We remain bullish on the oil and natural gas sector and that is why we have devoted so much time to it this week, with results to show for it too we might add. Every day we see buying opportunities for long-term investors and traders as well as those near-term event driven scenarios where the share prices do not reflect that news's impending release. We would focus on this until the fiscal cliff is resolved, and have put our own capital at risk by adjusting the retirement account to 100% invested at this point and using 20% of our taxable account to add two positions earlier this week. So when we say we are bullish, we mean it as we are out there buying with our own capital right now.
Oil & Natural Gas
We have studied this Freeport-McMoRan (FCX) deal in a bit more detail and looked back historically when other resource plays have diversified into the oil and natural gas E&P business. We have mixed feelings about the deal, as it will either turn into a segment of the business used for cash flow and competing for capital or the growth engine of the company as they face headwinds around the world with their mining operations. It is too early to tell right now how it will all play out, but rarely does a transaction such as this play out somewhere in the middle. Remember, the trend has been to diversify within your industry not into new ones and companies are spinning off and breaking up units which have separate sets of expertise to create pure plays…something that Freeport has already done with one of these companies not too long ago! Watch to see if the $30-30.50/share level can hold moving forward, and if not there are probably many more new 52-week lows ahead.
This brings us to Chesapeake (CHK), a company looking for large investors to take joint venture stakes in their large land holdings across many plays. The acquisitions remove Freeport from the equation (not that they were really considered before) along with the acquired Plains until they have successfully digested both acquisitions. It sure looks like Freeport is focusing on the deepwater Gulf of Mexico play, however via Plains they do get a little bit more diversification via shale plays and are even in a play sold to them via Chesapeake. The only problem is the company needs to focus that low risk drilling on liquids and oil (think Eagle Ford, which they have) rather than the dry gas. So although we think it is a long shot that Freeport makes a move in the next 12-18 months, it is a possibility that they could team up with Chesapeake.
Whereas Chesapeake's CEO Aubrey McClendon has done a good job talking down the value and prospects of the Utica shale oil window another Utica cowboy has been talking it up. We will see over the next month or so what the real value of the play is as EV Energy Partners, LP (EVEP) looks to monetize their Utica holdings along with their general partner, Enervest. Mr. Walker has previously stated that Chesapeake's deal was a floor and not a high water mark so it will be interesting to see exactly where the per acre number comes in at. One thing investors need to keep in mind is that Mr. McClendon's company came to Mr. Walker's Enervest to receive a large portion of their holdings, which are now the largest in the Utica. At $57.14/unit we think that EV Energy is offering investors another opportunity to accumulate shares within the $55-58/share range which has been a successful entry point in times past.
Looking at investors' willingness to add risk at this time we want to discuss two plays. First is SandRidge Energy (SD) which continues to rally as shorts are chased off and management continues to come under fire from the company's large investors who feel that the company has been mismanaged and the market capitalization fails to recognize the fair value of the assets by a large margin. Yesterday one of the large shareholders who has recently stepped up their rhetoric launched a website calling for change, and all of this has pushed the shares up to a level where they are within range of taking out the all important $7/share level. With the volume explosion it is apparent that day traders and computers have moved in, but to investors it is also apparent that something has to change here and probably soon. Changes to the board, some fresh blood to help manage the company or possibly even a sale of the company are all possibilities, although some more so than others.
Another name where investors have been moving capital into is Cheniere Energy (LNG) which we have used as a proxy for investor risk appetite for a while now. The stock is approaching a 52-week high and if it can rise above the $18/share level and maintain that, we see no reason why the 52-week high would not be taken out on that momentum. Volume surged to 12.6 million shares yesterday as the stock rose $1.23 (7.33%) to close at $18.00/share after a report was released stating that LNG exports would provide a net benefit for exporters, clearing the way for further permits to be approved for the company to move forward with their development plans. The company will not be exporting any natural gas in the near future, but they will be the first to get their export LNG facilities running and they recently stated that they are a good bit ahead of schedule (even with this report having been delayed) which investors cheered.
Disclosure: I am long EVEP.