We noticed yesterday that there was some interesting action in the coal names, with green arrows on our screen while other energy names were lower. With the cold winter setting in we understand many wanting to go bullish, but there is more at play than simply buying coal because it is a cold winter, or that the big iron ore names had good things to say about demand or even that each day brings us closer to LNG exports. Investors need to focus on the businesses and not buy blindly because we fear that a good bit of the buying that took place in Alpha Natural Resources (ANR) yesterday, and to a certain extent Arch Coal (ACI), was computer driven and not indicative of real price action based off of institutional and retail investor demand. This is why we want to direct readers towards names like Rex Energy (NASDAQ:REXX) which produces low cost natural gas and liquids as well as the opportunity that diversified CONSOL Energy (NYSE:CNX) presents - especially with a pending split of their coal and natural gas assets.
At this time the only pure play coal name we would buy, and this is if we absolutely had to have exposure to the coal sector, is Peabody Energy (BTU). Even Peabody has been hit hard during this correction in coal, but we view them as one of the few blue chips in the sector and one of the safest names to invest in because of their geographical diversification in regards to production.
Chart of the Day:
We have talked for over a year now about how investors requiring precious metals exposure could play the sector successfully by being long silver versus gold. The past three months have proven that to be true, and for those who continue to believe that the economy will defy the skeptics then the way to continue to play this trade is to be long silver and not gold.
Source: Yahoo Finance
Commodity prices this morning are as follows:
- Gold: $1343.00/ounce, up by $9.00/ounce
- Silver: $22.725/ounce, up by $0.108/ounce
- Oil: $96.19/barrel, down by $0.67/barrel
- RBOB Gas: $2.5574/gallon, up by $0.0051/gallon
- Natural Gas: $3.594/MMbtu, down by $0.025/MMbtu
- Copper: $3.2565/pound, down by $0.011/pound
- Platinum: $1449.70/ounce, up by $10.10/ounce
Strange Price Action In Coal ...
Yesterday saw Alpha Natural Resources shares spike by nearly 8% on no news and lead the coal names higher. Also trading higher, but only marginally higher, was Arch Coal - but up is up and with yesterday being a down day for energy commodities it makes it all the more relevant. With algorithms ruling the market these days and creating these mini-spikes and mini-crashes it is hard to say exactly what set these names off, but for those who read the various newsletter writers and the analyst reports that are out there the tide has been turning over the past few months to where many market participants now believe that 2014 is going to be the year when the foundation is set for a recovery. This all coincides with the beginning of LNG in the next few years, which is why we have remained cautious of the entire coal sector. Just because we begin to export natural gas overseas does not mean we will still not be drowning in a glut of the stuff. These unexpected and unexplained pops should be sold into, even though we are in the group that is expecting a cold winter. We think the way to play the cold winter is neither Alpha Natural Resources or Arch Coal but those plays with leverage to natural gas.
While Oil & Natural Gas E&Ps Got Slammed ...
The recent weakness appears that it will find some support in the $21/share range, and that is where one could safely buy as it is a nearly 20% pullback. Between $21-23 seems fair to us, but that is under the assumption that oil prices find support around $95/barrel.
Source: Yahoo Finance
The subheader here might be a bit too harsh, but the truth is that early in the session we saw many names hitting fresh lows, even close to the levels we had written that they could be bought at. One name which caught our eye however was Rex Energy which has given up nearly all of its recent gains even though it has had success in proving up its Utica acreage and enjoying continued success from its Marcellus acreage. Although the company is moving towards producing more liquids, it still has a lot of exposure to dry natural gas and will continue to so long as they are drilling in the prolific Marcellus. The low cost gas there makes it profitable to drill right now and we suspect that with all the drillers we follow in the area indicating that they are going to continue at their rapid development phases that we will continue to see natural gas production climb in this country. It is the names like Rex which have us of the opinion that natural gas prices will remain low in this country even with exportation of natural gas and that makes us to some extent bearish of coal.
But There Is Middle Ground ...
For those looking to gain exposure to coal with a hedge focused on natural gas, we would recommend CONSOL Energy. Now the company is exploring ways in which it could break out its coal business and focus on the shale acreage it has, but until then investors do get the diversification the company offers. This has been one of the two blue chips we have said are the way one has to play the sector and with winter kicking into high gear a bit early this year in the south we think CONSOL offers the best of both worlds. There is the risk that the company finds a buyer of its coal assets and investors lose that exposure, but we think it would offer a near term catalyst no one else in the coal sector can offer and a good opportunity to exit the position in some manner if coal exposure was the main reason the shares were bought in the first place. If the company spins off the coal business, as has been discussed, then investors would keep the exposure and simply have two entities they are invested in - with one potentially being an MLP-type of entity.