG185 5 T. Boone Pickens PlaysOver the long-term, the United States Natural Gas Fund (NYSE:UNG[9]) has been tagged as one of the worst wealth-destroying ETFs on the market due to the factors of backwardation and contango. However — in the short-term — the ETF is a pretty lucrative vehicle for investors to play the pops and drops in natural gas.

It stands to reason that a rise in prices will cause UNG to rise. For investors, that allows them to gain some allocation to the direct commodity. While I’m not advocating investors give up their day jobs and become traders, some tactical exposure to natural gas pricing could do a portfolio some good.

The fund currently holds nearly $1.1 billion in assets and trades more than 10 million shares each day. That makes it the best choice for more “short-term” portfolio aspirations[10].

I just wouldn’t hold it for very long.

First Trust ISE Revere Natural Gas Index Fund

FirstTrust185 5 T. Boone Pickens PlaysGiven the fact that so many U.S. energy firms have invested heavily in natural gas production during the past few years, a broad approach could be best and the First Trust ISE Revere Natural Gas Index Fund (NYSE:FCG[11]) is the best way to do that.

The ETF tracks 31 different energy producers that derive a substantial portion of their revenues from the exploration and production of natural gas. This includes exposure to large-, mid- and small-cap firms, as well as plenty of potential takeover targets, such as Range Resources (NYSE:RRC[12]).

So far, the ETF has been a real stinker[13], falling about 9.5% this year after losing 7% in 2011. This can be attributed to the continued decline in natural gas prices. However, if Pickens’ prediction comes true, the broad-based fund could charge. And you can get in for a relatively cheap 0.6% in expenses.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Endnotes:
  1. myriad factors facing it: http://investorplace.com/2012/09/get-ready-for-a-fourth-quarter-sale-on-energy-stocks/
  2. ECA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECA
  3. Duvernay Shale: http://investorplace.com/2012/09/all-eyes-on-canada-for-next-big-shale-play/
  4. recently highlighted EnCana as a buy: http://investorplace.com/2012/10/trade-of-the-day-encana-corp-nyseeca/
  5. KWK: http://studio-5.financialcontent.com/investplace/quote?Symbol=KWK
  6. unconventional reservoirs: http://investorplace.com/2012/09/3-plays-in-frackings-secret-ingredient/
  7. Asset sales and scandal aside: http://www.investorplace.com/2012/08/is-chesapeake-crawling-back/
  8. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  9. UNG: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNG
  10. more “short-term” portfolio aspirations: http://investorplace.com/2012/08/short-term-hedges-for-your-energy-bets/
  11. FCG: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCG
  12. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  13. the ETF has been a real stinker: http://investorplace.com/2012/07/a-new-contender-for-your-high-yield-dollar-ubs-amu/

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