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There has not been a whole lot to be excited about for those who are overweight in their exposure to the oil and natural gas names. The few wins that have been had by investors were due to surprises during earnings season and smart money buying positions due to value. The rest of the market has been about as boring as watching paint dry and tested many investors' patience. We have received the emails and messages and know all too well what many readers are experiencing, but it finally seems to U.S. that the pullback might have run its course.

There are still names which we view as overvalued relative to the general market, but overall we are far more comfortable with putting new capital to work at these levels than we were when buyout speculation was running rampant not that long ago.

Chart of the Day:

The sharp bounce at the end of the chart shows that there is still some life in the market and that Iran is not going to kill the oil market by flooding the world with cheap crude to replenish their treasury and build a stockpile of cash. This spike could prove to be the beginning of the next leg up for the oil and natural gas E&P plays, something we think could be played by buying the quality names which have been hit the hardest during this correction.


(Click to enlarge)

Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1,219.80/ounce, down by $2.10/ounce
  • Silver: $19.095/ounce, down by $0.194/ounce
  • Oil: $93.86/barrel, up by $0.04/barrel
  • RBOB Gas: $2.6854/gallon, up by $0.007/gallon
  • Natural Gas: $3.97/MMbtu, down by $0.018/MMbtu
  • Copper: $3.207/pound, down by $0.0105/pound
  • Platinum: $1,347.30/ounce, up by $0.50/ounce

Commentary:

Investors have seen a flow of good news from BP (NYSE:BP) over the past few weeks and the latest court ruling might be the most significant. Many who follow the oil industry, particularly the 'Big Oil' names, have worried about the payments that BP has been making and whether they had set aside enough in reserves to continue to cover the cost of the payments to those who suffered economic losses due to the Gulf oil spill. With the court victory BP now appears able to control the costs better and should be able to see fraudulent claims decline. Most importantly BP will not have to take any accounting charges in the next few quarters as a result of this and it should clear the way for the company to continue increasing dividends, maintaining their share buyback program and reinvesting in the business. BP is a name we have been bullish on, but reluctant to be buyers of due to the risk posed by these ongoing claims and court cases. This clears another hurdle for the company and should make the stock more attractive for investors moving forward.

Looking at the rest of the oil and natural gas sector we have to admit that it has gotten awfully quiet in the past few weeks regarding M&A activity and rumors. There have been some deals completed that were significant, but the bidding that many investors expected from the European names has failed to materialize thus far and indicates to U.S. that those searches were reported on while being in the very early stages rather than just before a strike.

After finding support at $18/share, Rex Energy appears set to take off once it can break through the $20/share resistance level. We like the company and its properties, but more importantly we like the value that is present here.


(Click to enlarge)

Source: Yahoo Finance

We think our caution in regards to those overextended takeover plays was timely and an excellent call in hindsight. With some of the pullbacks we are seeing more rational valuations, but still not anywhere near levels where we would be forced to be buyers. We are seeing value in other areas now and think that Rex Energy (NASDAQ:REXX) is once again a buy now that it is under $20/share and continues to have success in its exploration efforts. It is not a stock we currently own, but depending upon how Halcon Resources (NYSE:HK) performs over the next quarter or two we could rotate into it with the proceeds from a sale of our position in Halcon should the company continue to disappoint.

The oil and natural gas E&P names have seen some considerable pullbacks, especially among the momentum names. The price of WTI Crude has been inching higher in recent sessions and this is something we view as quite bullish. Oil did test the lows like we thought they would and found the support that was present. So long as the economy remains on course with its current trajectory one would suspect that the oil market and oil equity names would also rise. As has been the case in the past it seems that oil prices will head higher first, followed by the oil equity prices.

Source: Commodities Today: Oil Market Showing Signs Of Life