We have to admit the Freeport-McMoRan (FCX) deal confuses us and seems a bit overpriced, however we shall view it as a proxy of the industry and look at the situation as if the entire industry is cheap as that has been our thought for the past few months at least. Both purchased companies have their flaws, so the premiums assigned to them were impressive which makes us wonder exactly what types of premium would be assigned to some of the stocks in our portfolio with assets in the Bakken, Eagle Ford and/or Utica plays. We would assume a bit higher as there is less exploration risk but the next deal which will tell us more about the health of the appetite of buyers will take place in the Utica in the next month as Enervest (a private company) looks to monetize its assets in the play. That will be important to help value the rest of the players in the area, so we are eagerly awaiting that announcement.
Oil & Natural Gas
The market did not like the Freeport-McMoRan purchase of McMoRan Exploration (MMR) and Plains Exploration. Shares in Freeport-McMoRan were hammered yesterday as shares fell $6.12 (15.99%) to close at $32.16/share on extremely high volume of 153.8 million shares. It seems that everything has come full circle with the acquisition as the company is repurchasing McMoRan Exploration, a company that it previously spun-off about two decades ago. The price of this venture into the oil and natural gas sector is too rich for our blood. Crazy is probably the best way to describe the premium paid for McMoRan Exploration with the known issues out there.
McMoRan Exploration investors on the other hand cheered the news as shares rallied $7.36 (87.00%) to close at $15.82/share on volume of 87.1 million shares. We want to know who negotiated the buyout for the company and when negotiations began because it is beyond us exactly how the company was able to get such a high premium above the previous day's closing price. Yes the shares had retreated dramatically in recent sessions, but those moves were justified with the negative news surrounding their exploration in the Gulf of Mexico and inability to complete a well due to lingering issues.
There were more than a few beneficiaries of the surprise buyouts, and one was SandRidge Energy (SD). One can argue with the logic behind the move, but shares continued to show strength as they rose $0.34 (5.56%) to close at $6.45/share with volume coming in at 13.8 million. The good news is that companies are finding current valuations attractive to enter the business, so by extension one would think that those within the business should find current prices attractive to expand their presence. Freeport-McMoRan is probably finished buying for a while as they digest these acquisitions, but in the future the company could be open to joint ventures or buying assets such as the Permian holdings that SandRidge has available for sale right now.
Kodiak Oil & Gas (KOG) reversed course yesterday with shares closing at $8.57 after rising $0.41 (5.02%) on volume of 12.1 million, which is well above their average. The company just missed closing above the $8.60/share level but that might be attainable today as investors have had time to digest the company's news release yesterday which was an operational update. Everything is looking good and the company continues to increase production, with a heavy proportion of that production being oil and thus the higher margin production that everyone is looking for. Their results continue to come in strong and it appears they have refined their technique and understanding of the play to repeat the process and attain the same results across their holdings, just another reason to love shales in our opinion.
We recently discussed Alpha Natural Resources (ANR) and how at $7/share it was attractive for a trade. Well for those who liked the idea and went along with that trade, shares have bounced up to $8.07/share after rising $0.82 (11.31%) yesterday. Interest was high yesterday with volume of 24.2 million, but this is a trader's stock right now and not an investor's. We want to remind our readers to take profits and reallocate the capital to other attractive trades or long-term investments due to the market we are in. We have constantly stated that this is a stock picker's market, and this is one of those plays which readers can effectively move in and out of while achieving solid returns in the process.