We had a big day in commodities yesterday as the markets rallied sharply after the fiscal cliff was avoided. Every stock and option contract in our portfolio was up yesterday but we expect a pullback which appears will start today. Some of those moves were surprising even to us, and we recognize that investors may have gotten ahead of themselves and there is a need to consolidate the gains. We continue to recommend buying great names on pullbacks, including our Utica and Eagle Ford names.
Oil & Natural Gas
The discussion continues to shift towards oil plays in the shale exploration space and with that the conversation always seems to shift towards the Bakken. It is the most prolific oil shale in the US and current explorers have a pretty good understanding of the play now. When we get emails or discuss the Bakken with others it always seems that the conversation finds its way to Kodiak Oil & Gas (KOG) with some really liking this as their Bakken play and others simply liking it due to its liquidity and the ability to play momentum. Yesterday was a good example of the momentum being played, however the shares did once again cross above the $9/share level which for the long-term investors is a bullish cross, especially if this should turn into a support level as has been the case in the past.
Looking at momentum and risk-on trades, look no further than Chenierre Energy (LNG) which closed at another 52-week high. Not only was it a new high, but it blew away the previous high as the low for the day was still above the previous high - if you want to discuss bullish moves, that is certainly one! Shares are now in unchartered waters here technically speaking, but it looks like the $25.50-26/share level could be the next area where shares could face resistance. Chenierre has been on a bull run over the past few months and the trend is your friend here.
Shares in Molycorp (MCP) rose sharply yesterday as Bloomberg ran an article discussing how a takeover was possible at these prices. That article can be seen here. For those familiar with the rare earths there are a couple of glaring failures here by the journalist who wrote the story and makes one call into question the entire thesis. First Lynas is not developing a mine in Malaysia, that is where their processing plant is located while their actual mine is in Australia. More important than that is the selection of 'experts' to discuss the potential for a buyout with Byron Capital's John Hykawy being the big issue here. Byron Capital gets paid big bucks to raise money for rare earth players in Canada and also to simply provide coverage on their shares with some consulting services - hardly an independent third party in our view. Goldman Sachs being interviewed and cited is also a bit of a joke as they were the reason the company did an IPO and sold shares well above current prices.
The logic behind a private equity firm buying Molycorp out is a bit preposterous at these levels as the price tag is far too high with a company sporting very little in terms of revenue and free cash flow, let alone profits. We are not buyers of this newfound optimism simply based upon the above facts.
We have come under fire lately for our views on Alpha Natural Resources (ANR) with the inbox getting filled with shareholders mad that we have recommended trading in and out and personally have ventured in far less. We think that we addressed this in the comments section of a previous article but today feel the need to once again point out that the shares were unable to hold above the $10/share level, which we have pointed out has been a level of resistance for the shares. Coals as a sector were weak yesterday for the most part and if the fiscal cliff resolution does not put you through resistance with the market up big, then the question is what does?
It is hard not to be bullish of the refiners these days as domestic production is increasing dramatically, and exponentially in some plays, with new supplies being shipped to us from our neighbors up north as well. Some refiners have better access to cheaper supplies than others, but with the new pipelines being constructed and the development of some new shales it appears that this newfound wealth will be spread around more and enable the industry as a whole to benefit further. The sector was real hot in 2012 and that momentum seems to have carried into 2013 as Phillips 66 (PSX), Valero (VLO) and Tesoro (TSO) all setting new 52-week highs yesterday as each company rose at least 3% during the trading session. Until we see oil prices begin to move higher and domestic oil production slow (paired with slower growth in imports from Canada) then it seems that the refiners shall remain in a bull market. With these companies it is always important to watch the margins which tell the whole story, so investors would be wise to watch those and stay in the trade until a red flag arises.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.