Striking while oil is hot

Boone Pickens’ calls that prices would keep rising have paid off big
By Sudeep Reddy –
As oil surged toward $55 a barrel last week, Boone Pickens and his energy investment funds had their most profitable day ever.
But the 77-year-old sat quietly in his Dallas office without celebration. When making bets in the volatile oil and gas markets, Mr. Pickens says, he’s taught his team to look past daily fluctuations as they manage some $2.5 billion for him and wealthy investors.

“You don’t get up high on a high day and you don’t get your chin on the table on a low day,” said Mr. Pickens, who declines to disclose publicly the precise day-to-day changes in his funds.
The legendary oilman gained his fame as a corporate raider in the 1980s, driving up the stocks of energy firms such as Gulf Oil Corp. and Unocal Corp. with his hostile takeover attempts.
Today, he’s offering public predictions about oil and gas prices while managing investments at BP Capital, the firm he launched in 1997 after selling Mesa Petroleum.
So far, his predictions have been on target.
Last May, as crude oil flew past $40 a barrel, Mr. Pickens offered that it would hit $50 a barrel before it hit $30 again. He went even further in September, betting oil would hit $60 before it reached $40 again.
The latest prediction held true in electronic trading, though oil hasn’t topped $58.28 in regular trading.
Mr. Pickens isn’t strongly pushing the $70-before-$50 view now, but he says oil only has one direction to go over the long term as the supply-demand fundamentals get tighter.
“We’re still convinced that production globally has maxed out,” Mr. Pickens said. “If it isn’t, it’s very close.”
Even as oil dipped below $47 last month, Mr. Pickens said he was secure in his view about the general trend.
“I think you’ll be back to $60 before year-end for sure,” he said. He has also predicted $3 gasoline by next year.
Driving force
The bullish outlook has been the driving force behind BP Capital’s investments.
Mr. Pickens and an investment committee of about 10 people – including several from his old company – meet twice a day to discuss trends in the oil market.
They’ve bet on coal companies, refiners, and oil and gas firms focused on unconventional reserves that are harder to extract. The firm has shorted industrial firms that can be hurt by higher energy costs.
BP Capital’s equity funds, which invest in stocks of energy and energy-dependent industries, have returned more than 32.3 percent in the first five months of the year.
The stock funds, which stood at more than $700 million last week, are open only to investors with a net worth of more than $1 million.
A $1 million investment when the fund launched in August 2001 would be worth $3.65 million today, the company said.
Mr. Pickens also runs an $800 million commodity fund – betting on the direction of oil and gas futures – and a handful of other closed accounts, including Mr. Pickens’ personal fortune.
The equity fund’s returns have beaten out most hedge funds, which have had flat performance so far this year, said Ed Easterling, president of Dallas-based Crestmont Research, which tracks the industry
“That’s a terrific year,” he said of the 32 percent return through May.
Hot spot
As the energy sector remains hot, energy funds should continue drawing interest due to the oil market’s volatility and tight supply-demand picture, Mr. Easterling said.
“I think a lot of what investors are looking to do is benefit from those inefficiencies,” Mr. Easterling said.
Last Wednesday, when crude oil jumped $2.63, or 5 percent, to $54.60, BP Capital had what Mr. Pickens simply called “a good day.”
The funds had been buying up futures contracts for eight weeks after the price of oil dipped, said Michael Ross, the firm’s 28-year-old trader.
They shorted oil prices, betting they’d go down, for just one day this spring just after the price passed $58 – what turned out to be the peak. But Mr. Ross said they’re expecting a tighter market later in the year.
“Demand only gets better as you go on,” he said.
Mr. Pickens travels across the country several times a month, delivering speeches and meeting with potential investors for his funds.
He continues to gain attention for his price projections, even though he says people expect him to eventually miss.
“You keep trying to be right, knowing that it’s probably unlikely that you will make it every time,” he said.
Through last summer, Mr. Pickens’ net worth had risen to $750 million, a figure that should grow larger with his more recent gains.
Mr. Pickens says he’s enjoying life more than during the 1980s, when his takeover attempts drew a constant stream of criticism.
“I won’t ever retire,” he said. “We’ve had more fun in the last eight years than we’ve ever had in our lives.”
Source: Dallas Morning News

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