We could see a bump up in commodities due to both Germany and China having positive economic numbers out this morning. The general market should be less impacted by the news, if even at all, but with the amount of commodities consumed by China's economy we could see a pop in areas such as iron ore and coal. We are skeptical of adding any more positions heading into the weekend and may even look at lightening up our exposure if the politicians continue to down talk the necessary compromise.
Oil & Natural Gas
We have watched over the past few sessions as EV Energy Partners, LP (EVEP) has seen its share price get weaker as investors await news of their deal for 100k net acres of prime Utica leasehold, which is scheduled to be closed by year end. The plan is to turn these not producing assets into fully paid for producing assets and then leverage up by buying new properties by borrowing against their newly created value. There is a second part of this deal to divest the Utica holdings which is scheduled to occur in the first half of 2013. We remain bullish of the units long-term and may find ourselves adding to our current positions at these levels.
Rex Energy (REXX) is another Utica player which has seen shares retreat recently, and with shares finishing the day down $0.25 (2.06%) to close at $11.89/share we think that the company may be approaching a buying area. With shares having fallen below the $12/share level yesterday, which has served as a support level for the shares numerous times, we think it is possible to see even more of a pullback should shares not recover to reclaim the area north of $12/share. If we do not see the bounce higher, we would expect a short-term trend lower at which point we could find an entry point which provides for an attractive opportunity to enter a trade.
Although it may be harder for Canadian resource companies to sell themselves to overseas entities, especially those owned or backed by their homelands (think the Asian players), we think that we will see a pickup in deals such as the one Talisman Energy (TLM) did with the Chinese in the North Sea whereby they sold a stake in the property rather than the entire property or the entire company. Canada's resource sector could essentially move away from M&A with Asia and more towards a model utilized by many junior resource companies whereby joint ventures are used to gain exposure to properties by the buyer and the seller is able to cash out or carry their interest for a period of time.
This can indeed create value, and is but one way which the industry could change. We suspect that the investment bankers will come up with strategies far more complex and far more impressive but this morning we just wanted to point out that there is still value in these Canadian names and very real possibilities that they are able to tap Asian markets to access capital to develop their assets.
We recommended that readers exit the potash trade this year, and Potash (POT) specifically, after it turned out to be far more disappointing than we had imagined. It is one of the worst calls we had this year and even more disappointing due to the fact that we picked the entire industry to be a top performer but as it turned out the only top performer was Agrium for the year. The shares are stuck in a $37-46/share trading range and the chart is nothing short of ugly. It is our opinion that the activists over at Agrium need to stop agitating there and instead visit Potash HQs to push management in the right direction. Our view is if it is not broken then do not fix it, which fully applies to Agrium, but Potash is broken right now and it needs fixing.
We have watched Freeport-McMoRan (FCX) shares rebound since the sharp sell-off after announcing they would be acquiring two oil firms for what seemed to us a very rich price. The shares traded down on the news and hit levels which had previously served as support and once again provided support, which is why we think that the shares are now in the buy range. We are not making any moves on our own right this moment, but based off of the initial fall and subsequent bounce off of those levels of support it sure appears that the worst is over. One should not buy the entire position right now, but rather average in using ¼ as the portion of your position to buy each time. If dealing with smaller amounts of money, try using a buying strategy using two buy-ins. Keep in mind that the shares provide a dividend to pay you while you wait, yield is always a plus in situations such as this.