This morning it appears that oil will be up with U.S. markets moving higher as well. Look for a rebound in our Utica names, but this morning we also wanted to highlight a comment made by Chesapeake (CHK) CEO Aubrey McClendon which has us a bit perplexed. Things are not always as they may seem, but something is going on with Chesapeake as it makes no sense for them to talk their own book down.
We have been wrong on uranium for 2012, but we are still convinced that the logic for an eventual rise is spot on. We will have the Russians pushing prices higher soon, and to draw a parallel for serious commodity followers it will resemble exactly what the Chinese did with rare earth prices. They control a very large chunk of current supply, and no one wants to sell a product cheaply when they could sell it at least for a fair market price anywhere from 5-10x higher than what they currently receive. That will most certainly be a story to watch moving forward and might very well be THE story of 2013 in the commodity space.
Oil & Natural Gas
As it pertains to Chesapeake Energy and its CEO Aubrey McClendon, we are a bit taken aback by their comments regarding the oil window in the Utica shale. The company has been quite active in the wet gas window, simply because they had little money and a joint venture partner footing most of the bill for that drilling. In the oil window they have been less active as they would have had to fund that themselves and it would have spread them out over new acreage with new techniques. We figured that the cash constraints were the major issue and that the company would be eager to drill there as soon as possible. Just when you think you have Chesapeake, or Aubrey for that matter, figured out you realize quite quickly that you do not.
At an investor conference it was stated that the company had their position and would not be drilling there as their focus was on the wet gas window, however they were happy to let others allocate capital towards the oil window at this time (see the Wall Street Journal article here discussing the comments). That statement is a real head scratcher as Aubrey not only belittled current joint venture partners but also talked down his own book at the same time. Little sense can be made of this, but we believe that it all boils down to the company trying to keep drilling to a minimum until they can offload some more properties … although we would imagine that trying to sell any part of the Utica oil window just got harder for the company.
In the Eagle Ford we have focused on Rosetta Resources (ROSE) for trading, and right now the shares are quite close to a buy point with shares having closed Friday at $46.10/share. The company has some great acreage in the play and could very well become a takeover target in the next few years as their acreage draws more attention from the multinationals looking for domestic projects light on the dry natural gas and more heavily skewed towards the wetter gases and oil. A buyout here could be a slam dunk for shareholders who set up positions around these levels and we are looking at using some of our cash position in the retirement portfolio (10% currently) to gain exposure to the Utica and/or Eagle Ford which would have us looking at Rosetta.
Quicksilver Resources (KWK) saw shares rise by $0.31 (11.57%) to close at $2.99/share on volume of 4.7 million shares on Friday as the company received an analyst upgrade. The analyst moved the company to neutral from underperform. For those wanting to bet on a rebound in dry natural gas prices or even the United States getting serious about exporting this resource in large quantities in the near future then Quicksilver is a decent trading position to have.
We have been wrong regarding uranium thus far and a recovery taking place seems far-fetched to many of our readers, but it is still something we believe will take place over the next 12-24 months. There is simply too much going on behind the scenes in this market for uranium prices to rebound and supply to disappear from the market - events which will most likely happen in the reverse order of how we gave them, but if the market catches on early could happen in that order. It all hinges on the Russians and we think that in this instance they will be predictable. So even while Cameco (CCJ) is now trading at 52-week lows, it could reverse course and move higher should the overall uranium market improve - and yes that is factoring in that they have long-term contracts locked in at these low prices.
For those wanting a bit of leverage to the uranium story and maybe some upside via new production coming online, we would look to some of the junior miners and explorers. The big name with production in Texas is Uranium Energy Corp (UEC) which currently trades at $1.93/share and has daily volume which ranges from 300-500k per day. For most individual investors this should be plenty of liquidity to move in and out of safely. We think that 2013 will be the year investors rediscover uranium and push up some of these long forgotten names.