Sep. 21–As Boone Pickens and his team file into their Dallas conference room, Hurricane Isabel plows across the Atlantic.
Will the storm continue barreling toward the northeastern United States? Or will it veer back toward the Gulf of Mexico, disrupting oil and gas production and sending prices higher?
Mr. Pickens and his team hope it’s the first scenario as they ponder a multimillion-dollar investment decision.
“Gas is going to come down and come down dramatically,” predicts Michael Ross, a confident, fast-talking 27-year-old trader tracking the hurricane’s path with the enthusiasm of a TV weather forecaster.
By day’s end, Isabel strengthens to the highest-level storm rating.
And Mr. Pickens and his investment funds pull down almost $11 million, most of that from betting that natural gas prices would fall as the hurricane heads away from the Gulf.
In a two-hour meeting, he and his top lieutenants survey the global commodity and stock markets — assessing risks here, seeing opportunities there.
In doing so, they briefly lift a veil on the investment company into which the legendary oilman/takeover artist now pours his 50 years of energy industry experience.
No longer hunting for crude, the 75-year-old Mr. Pickens now runs BP Capital, catering to wealthy individuals and institutional investors with the stomach to bet big on the energy sector.
The BP Capital Energy Equity Fund has surged more than 80 percent since its launch in August 2001, eclipsing market indexes and almost every stock in the industry. Mr. Pickens’ team of 18 manages more than $600 million across the sector — tied up in an equity fund and a commodities fund.
Mr. Pickens has surrounded himself with former employees of Mesa Petroleum, the company he built and led for four decades before relinquishing the reins in 1996. Among the top deputies at the conference table are longtime Mesa attorney Robert “Bobby” Stillwell and Mesa’s former chief financial officer, Garrett Smith, who leads the equity fund.
Twice a day, five days a week, the investment committee meets in sessions like the one that considered Isabel’s approach. The sessions can last as long as four hours as the 10 members each offer their opinions.
The ritual began a year ago. As others around the table discuss how the meetings got started, Mr. Pickens makes their purpose clear: “We do it to make money.”
On this Thursday afternoon, Sept. 11, the gathering gives the group a chance to hear updates on the long-term fundamentals for oil and gas prices, which ultimately determine the fund’s plans for energy stocks.
Mr. Pickens says the secret is to “understand the commodity,” a difficult task as oil and natural gas prices swing each day based on supply reports, global political developments and weather.
The equity fund hedges its bets — going long on 65 percent of its portfolio, hoping stocks will go up, and short on the other 35 percent, expecting them to fall.
The fund virtually minted money last winter as prices shot up. It reversed positions this summer, turning bearish on gas as prices dropped from their highs.
As Mr. Ross runs through that morning’s Energy Department report on natural gas storage levels, the others around the table listen.
The industry’s conventional wisdom holds that natural gas is in for another huge spike this winter.
But additions to storage have some people thinking that prices may not jump so high.
The group discusses the movement of oil and gas prices during previous years, looking at technical movements in the market. Would natural gas, which closed that day at $4.74 per million British thermal units, break the $4.45 mark and fall further? Crude oil was holding just above $28.50 a barrel.
“The market doesn’t think it will break, so I think it will,” Mr. Ross says. (On Friday morning, oil breaks that barrier and drops for the next week.)
The discussion continues. Every few seconds, someone glances at the large computer screen on the wall to look for changes in natural gas prices in after-hours trading.
A weather update comes in by phone from Sempra Energy, one of BP Capital’s traders, telling the group that Hurricane Isabel has gained strength but has a small chance of reaching the eastern Gulf. That would spare the major oil and gas producers, but depress gasoline demand in the Northeast as consumers stay inside.
Next up is Dr. Gary Ross, chief executive of PIRA Energy Group, a consulting firm that lists major oil companies and several OPEC members as clients. His sobering five-minute overview of the oil and gas markets quiets the room.
“Gas is in trouble,” says Dr. Ross, Michael Ross’ father and a longtime friend of Mr. Pickens.
Natural gas has been going into storage and could be at the low $4 end soon, he says. With milder-than-expected weather, it could head toward $3 by winter’s end.
His son quietly calls the projection “too pessimistic.”
Mr. Pickens listens to reports from others throughout the meeting as he makes last-minute changes to a speech he’s delivering that night to a group of real estate executives. He jumps in now and then to give a brief take on a comment or offer a story about someone he knows in the industry.
His assistant, summoned to the conference room by a wireless buzzer, enters periodically to make changes to his calendar.
A lot goes onto that calendar. Coming up is a visit to potential investors in New York and a trip to Oklahoma State University, which was known as Oklahoma A&M when Mr. Pickens graduated from the school in 1951. There, he’ll watch a football game — in Boone Pickens Stadium.
Closer to home, Mr. Pickens’ august past also echoes throughout his Dallas headquarters.
