As oil prices have fallen in recent sessions we are noticing lower gasoline prices as well, with consumers realizing the benefit right before the holiday season. We have seen it discussed on the news, in interviews and heard the conversations on the street. This is a good thing and could really help save what many thought would be a dud of a holiday season for the retailers. That does not really help commodities directly, especially the energy names, but what is good for the economy in general terms usually ends up being good for commodities not too far down the road.
Even with falling oil prices we are bullish of the energy complex, especially with the upgrade at Chesapeake Energy (CHK) and the solid operations update from Diamondback Energy (FANG). The one stock we have become concerned with after a huge run is Kodiak Oil & Gas (KOG) and we discuss our thoughts on rotating out and putting the funds in Whiting Petroleum (WLL) and Continental Resources (CLR).
Chart of the Day:
So we were looking at recent temperatures for the country over the past few years and then decided to look at historical averages to see where we stood for this winter. Strangely enough the 30 day forecast for October called for cooler than normal in the U.S. southeast and northwest with the southwest and northeast regions experiencing warmer than normal temperatures. That has held true thus far, but with the change over the past week we wonder what is in store for November because that could change the chatter around energy prices.
Source: The Weather Channel
Commodity prices this morning are as follows:
- Gold: $1346.20/ounce, down by $4.10/ounce
- Silver: $22.47/ounce, down by $0.352/ounce
- Oil: $97.51/barrel, up by $0.40/barrel
- RBOB Gas: $2.5677/gallon, down by $0.0219/gallon
- Natural Gas: $3.667/MMbtu, up by $0.038/MMbtu
- Copper: $3.25/pound, down by $0.0135/pound
- Platinum: $1449.90/ounce, down by $6.30/ounce
Oil & Natural Gas Names Strong ...
Yesterday saw a good bit of news regarding the names we follow with Chesapeake Energy seeing Citi raise its shares to a "Buy" rating. The analysts there see a situation where future growth is not being anticipated by the market, and instead the shares are being valued on the most recent lean years when production growth has lagged as Chesapeake has sought to rebalance its asset portfolio and redirect spending. The moves have led to longer completion times as effort was spent to lock up land leases with HBP status instead of drilling in the most efficient manner possible. That will be changing moving forward, and Citi seems to believe that there is considerable upside to be realized as this plays out. Citi's new price target for Chesapeake Energy is now $35/share, up from $27/share.
We have to agree with Citi on this one, production growth is going to accelerate for Chesapeake moving forward and costs will fall. Watch for production growth AND margin growth in the next few years.
Source: Yahoo Finance
Another name seeing investor interest yesterday was Diamondback Energy, a name we highlighted as a buy on the pullback but sadly their pullback did not last too long and offered a very small window for investors and readers to buy. The spark was the operational update the company released, located here, and was further explained by Diamondback's CEO on a conference call, the transcript of which is located here. The analysts had been turning negative on this name recently, but the truth of the matter is that the story is gaining traction and the company is ramping up production very quickly. In fact, Diamondback will be adding a fourth rig in early November as they look to increase their drilling activities due to the recent acquisition of 11,150 net acres. The Wolfcamp is an exciting new play in the Permian and Diamondback is one of the best plays out there with exposure. The conference call yesterday was quite bullish and with the exit rate for daily production looking to be about 11,000 boe/d, we think the growth story speaks for itself.
The sell-off was short lived, however the rally shows just how good the news was and the strength behind Diamondback. The momentum is strong here.
Source: Yahoo Finance
A Rotation In The Bakken ...
One of the few names which Global Hunter Securities was bullish on this week was Kodiak Oil & Gas , which has had a very strong run as of late on the back of continued strength in the Bakken names, industry M&A speculation and continued high oil prices. Many names were downgraded by Global Hunter, but the fact that they remained bullish on Kodiak implies to U.S. that the smart money believes that Kodiak might hit the headlines as a takeover. The company was already on the bloc earlier but nothing materialized and the stock was punished. The recent talk of European energy companies on the prowl and focusing on North American shale plays has added a floor to this name. But, the stock rose another 6% yesterday on this continued strength and one has to wonder where this tops out. It is well past levels where we thought the shares would go, although the data has become more bullish, and is now approaching levels where we previous thought it would price if a suitor emerged. Times change, but buyers in this industry tend not to pay for quickly rising assets and we think that some of the speculators here might be getting ahead of themselves. The story used to be great on a risk/reward valuation, but the ratio has changed drastically in recent weeks.
If it were our capital invested in Kodiak right now we would rotate out and instead split it among Whiting Petroleum and Continental Resources, two names which should protect gains while also still affording investors exposure to possible M&A activity in the Bakken. Whiting would be the potential M&A target, but Continental would provide stability and bring the risk/reward back in line with what we are comfortable with. One could argue that you could accomplish this by selling in the neighborhood of half of the Kodiak position and taking that money and allocating it to Continental Resources and we would agree to an extent. We are bulls of the entire space, and find ourselves bullish the vast majority of the time, but we do get feelings of when things have run their course and that feeling hit U.S. the other day with Kodiak.