The fiscal cliff has become somewhat of a punch-line here in America with it being the centerpiece of the intro to this week's Saturday Night Live. It has become obvious to many observers that the Republicans have been cornered and are now widely blamed for absolutely nothing getting done. We have talked to many people about this and the bottom line is that many Republicans now think it is bad business to protect the top 2% at the expense of the top 50%. Protecting the higher tax brackets' lower overall rate by negotiating away tax credits which actually help the middle class is nonsensical. It is laughable that the home mortgage credit is seriously being discussed as an item to be taken away in order to preserve the lowered rate. There are far better options here, and it is simply bad business to protect people, who for the most part do not even want the lower rates, by drawing lines in the sand and holding up progress in negotiations. If we can resolve this, watch the stocks highlighted today rally, if not, be prepared to see them fall. It actually is that simple.
Oil & Natural Gas
Today we want to look at two sets of companies within the oil and natural gas sector, with one being a group rallying off of lows and the other being a set of companies which should have further drilling results in the Utica due out.
First lets look at those companies rallying off of the lows. It is quite impressive when one looks at how far and how fast SandRidge Energy (SD) has risen over the last week. The shares finished the week at $7.29/share after rising another 7% in Friday's session. Volume remained strong with 38.2 million shares exchanging hands. It will be interesting to see if the momentum carries forward to this week or whether the rally ended along with last week. As we said last week, we have been bullish of the stock, but even we recommend taking caution after the large and fast rise.
Kodiak Oil & Gas (KOG) might be a better play for those seeking an oil and natural gas stock with a bit of momentum behind it. The stock bounced off of recent lows and as of Friday's close the company is above nearly every single significant trading level, which was not the case even a few trading sessions ago. This is one of those heavily skewed oil plays and if one believes that we are not going over the fiscal cliff, then Kodiak is a great play. Although if one does believe that the fiscal cliff is breached, that also makes this a great play - for a short trade - as crude prices would most likely sink by 10-20%.
One of our holdings which we are excited about is PDC Energy (PDCE) which should be reporting the results of their first Utica wells very soon. That is one of the two catalysts we see for the shares in the near-term, with the other being drill results from Gulfport Energy (GPOR), another holding of ours. The two companies have land holdings near each other and it appears, on paper anyways, that PDC might also be in the Utica sweet spot. It will take drilling to confirm it, and that is what we expect in the next few weeks. These shares are a buy on any pullbacks as we have the Utica news coming up and 2013 should see better operating results for the company as midstream capacity picks up and the company is able to produce more in other plays outside of the Utica.
Gulfport Energy had an interesting day on Friday as an analyst at Stifel Nicholas downgraded shares. Rather than being St. Nick, they decided to play the Grinch but we cannot help but wonder why they would switch sides of this trade with all of the recent good news. Sure they only took the shares down to neutral from buy, which allows them to still say they were not bearish but we still believe that $50/share is still the target price for Gulfport shares in 2013. Make no mistake, we understand their worries about the shares rallying from the lows this year to this level, but one has to remember why the shares got that low and how the company has not only resolved those issues but also proven how big the Utica could be for them.
It was pointed out to us how General Moly (GMO) received the funds from their partner to get the Mt Hope project developed and lock in the financing from the Chinese bank which has promised to fund the project. What happened was the company's joint venture received a catch-up payment from the co-owner as well as the third payment. The two agreed to place a portion of this cash into an account to be set off to the side while the Chinese portion of the financing is finalized. With all of this it appears that the Mt Hope project is well on its way towards getting developed, however investors did not cheer last week. And that to us is quite puzzling.