On the wall across from him in the conference room are several Texas maps. They chart his Panhandle ranch, ground zero for his water pipeline project that would transport millions of gallons across the state to growing cities.
Just outside the glass-walled conference room hang a dozen magazine covers from Fortune, Time and others, featuring Mr. Pickens from his days as a corporate raider.
His platform at the time was Mesa, once one of the nation’s largest oil and gas producers. After the company was wrested from his control seven years ago, he moved into private investments. He recruited former employees and a handful of investors to launch a fund to deal in oil and gas.
With all the industry data they needed already in house, the equity fund started four years later with Mr. Smith’s arrival.
The private fund’s investors, who must put up a minimum of $1 million to invest, include Dallas financier Harold Simmons, former Bear Stearns chairman Alan Greenberg and Houston money manager Fayez Sarofim.
BP Capital employees, including Mr. Pickens, own more than 30 percent of the funds.
And they haven’t always been cheering.
Last year, returns went deep into negative territory as the fund tried to recycle Mr. Pickens’ experience of going after undervalued companies, as he so famously did with Phillips Petroleum Co., Gulf Corp. and Unocal Corp.
BP Capital bought up shares in Vintage Petroleum Inc. and Penn Virginia Corp., two independent oil and gas companies, with a goal of influencing the management teams, Mr. Smith says.
The result: By the end of July 2002, the fund had lost almost 33 percent from its launch. By the end of October, it was down 38 percent.
Mr. Pickens says the strategy was “a flawed concept” and adds: “We won’t be back in that business again.”
Eventually, the fund recovered and shot higher and higher as natural gas prices soared.
The fund is bullish on natural gas in the long term — a strategy that became clear in February, when the team began buying contracts every morning, predicting that colder weather would hit.
“Every star was aligned,” says the younger Mr. Ross. “We don’t take big bets unless we know we’re going to be right. It’s a question of when.”
Once the winter storm hit at the end of the month, the commodity and equity funds took in more than $370 million for the month.
Closing out its second year last month, the fund has given its investors a 65 percent return, 27 percent a year, after fees and expenses.
BP Capital also runs a separate 6-year-old commodity fund, controlled mostly by Mr. Pickens and close investors, that has returned a 300 percent profit in 2003 alone, enough to set the cumulative profits to more than $800 million after a $37 million start in 1997.
It’s not an easy return for investors to find. Hedge funds, which draw the ultra-wealthy, have returned about 10.8 percent this year after losing 0.4 percent last year, according to fund tracker Van Hedge Fund Advisors International Inc.
“There aren’t many funds that have made that much money in these years,” Van Hedge chairman George Van said of Mr. Pickens’ 27 percent annual return. “He’s among a handful.”
“I’d be more enthusiastic if the returns were balanced between the years as opposed to the volatility the fund has exhibited,” he added. “But the aggregate return for both years is outstanding.”
A fund built on Mr. Pickens’ experience and contacts naturally raises questions about life after Boone.
He has no plans to let go but says the fund is designed to keep going beyond his time.
The bulk of employees, including the 42-year-old Mr. Smith, have been soaking up his expertise for decades.
“I think if I got hit by a bus in the morning, the fund would go ahead and proceed,” Mr. Pickens says.
“I think we’ve got enough background now and enough confidence in what we’re doing.”
The team runs through its daily returns on the markets and ponders whether to change positions on anything.
The equity fund has shorted oil exploration and production companies, or E&Ps, along with drillers on bets that their fortunes would soon dip.
It has long positions in just about every other sector of the industry, including refiners, chemical companies, royalty trusts and liquefied natural gas firms.
“Company specifics aside, I think the fundamentals for being short E&Ps and short drilling contractors are good,” Mr. Smith says.
Mr. Pickens agrees, casting doubt on whether the sky-high profits of oil companies from the first half of the year can continue.
“You’re going to have big cash flows, but not huge,” he says. “The finding costs are going to kill them.
“As old Ed Watkins used to say, bust everyone big enough to carry money,” he continued, referring to his late friend. By the end of the meeting, Mr. Pickens and Mr. Stillwell, the former Mesa attorney, have stepped away for calls.
Alex Szewczyk, an equity analyst, runs through a presentation on Golar LNG, a Norwegian firm that operates tankers powered by liquefied natural gas.
Just about everyone in the industry has high expectations for LNG to meet the nation’s growing dependence on natural gas. Golar’s stock price has doubled over the last six months.
The team decides to start buying the next morning, with plans to invest $8 million to $9 million, about 5 percent of the equity fund’s value.
The tally from the day: The equity fund made about $4.7 million, and the commodity fund was up $6 million.
The equity fund won on the long and short sides, winning on 21 stocks, losing on 11 and tying on one.
“We were betting on gas going down, and it did,” Mr. Smith says. “And all of our stock bets are lined up in that same direction.”
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