T. Boone Pickens, Retired Raider, Hits Gusher with Bets on $50 Oil

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The New York Sun

T. Boone Pickens, who in May predicted oil prices would hit $50 a barrel, says he’s earned more betting on energy prices than he made in his days as a corporate raider.


Mr. Pickens’s Dallas-based hedge fund, BP Capital Energy Commodity Fund, has risen 283% to $575 million so far this year and has had a profit of $1.3 billion since the start of 2000, he says.


“I really needed to win,” said Mr. Pickens, 76. BP Capital racked up losses in its first two years, 1997 and 1998, that cut his personal wealth to $24 million from $35 million, said Jay Rosser, his spokesman.


Mr. Pickens is now poised to make even more money in the $60 billion-aday energy trading market after crude oil closed October 1 above $50 a barrel – at $50.12 for November delivery – for the first time in the 21 years oil futures have traded in New York.


The rising oil prices from which Mr. Pickens is profiting may hurt the reelection chances of President Bush, the fellow Texan whose campaign Mr. Pickens has supported.


Mr. Pickens founded the company that became Mesa Petroleum Co. in 1956 and made a fortune attempting hostile takeovers of companies such as Phillips Petroleum Co. and Cities Service Co. in the 1980s.


BP Capital – like other hedge funds, a loosely regulated pool of assets from wealthy investors – bets on rising and falling prices of natural gas, heating oil, and gasoline, said Mr. Pickens. BP Capital has been profitable every year since 1999, when it made $900,000, he says.


It had profits of $252.2 million in 2000, $146.8 million in 2001, $51.6 million in 2002 and $435.6 million in 2003, according to figures provided by the company, which doesn’t disclose its earnings publicly.


“He’s hotter than a firecracker,” said Shad Rowe, 58, a general partner at Greenbrier Partners Ltd., a Dallas buyout firm that tracks Mr. Pickens’s fund. “His record since 1999 is just incredible. He’s distributed more than $1 billion of cash.”


Mr. Pickens has seen his personal fortune rise to about $760 million, according to Mr. Rosser. Mr. Pickens said he has paid 75% of his lifetime’s income taxes since he turned 70 in 1998.


“We’re doing better than we ever did,” Mr. Pickens said in an interview in the North Dallas offices of his company, BP Capital LLC, which manages the fund.


This year for the first time, Mr. Pickens made Forbes magazine’s annual list of the 400 wealthiest Americans, published in September. He placed 389th, tied with 11 other people.


Mr. Pickens turned Mesa Petroleum into one of the world’s largest independent oil operators before bad bets on natural gas forced him to sell it in 1996.


‘LIKE NO ONE ELSE’


He made much of his wealth as a corporate raider, buying companies’ shares and threatening to take them over, then turning a profit when the company’s investors bought back the shares at a higher price.


Unsuccessful bids for Phillips Petroleum, Cities Service and four other publicly traded energy companies between 1982 and 1986 helped generate profits of $855 million for Mesa, according to figures in Mr. Pickens’s book “Boone” (Houghton Mifflin Co., 1987). By September 30, 1986, Mr. Pickens was worth $107 million, according to the book.


“He understands the industry and business like no one else,” said billionaire Harold Simmons, one of the BP Capital Energy Commodity Fund’s original investors, who ranks 106th on the Forbes list with a fortune of $2 billion.


Mr. Simmons said he’s made $150 million from the $5 million he invested in the first fund in 1997. Mr. Pickens himself invested $5 million of the $37 million in the fund, said Mr. Simmons, 73, chairman and chief executive of Contran Corp. and NL Industries, and chairman of Valhi Inc., all based in Dallas. $50 A BARREL FORECAST Before the profits, though, there were losses in the fund’s first two years. Mr. Simmons’s investment fell to $400,000 in 1998. “I thought we were going to lose the whole thing,” said Mr. Simmons.


Mr. Pickens predicted May 19, in an interview on CNBC television, that oil would hit $50 a barrel and repeated that forecast in press interviews and speeches in the following days.” I think you’ll see $50 before you see $30 again,” Mr. Pickens told the Petroleum Club in Midland, Texas.


Oil traded at $41.50 on the New York Mercantile Exchange on May 19, and the average price for the year to date was $36.18. In a survey at the start of the third quarter, the median forecast among analysts was for $35 in the third quarter and $34 in the fourth quarter.


Mr. Pickens had a different view. He said oil demand had climbed faster than expected and has used up most of the excess supply in the world. Refineries also had little excess capacity because of the surging need for fuel in America, India, and China.


American oil supplies and refinery capacity remain tight, and the price of crude continues to rise. It gained 2.5% last week, reaching $50.12 a barrel on the New York Mercantile Exchange.


