With the news yesterday from the Federal Reserve, paired with the news out last night regarding China, we are seeing markets rally as the fears that have worried investors appear not to be coming true. We are seeing some commodity names move higher on the news over the past week or so, but the potash and fertilizer names have remained under pressure and will continue to do so as this week's news is a seismic shift in how the industry operates.
Remember, BHP Billiton (BHP) backed off their potash ambitions when the price declined a bit, and their game plan was to produce as much as possible via low-cost mining techniques and take on the cartels. That was ambitious and turned out to be too big of a risk, which makes you wonder how big of a risk investors are taking by being long the industry right now. The chart of the day below displays the large moves in many of the bigger names, but the question of how much lower these names can go remains. The next few months will be telling.
Chart of the Day
Click to enlarge images.
Source: Yahoo Finance.
Commodity prices this morning are as follows:
- Gold: $1325.00/ounce, up by $12.00/ounce
- Silver: $19.86/ounce, up by $0.232/ounce
- Oil: $106.82/barrel, up by $1.79/barrel
- RBOB Gas: $3.0194/gallon, up by $0.0231/gallon
- Natural Gas: $3.435/MMbtu, down by $0.011/MMbtu
- Copper: $3.177/pound, up by $0.0585/pound
- Platinum: $1443.00/ounce, up by $13.70/ounce
Oil and Natural Gas
Chesapeake Energy (CHK) did just as we thought they would and beat for the quarter. The icing on the cake was that they beat on both the top and bottom lines, as they beat the EPS consensus figures by $0.10/share. We would point out, however, that the quarter was somewhat mixed from an operating standpoint and our predictions, as the Eagle Ford Shale continues to see efficiencies realized that allowed the company to increase their FY guidance for oil production. That was the positive news.
The negative news was due to the Utica Shale in Ohio still lagging as the infrastructure is simply not catching up to the development of acreage in the play. This caused the company to move their guidance on NGL production lower for the year, as they deal with ethane rejection and other issues from third parties. Focusing on the Eagle Ford and other areas right now will alleviate these issues in the short term, but long term the company needs to see their midstream partners pick up the pace of development.
With today's news, it sure looks as if our earlier thoughts that Chesapeake could take out $25/share on positive earnings will play out. Maybe not today, but certainly in the near future.
Source: Yahoo Finance.
Full-year guidance on oil production was raised by 1 mmbbls to a range of 38-40 mmbbls for FY 2013. NGL production was reduced by 2 mmbbls to a range of 21-23 mmbbls for FY 2013. Readers can find the press release announcing the quarterly results here. The pace of Utica development will be the difference for the company moving forward.
Although this news is pretty disappointing, we would point out that it does not necessarily apply to all the companies operating in the Utica. We know that Gulfport Energy (GPOR), a company we own shares in personally, came in just under the high end of their guidance on production numbers. That indicates to us that they were correct when they stated earlier this year that their midstream partners would have many of the issues corrected this quarter and through the end of the year.
We saw Barrick Gold (ABX) report adjusted EPS of $0.66/share, which came in above the analysts' consensus (the press release is available here). It would be easy to shrug this off and dismiss the numbers, but when factoring in the volatility in gold prices which forced revenues for the quarter lower as well as the input costs to actually mine and process the ore it is quite impressive. In fact, the company announced that they believe they have a very good handle on costs and are maintaining their guidance on production costs for the year. Oil prices have been increasing, and so too have gasoline and natural gas. We thought this was quite bullish indeed. Barrick is an industry leader as far as low-cost production, and this quarter simply reinforces our thinking of this being one of the lower-risk plays out there for readers to use in order to gain exposure to rising gold prices.
We are curious as to how the market will perceive the news from Barrick Gold this morning. We view the fact that the company has a solid handle on their production costs as a plus and think if that is not rewarded now, it will be over the course of the year -- especially if gold prices rise.
Source: Yahoo Finance.
We have given the potash sector a lot more attention over the past three days than in the previous three months, but the news is simply that big. Many think this news may simply blow over, but that might be a bit short-sighted. We think that a name such as Potash Corporation of Saskatchewan (POT) will survive, but margins might very well be destroyed in the near term. Yesterday saw heavy trading in the company's shares once again, and the stock hit a new 52-week low on the session. To make matters worse, the stock actually closed at the 52-week low as shares finished the session down $2.63 (8.31%) to close at $29.00. Readers should focus on the contracts signed for the latest year and pay careful attention to the new contracts signed for the upcoming year. Bloomberg usually has this information available and the articles are free.