The news coming out of the commodities complex recently has not been good, and it seriously has us questioning the strength of the world economy. Metals companies are not doing well and we are seeing commodities prices across the board fade since the election. Yes some of that is probably due to investors being incorrect on who they thought would win, but this fiscal cliff issue is really taking a toll not just on current economic activity but on expectations on future economic activity. The quicker this issue is resolved, the better for everyone involved.
Oil & Natural Gas
Halcon Resources (HK) had some good news to talk about after reporting their earnings yesterday, and it simply confirmed our belief in the company's future. We have not gone through the conference call, which we will have to do this weekend, but based off of the press release we really like the plays the company is in and their ability to add to their acreage positions in the best areas. The company saw its shares rise $0.49 (9.11%) to close at $5.87/share with 8.5 million shares traded in yesterday's session. Halcon reported that they see fourth quarter production of 17,000-20,000 boe/d with 40,000 boe/d seen as the average for 2013. That looks like spectacular growth moving forward and based off of the company's stated drilling plans (as well as what is already in the works) we think that the company will not get that growth simply through drilling for dry gas. Sure dry gas looks like it will be a solid contributor to that growth, but with the oily plays that the company is focused on, we believe that it will remain an 'oily' play and should outpace the industry as a whole with that higher margin production.
Yesterday we noticed comments from Chesapeake Energy's (CHK) Aubrey McClendon on the Utica's oil window. We think that a few things are at play here, and it mostly has to do with Aubrey no longer calling the shots and single-handedly running the show at the company. It is our opinion that the company has begun to stress rates of return and put less of a focus on achieving HBP (held by production) status across all of the acreage that they acquire. We always suspected that the company would allow some acreage in the Utica to roll off the books or be sold off to competitors due to the sheer size of the holdings, so we are not too surprised by this news. Also of importance is the fact that much of the company's land position in the JV with Enervest and its related parties already has HBP status. We look at this as Chesapeake waiting for others, and potentially those they are partnered with in the Utica, to figure out the best practices for the oil window while also allowing technology to improve in order to be able to gather more oil a few years down the road. Remember, the company can drill rapidly when they have a JV partner willing to foot the bill and we think financial/cash considerations are the main reason so much effort has been focused upon the wet gas window and not the oil window at this time.
Molycorp (MCP) was once again lower yesterday, setting a new 52-week low during the day as 6.9 million shares traded hands. The shares were down $0.50 (6.97%) to close at $6.67/share and it is now apparent that the bears are certainly having their way here and elsewhere in the rare earth sector as the bulls are nowhere to be found. Molycorp probably has more to do with this than one thinks as the company generally leads the junior rare earth companies directionally (when it is higher they follow suit and as it heads lower they fall as well). For those looking to buy, watch the entire sector and see when the juniors appear to have capitulated, which would give investors a pretty good indication of when the coast is clear for Molycorp - although they have SEC issues to also be aware of.
We have recommended that investors wanting exposure to steel stay away from AK Steel (AKS) which we have viewed as one of the weaker players in the industry. The company reported earnings below expectations and sees much of the same looking forward. AK Steel will also have to sell 25 million shares of their own stock to pay down debt and use for general purposes. That cannot be good news and investors acted accordingly by pushing shares lower by $0.96 (17.58%) to close at $4.50/share. Even after this fall, we still recommend that investors who do allocate money for the steel industry in their portfolio direct those funds to competitors of AK Steel and not AK Steel itself.
Clean Energy Fuels (CLNE) saw shares rise $1.20 (10.85%) to close at $12.26/share after the company announced a deal with GE. T. Boone Pickens' company is constructing a national network to allow commercial transportation trucks to use natural gas as a fueling source for cross country shipping. The company is coming off of levels around its 52-week low, but we would rather play the natural gas producers for any rallies based off of a switch from diesel to natural gas among America's shipping and long-haul truckers. The deal is interesting, but we believe that Clean Energy Fuels is simply a tool to get us to the point of converting part of our fleet in order to provide an incentive to other industries to convert or manufacturers to produce vehicles with natural gas run engines.