Mr. Pickens’s forecasts continue to rise too. On September 27, he said in a radio interview with Bloomberg News that he expects the price of crude to surge to $60 before it returns to $40.


Proven reserves of American crude oil are close to a 29-year low after falling 3.5% last year, the first decline in five years, the U.S. Energy Department said September 22.


American refineries have run at 92.4% of capacity so far this year, compared with 87.6% in 1990.America hasn’t built a new refinery since 1976, and crude oil refining capacity peaked in 1981.


Worldwide oil demand will average 82.2 million barrels a day this year and jump by another 1.8 million barrels next year, according to the International Energy Agency, oil adviser to 26 industrialized nations. Oil output is about 83.5 million barrels a day, the agency said.


The IEA boosted its demand forecast every month from November 2003 through August 2004.


‘JUST GOT LUCKY’


Rising oil prices have hurt the re-election chances of American presidents or their party, history shows. After each of the four biggest global oil price surges since American production peaked in 1970, the incumbent party lost the White House in the next election.


Not everyone thinks Mr. Pickens’s forecast of $50 oil was so smart.


“He just got lucky,” said Peter Fusaro, the chairman of Global Change Associates, a New York consulting firm that helps companies with energy trading strategies. “He wasn’t the only one. He was just the most public.”


Few hedge funds make money in the energy commodity market, said Sol Waksman, president of Barclay Group, a Fairfield, Iowa-based research company that tracks hedge funds.


“It’s extremely volatile with very big swings up and down,” said Mr. Waksman, 57. “I can count the number of people who have successfully run an energy hedge fund on one hand and probably have a finger left over.” His company stopped tracking energy funds because there are so few, he said.


For Mr. Pickens and BP Capital, that volatility has contributed to big gains.


In 2001, BP Capital opened its fund with $50 million and ended the year with a profit of $146.8 million, Mr. Rosser says – posting a gain of 294%. That year, the September 11 terrorist attacks triggered a 39% plunge in the price of crude oil over two months on concern that a prolonged economic slump would follow.


By comparison, Hedge Fund Research of Chicago says its index of funds that conduct energy trading rose 0.37% in 2001, according to the president, Josh Rosenberg.


This year, helped by Mr. Pickens’s call on oil, BP capital gained 220% through August, Mr. Rosser said.


LEVERAGED BETS


By comparison, AAA Capital Management Inc. of Houston returned 20.9% so far this year through July, and Global Advisers of London returned 24.1% through Au gust, according to Barclay Group.


BP Capital distributes profits and starts with a new investment pool each year. That pool was $50 million in 2001 and grew to $150 million in 2004, said Mr. Rosser. He declined to disclose the size of that pool or the percentage gain of the fund for years other than 2001 and 2004.


Mr. Pickens’s winnings – and potential losses – can be huge because his energy bets are leveraged. They are based on futures contracts that are bought and sold for a fraction of the value of the underlying commodities, delivering gains or losses that are larger than those of the commodity itself. Futures contracts are agreements to provide a commodity at a future date for a stated price.


Mr. Pickens’s fund, unlike some hedge funds, doesn’t attempt to profit by exploiting price discrepancies at different locations or months of delivery for oil, natural gas, heating oil, and gasoline, said Michael Ross, who directs BP Capital’s commodity trading.


Instead, it bets on the rising and falling prices by buying and selling those energy commodities themselves, through futures contracts and options, said Mr. Ross, 28.


“We buy it or sell it,” he said. Mr. Pickens makes most of his bets on the period six to 24 months ahead, says Ross.


In August 2002, for example, when the fund was down 30% for the year, Mr. Pickens decided to bet that natural gas prices would rise in 2003, Mr. Ross said. The futures position was purchased for about $3.25 per million British thermal units. Prices touched a record $11.899 per million Btu and averaged $5.486 for the entire year.


Mr. Pickens said he began trading commodities in the 1980s to cover Mesa Petroleum’s losses on natural gas investments. He earned $151 million on $2 million of equity between 1986 and 1996, making it the most profitable part of the company, he said. The average returns of $15 million per year covered Mesa’s overhead, he said.


CREDITING ADVISORS


Mr. Pickens credits his hedge fund’s success to a team of advisers. One of them is Robert “Bobby” Stillwell, 67, a former attorney for Mesa who helped Mr. Pickens with some of the takeover attempts. Another is Mr. Ross.


Mr. Pickens says the advisers work as an informal committee, discussing investment trends, commodity movements and news and weather developments that could affect the fund’s positions.


The group, he says, focuses on “fundamentals,” or assumptions about where prices are going based on supply and demand information. About once a week, Mr. Pickens takes them to dinner at Bob’s Steak and Chop House in Dallas and other local restaurants to brainstorm on investments. “It’s interesting how many decisions you make at dinner that can make you so much money,” said Mr. Pickens.


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