Oil futures are down in early morning trading as European debt worries are spooking traders. There is a lot of talk these days about the world's largest economy falling apart - something of a second Dark Age if you will. The leadership in Europe is weak, and the framework and foundation which their system is based upon is hardly stable in times such as these but with that said it is hard to see world leaders allowing the continent to fail. It has never been allowed to happen before so it shall not be allowed to happen now.
Oil & Natural Gas
Chesapeake Energy (CHK) fell below $20/share on Friday as investors continue to worry about the company's ability to generate the cash flow necessary to drill out their massive acreage positions throughout the country's shale plays. Most of this has to do with the price of natural gas continuing to fall and now trading below $2 per billion BTUs. We grow more and more intrigued by Chesapeake as the price continues to move lower, yet we know now is not the time to make a move into the shares. As we said Friday, we are short-term bearish of the shares and long-term bullish. Sometimes it pays to be a hero, but here it does not. One should wait until we see hard evidence that the shares are due for a reversal.
SandRidge Energy (SD) and Chesapeake could potentially cause some problems for each other over the next 8 months as both companies look to monetize their Mississippian assets. Although this is something which came up during a conversation we had recently we find it hard to believe that these two companies would destroy value for the other as they are friends and have a history together. That is the truth of the matter and to think that because two big deals will be done in the same play will somehow destroy value is mind boggling. Look no further than the Eagleford to see that big monetizations can take place without hurting other players looking to do joint ventures.
Kodiak Oil & Gas (KOG) has seen volume dry up over the past few months. This is normal for junior resource stocks as investors turn bearish on their underlying commodity. Obviously that is what is happening here, yet we see strength in this stock which we find comforting. The key for the Bakken players is getting pipeline capacity in order to get their oil out and realize higher prices for their production. That alone will increase the top line and have all of that added revenue flow to the bottom line minus the pipeline costs of course (although one would have to imagine the pipeline capacity costs would be cheaper than trucking the production out of the area). Exploration success will continue to be the major driver behind moves in the stock, but the pipeline issue will be the kicker as it will make the pie larger for shareholders as soon as capacity comes online.
Gold has fallen below the $1650/ounce level, and we have been on the sidelines for a few weeks now. We have little faith in the bulls right now, as it is hard to find many after the slaughtering the bears have given them as of late. Every rally has been met by a sell-off and the bulls have both the Fed and the bears moving against them, tough to win that game.
Silver has been acting much the same, and here too we have been relegated to watching from the sideline. We think ultimately silver will outpace gold as the economy improves, but we shall wait before adding any new holdings in the silver arena until we see some strength in Asia and Europe. And that is indeed asking a lot!
Continuing to watch the coal stocks Alpha Natural Resources (ANR) is hanging in just above its 52-week lows. The shares have bounced off that level, but not much so and one has to imagine that the news is not going to get much better in the near-term for the shares. If one believes natural gas prices are headed lower, waiting to buy the coal producers is the play here. Patriot Coal (PCX) might also be of some interest to traders looking to make a move once natural gas prices have stabilized and/or bottomed. It has a much smaller market cap, and less attractive assets, but in market bottoms and the subsequent recoveries one can almost always do better investing in the junior players rather than the market leaders. In this case both options offer plenty of liquidity to investors so it seems logical to pay attention to the junior companies in the sector.