We have remained bullish of commodities in the face of a less accommodating Federal Reserve but believe that even if they lessen their actions their words will still carry weight. Yes it would be embarrassing to have to once again increase assistance to the economy to help it grow, but that will be necessary if the tapering move is too soon. The good news for investors is that the Fed has thus far recognized the seriousness of the situation and would most likely move to correct their misstep quickly.
If the economy is recovering quicker than we thought then short-term we might take a hit with the tapering move but longer-term we would expect to win with our bullishness of energy related commodities and the metals. This afternoon shall be interesting indeed.
Chart of the Day:
The Fed is looking to take their foot off of the gas pedal and the US Dollar Index is once again back at its monthly lows around the 81.0 level. The weakness has been good for commodities, but look for volatility to crank up if the market gets surprised either way regarding the Fed's tapering move.
Commodity prices this morning are as follows:
- Gold: $1302.30/ounce, down by $7.10/ounce
- Silver: $21.63/ounce, down by $0.154/ounce
- Oil: $105.75/barrel, up by $0.33/barrel
- RBOB Gas: $2.6651/gallon, up by $0.004/gallon
- Natural Gas: $3.706/MMbtu, down by $0.039/MMbtu
- Copper: $3.2705/pound, up by $0.0475/pound
- Platinum: $1424.10/ounce, up by $2.00/ounce
Shares of SandRidge Energy (SD) shot up yesterday nearly 6% to close at $5.84/share after investors began searching for the possible targets that the Europeans will seek out over the next few months. Does Repsol (OTCPK:REPYF) buying SandRidge make sense to us? No, not really. They are focused on one play that will provide growth and although this is in an area that Repsol is already in we think that the company would much rather seek out assets that are in the Oklahoma, Texas, New Mexico region with better oil production. After all, the reports all indicated that liquids production would be a driving force behind their decision, so we would take the field on this bet.
A new all-time high was hit yesterday at $29.08/share for Laredo Petroleum as investors speculated that they could be the target of a bigger oil company looking to gain exposure to North American shale oil.
Source: Yahoo Finance
As it pertains to the trading yesterday we would side with those thinking that Laredo Petroleum (LPI) was a target because their assets would appear to us to fit the bill of what Repsol is in fact looking for. The market cap might be a little light, but one has to remember that there would be a premium involved too which could place Laredo in the bottom of that $5-10 billion range. The options market heated up here too and that we always find bullish, especially when we see a lot of OTM (out-of-the-money) calls getting traded that expire in a month or so.
Gulfport Energy (GPOR) finally released more drill results yesterday, an event we have been telling readers to keep an eye out for. The press release (located here) provided initial production averages for three wells, the Wagner 3-28H (2,607 BOE/D), Clay 3-4H (1,019 BOE/D) and the Lyon 3-27H (1,014 BOE/D). Important to note here is that all three wells were placed into production with no resting period, something that we have not seen others do yet. The resting periods initially increased in time early on and then began to come down over time but finding out that the company thinks the resting periods may not be needed is interesting and could speed up the development of the entire Utica if the process works and can fit the geology throughout the rest of the play as well. It would certainly make investing in the area much more attractive and help with cash flow management. Gulfport has recently experienced some setbacks with their midstream partners, but this news could more than offset that issue assuming of course that takeaway capacity does not continue to plague the company's efforts.
Our focus now is to find out whether Chesapeake Energy (CHK) has moved onto this process of not resting wells because they are very active in the play and were a first mover. It is quite possible that they are not currently implementing zero resting periods but if they are going to look into it now it might indicate that Gulfport is onto something. Drilling these shale plays is both an art and a science, so when one company tries something new that appears to work others follow and can sometimes improve upon it. Let's see if others adopt the technique.
There was a bounce yesterday in a few coal names with Alpha Natural Resources (ANR) catching our eye as it rose nearly 4% on good volume of 7.2 million shares. A smaller competitor announced that they would be laying off miners and reducing capacity which we see as a necessary move for the industry. Remember, when we were bearish of the coal industry we stated that we could see a one or two names go bankrupt in the coming downturn but that a bottom would not have been reached until we saw cuts in capacity at the smaller more inefficient miners...which is precisely what is happening right now. What is bearish for one miner is bullish for the industry as a whole. We are not yet at the turning point for the industry, but quite close. More moves like what we saw yesterday would help.