Yesterday saw a bounce in some of our resource plays which were presenting at conferences, received upgrades or released good earnings. Oil is hanging in above the $100/barrel level, yet natural gas set another 10-year low in here in the U.S. There is nothing short of an absolute natural gas glut here in the US, and as we have stated previously and will continue to do so, prices are going lower - and probably by about 50% from current levels. If storage reaches capacity, it is also possible that we could go negative in price, however briefly, much like prices did in the U.K. when they had a glut of natural gas not too long ago.
Oil & Natural Gas
With no documents in the public domain to look at regarding these "loans" that Chesapeake Energy's (CHK) Aubrey McClendon has we are left to rely on the information from the Reuters article. Having read the original document that Chesapeake put out, and then the revised document which included even more information we are left with the impression that like most things Chesapeake does this is not a straightforward loan or mortgage. Instead it appears to resemble some sort of hybrid debt instrument like a VPP as the lender receives all cash flows until a predetermined profit is realized. After that the lender has a carried interest in the net profits of each well they financed for Mr. McClendon, so it appears that the $1.1 billion in debt is being blown a bit out of proportion. Unlike when he had shares on margin, it does not look like his lender would take possession of a well. This is merely our impression of reading what everyone else has access to, and we are not condoning the program or past actions by the company or CEO … but everyone knew this program existed and we are left to believe that this is just the ammunition that Chesapeake's bears and enemies alike needed to push shares lower. We were on the sidelines, and have remained on the sidelines through all of this, so no sour grapes here, just astonishment at the situation as it has unfolded.
Kodiak Oil & Gas (KOG) is getting into what we think is serious buying territory. The company is primarily oil focused, flares its natural gas currently and is in the Bakken. This is an oil story, albeit an oil story that realizes a lower price for that oil due to pipeline constraints, but an oil story nevertheless. The fact that this is tangled up in the junior pullback and confused with natural gas players (yes we have heard it discussed as one ironically) is ridiculous. The day the pipelines are in place the company will realize higher margins as trucking will no longer be required and once the big pipelines are in place higher prices will be realized as the bottlenecks in the system will have been resolved.
Copper
Freeport-McMoRan (FCX) reported first quarter earnings which were down 49% but beat analysts' estimates. The company's CEO, Richard Adkerson, told CNBC that his company was not for sale regardless of what market rumors are. He also went onto say that the company has enough projects to allow the company to grow organically and not have to go out and buy anyone right now. That seems to be a good place to be right now, especially when faced with the issues in Asia and Africa which have recently crept up for the company.
Coal
Peabody Energy (BTU) rose as their earnings beat the Street, however earnings were down. Shares rose $2.00, or 7.03%, to close at $30.46. This is an industry we have looked at and decided to wait for lower prices, and we think that as the coal producers transition their demand base from North America to Asia and other growth areas of the world that we will be able to get those lower prices. There are other issues facing the coal producers including rising transportation prices - notice that the railroads are raising prices on their lines, by 10% in some cases.
Alpha Natural Resources (ANR) will be another one to watch, and their earnings will be out on May 3. It could be a short-term play on comments made during the conference call and their outlook, but we like to come up with our view on industries and then play them accordingly. There will be ups and downs in the coal industry in the next two years, but we think ultimately it will be a trend lower, so no need to get cute and try to game it.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
