Commodities are weak right now. There is no other way to really look at it, and no better way to say it. Much of the issue results from natural gas prices, which it is important to note broke through the wrong side of $2 yesterday. We have been one of the first out calling for unheard of natural gas prices here in the U.S. for some time now, and it seems many are now coming on board, which worries us. However we still see a high probability of near-term futures prices falling below $2 for sure and most likely $1.50 after that. If numbers do not change going forward we could see $1 natural gas this year as well. Always important to remember is that prices could even go negative for a short while, it is unlikely, but absolutely possible for those holding contracts who would rather not take delivery.
Oil & Natural Gas
Chesapeake Energy (CHK) itself almost took out $20/share, and that too would have been landing on the wrong side of that important psychological price. The company is trading at a 52-week low however and there are a myriad of reasons to attribute this to, one could take their pick. Low natural gas prices are one, cash flow concerns another but we think that investors are a bit worried about this bet the company play management has pulled out by taking off all their natural gas hedges. It seems counterintuitive and most certainly goes against the tide. But at the end of the day that is Aubrey, and that is how he has always run the company.
Southwestern Energy (SWN) is another natural gas play to watch, and this one is far more susceptible to natural gas prices than Chesapeake long-term as it is not focused on the oil and liquids as Chesapeake is. Southwestern does have hedges though, so they have downside protection through all of this downward pricing and can buy themselves time. We suspect that as natural gas prices continue to slide, so too shall the prices of these two companies, simply because bears will be placing bearish bets. There will be a point when there will be a great investment opportunity in the sector, but that day is certainly not today.
Silver
Rather than recommend buying physical silver or a silver note in the future, we think that Silver Wheaton (SLW) will be our way to play silver moving forward. Yes it adds some risk to the equation, but it also pays a small dividend and does not make the tax situation as tricky for when that time does come around. The company has liquidity so one does not need to worry about getting trapped in the shares, and it tends to track silver reasonably well, which one cannot say for the miners. Remember that Silver Wheaton is not a miner, but a financier who then has purchase agreements to purchase silver and metals as agreed-upon prices once production starts and making money on the difference between their purchase price and selling price of the various metals (mostly silver).
Rare Earths
Molycorp (MCP) has fallen back a bit now, and is probably going to test $30/share at some point in the near future. The stock has been on fire with the recent news out of China and its own news regarding Mountain Pass. We would watch this one carefully if one held the smaller rare earth players as Molycorp has been the leader lately and as Moly moved, so too moved the juniors.
Potash
One play in the potash arena we accidentally did not include in our article yesterday was Agrium (AGU). The company was one of our picks due to its diversified revenue streams and ability to further benefit from the farming boom via more than just fertilizers. The company has performed better than its peers and actually has a far better looking chart in comparison, note that it is the only one actually with a positive return to shareholders over the past three months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
