Commodities are languishing after their large run-up earlier which is fine by us. As we stated yesterday we are holders at this time and will be perfectly content to allow our gains to consolidate before the next run up. We will continue to build up a cash position in our accounts and will look to deploy those funds on any pullback on stocks in our watch lists. We still like the oil companies and those increasing production dramatically, but we also want to add some exposure to the uranium sector over 2013 and the current pullback looks like it will offer us an opportunity to do so.
Look Out For:
We have some very interesting data we are converting into charts for readers pertaining to the shale plays. Hopefully this will be completed by next week, however it is hard to estimate as the conversion has to be done manually.
Commodity prices this morning are as follows:
Gold: $1666.10/ounce up by $4.10/ounce
Silver: $31.38/ounce up by $0.029/ounce
Oil: $97.32/barrel down by $0.17/barrel
RBOB Gas: $3.0175/gallon down by $0.0142/gallon
Natural Gas: $3.305/MMbtu down by $0.034/MMbtu
Oil & Natural Gas
As we reported yesterday Occidental Petroleum (OXY) beat their EPS figures by a large margin on an adjusted basis. We had to quickly cover that as the earnings were released a bit later than we were expecting and it caused us to not be able to cover some of the topics as in depth as we would have liked or highlight some of the other earnings which came out. We got a few questions about our comment on the write-off and to go into that a bit more today, as it applies later as well, the move is really an accounting adjustment due to the economics of the asset. It has to do with impairment accounting which is looked at once a year by the company's auditors. In this case they found the assets to be worth less than their book value and so they wrote off the difference in the value on the books and the current value. This has and will continue to take place throughout the industry as natural gas prices continue to languish.
Royal Dutch Shell (RDS.A) is another company which reported yesterday, although the news here was not altogether good and rather bleak to be perfectly honest. The market pushed shares lower by $2.20 (3.03%) to close at $70.52/share after the company announced that they only replaced about 44% of the reserves which they pumped out of the ground this year. Although it is hard to say from the reports we have read, that number may turn out not to be so bad due to accounting and reporting rules which could be the reason why that number is so low. The low price of natural gas in North America might be partly to blame, and that is what one would expect with the company spending billions on capital expenditures. If that is the true replacement rate unimpeded by rules limiting the company's ability to book reserves, then the situation is worse than many think. Shell would need to do an acquisition of a few shale plays to quickly up that rate and with their plans for future cash flow it is hard to see how that fits in, so exploration success has to be around the corner.
Investors also are worried as the company plans to spend $33 billion on capital expenditures to continue to develop projects. It is a large sum but it also seems that the price tag for various projects continue to increase…the project inflation, if you will, seems to be getting out of hand in certain regions. The good news is that the company has a lot of exposure to "elephant" projects which cost many billions to develop but have large production footprints and last decades. Most of the pipeline is focused on natural gas in some way, either LNG (liquefied natural gas) or GTL (gas to liquids…not to be confused with the obnoxious Jersey Shore catchphrase gym, tan, laundry).
ConocoPhillips (COP) was also a disappointment yesterday as investors disliked the news that the company would see production figures drop this year before rising again after 2013. This is due to the company's asset sales which are positioning the company to deliver better results for investors as margins increase and the company is able to better allocate capital to projects deemed superior. The company managed to increase production of liquids (oil, condensate and NGLs) from 41% to around 48% but the only setback there is the fact that NGL pricing continues to be pressured with prices down about 1/5th from this time last year. Rather than simply selling off their remaining assets they have earmarked for sale maybe the company should look at swapping those properties for Utica acreage which EV Energy Partners, LP (EVEP)has for sale.
Also disappointing with a project pipeline issue is Murphy Oil (MUR) which also fell more than 5% on Thursday. The company saw its rating cut at Societe Generale SA to a 'Hold' from a 'Buy' as the analyst agree with investors' reactions and did not like the outlook provided by the company. With the company's current dividend and yesterday's sell-off the shares now yield 2.0% which is a bit of good news for those seeking yield, however there are much better growth opportunities out there.
A quick note to readers this morning is that Vale (VALE) rose almost 4% yesterday to close above $20/share once again. If the economic news continues to be good and the politicians in Washington can sort the debt ceiling out, then one would venture to believe that real economic growth would result in higher demand for iron ore and steel. It is still too early to go all in here, but a story we continue to watch.
Additional disclosure: Briefly referred to was a holding in our portfolio, EV Energy Partners, LP which we hold both stock and options positions in.