Commodities continue to get pounded, but natural gas is really sticking out. It is still not time to move into these plays, because as we have said before, this has a very good chance of going below a 1 handle before a 3. The bears are now hitting any company with significant natural gas production and even those with little to none simply for the fun of it. Simply being associated with the E&P industry will get a red tape for your stock it seems, but that is how buying opportunities are created - irrational pessimism. This morning we must simply stress to be patient for a general move into the natural gas plays.
Oil & Natural Gas
We are quite puzzled this morning, as we were yesterday, by the talking heads and their opinion on Chesapeake Energy (CHK) and Aubrey McClendon. To be truthful we did not realize Mr. McClendon had amassed that much debt to fund his portion of the program, but we did realize that he would have debt associated with that position. And how could he not?! Does the market really expect that an individual would be able to fund 2.5% of the company's drilling expenditures based on cash flow when even the company itself cannot? This seems a bit illogical to us. Everyone on Wall Street appears to have a negative view on Chesapeake, and has had a negative view for some time, but we think that this is approaching a buying opportunity, if only for a short-term trade.
Cheniere Energy (LNG) set another 52-week high yesterday as shares rose as high as $18.19 before trending lower on the day. As natural gas prices fall, their future margins rise so this has become a way to place bearish bets on natural gas here in North America. It is still a few years from producing any revenues, but it appears that everything is in order and that this business plan will become a reality. As we are bearish on near-term natural gas prices, it seems we find ourselves bullish of Cheniere's short-term prospects as this plays out.
For those selling out of Chesapeake, but still want exposure to oil and companies which are growing reserves aggressively, we would point out SandRidge Energy (SD) and Kodiak Oil & Gas (KOG). We are not recommending new money to these two, or to sell Chesapeake as we think there is a short-term bounce due to shares there but simply that if you must reallocate within the industry these two have nice profiles for reserve growth and very nice land packages. Neither is as diversified as Chesapeake, but then again they do not share the same production issues as Chesapeake with the huge natural gas exposure either.
Ivanhoe Mines (IVN) was up $1.88 or 15.99% to close at $13.64/share yesterday. Volume spiked up to 21 million shares and the company was one of the top gainers as well. Strong bull case all around. It also helps that some on Wall Street are now saying that copper has been overlooked and with world growth continuing at this pace that we could see a rally in copper prices. This is one we have liked, and now that Rio seems to be taking more and more control and an interest in the company, it appears that a buyout down the road is much more probable - that is what the market is betting on anyways.
Gold fell through the $1650 level yesterday, and we are hardly surprised. What would surprise us is a sustained bull move to levels that chase off the bears. We have watched too many times as this has failed over the past few weeks, so we are on the sidelines. Today we could very well test $1630 if the employment and housing data is not up to par. Silver finds itself falling through the $31.50/ounce level this morning, and here too we have been a bit disappointed with action. Obviously the market needs Europe and Asia to get back on track to trend higher, but that does not look likely in the near-term right now.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CHK over the next 72 hours.