Commodities Today: Upgrades And M&A Talk Continue In Oil Sector

by: Matthew Smith

It is not often that a big Wall Street firm comes out and initiates coverage on an entire sector, let alone one of the top, if not THE top, Wall Street firm as it relates to analysts and investment banking. Goldman Sachs did just that yesterday and our belief is that they moved into this sector with coverage in order to open up doors for their investment bankers and their M&A teams. We already know that two European firms are searching for North American assets and the larger E&P companies are looking to beef up their domestic operations so further M&A only seems logical.

There is an awful lot of smoke in the oil names these days, so much so that there has to be a fire somewhere. The rumors we already know are true, but to the extent of any possible deals the real questions are how many, what types of premiums are paid and how large of companies will be taken out?

Commodity prices are higher this morning across the board. Our screens are all lit up with green arrows, and that is always a welcome sign. We are watching to see whether the S&P 500 can finish higher today, because if it cannot it will mark five consecutive down days...the first time that has been done this year!

Chart of the Day:

Corn continues to show weakness, but that is to be expected. Our thinking is that after this record harvest we shall see farmers diversify their crop a little more and stick with substitutes in the next year or two.

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Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1324.40/ounce, up by $8.10/ounce
  • Silver: $21.76/ounce, up by $0.174/ounce
  • Oil: $103.50/barrel, up by $0.37/barrel
  • RBOB Gas: $2.6903/gallon, up by $0.0311/gallon
  • Natural Gas: $3.512/MMbtu, up by $0.02/MMbtu
  • Copper: $3.273/pound, up by $0.0165/pound
  • Platinum: $1424.50/ounce, up by $5.70/ounce

Oil & Natural Gas

Goldman Sachs set the small to mid-sized E&P names on fire yesterday with their numerous recommendations in the sector. Catching our eye was Gulfport Energy (NASDAQ:GPOR) which was initiated with a $79/share target price due to Goldman's positive outlook on the Utica, the company's attractive assets that are concentrated in the heart of the play and strong liquids production which is powering the growth in free cash flow. Goldman also pointed out that Gulfport was a top M&A target in the sector because of its strong exploration results and expected production growth. We have been bullish on this from the $19-35/share range where we were buyers and have continued to think that long-term it is a solid play in the sector. Goldman now agrees and we view this as further bullish news for all involved. Gulfport shares fell just short of hitting another all-time high yesterday, but with results due out soon we expect fresh new highs - even if oil prices continue to retreat.

Also on Goldman's list of top plays was Bonanza Creek Energy (NYSE:BCEI) which we have highlighted in previous articles and have a bullish opinion on. Our personal portfolios do not have any exposure to the stock, however we are long PDC Energy (NASDAQ:PDCE) which gets U.S. access to some of the plays where the companies' assets overlap. One has to like the Wattenberg and the way the play is developing. The acreage is turning out to be highly desirable with multiple pay zones and continues to demonstrate that operators can downspace wells. More drill locations with more pay zones equals more reasons to be bullish. Both of these names hit fresh highs on the Goldman note yesterday and we like both names.

Our view is that you cannot lose choosing between these two names. We like them both and even own PDCE ourselves.

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Source: Yahoo Finance


Not mentioned by Goldman were Kodiak Oil & Gas (NYSE:KOG) and EOG Resources (NYSE:EOG), both of which set new all-time highs yesterday as they rallied along with the rest of the oil and natural gas names. Kodiak is a name which is high on many people's list to be a takeover target in the next 12-18 months. Their failed sale is now widely known but the circumstances surrounding the industry have surely changed, and we all know that when the circumstances change, so too shall investors' opinions and the opinions of those trying to be consolidators within the industry.

There are few names available today that can provide the operating interests in the acreage like Kodiak has, and fewer with the experience and technology to offer a buyer. The company was an early mover and regardless of the fact that price was an issue before, when you have numerous buyers in a market the sensitivity to price becomes moot.

Since we were pounding the table on EOG on their recent pullbacks the stock has been a strong performer. These guys are great at what they do, and their next big play might just be the Delaware Basin.

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Source: Yahoo Finance

We have long said that EOG Resources was our pick to be a consolidator within the industry. Our belief was that the company would use its cash flows from the Bakken and Eagle Ford to branch out into new plays and be aggressive when the majors were not. At this point the company has been less aggressive than we predicted and instead of buying companies they have opted to instead use their cash to enter joint ventures with other companies or add to their acreage in transactions that have been more beneficial to their shareholders. The company is involved in some of the top shale plays in the country and continues to work on developing potential new plays within their pipeline of projects. The Delaware Basin in the Permian Basin sounds like the real deal and we would bet that the play is the reason for the next move up in EOG's share price.

Disclosure: I am long GPOR, PDCE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.