Yesterday was a mixed day for commodities, yet we found our portfolio up as certain plays bounced off of their lows. Generally many commodity plays opened at their lows and rallied back, mostly closing lower, but still showing strength over the course of the day. We are not sold on a bottoming in commodity stocks yet, but across the board it is our opinion we are approaching those levels. The summer will most likely be a boring trading time and the best time to get back in will most likely be the months of July or August.
Oil & Natural Gas
The stock market was down sharply yesterday, and so too was SandRidge Energy (SD) early on. The shares rallied from early lows which were below the $7/share level and actually closed up and above $7/share. The company's shares appear to be oversold, and one would do well to accumulate on dips such as we saw yesterday at the open. When doing this $6.80 does appear to be a good entry point, and SandRidge does not face the same natural gas issues many of the E&P plays face, so it is lacking the downward price risk of natural gas - always a plus.
Chesapeake (CHK) was another one of the commodity plays which rallied yesterday after opening sharply lower. The shares closed at $18/share and at times yesterday Chesapeake was one of the leaders of the S&P. There are a lot of bears around this one, and a lot of negative bets due to the natural gas exposure and the fact that the company took their hedges off, however with the company's new focus natural gas is not a focus but a by-product, so current drilling creates many more times the revenue as dry natural gas drilling. The volume will not be there this year or next to offset falling natural gas, but after that we should see all important financial metrics heading higher, including the company possibly being cash-flow positive.
Devon Energy (DVN) was recently positively profiled in Barron's. The company is trading at a cheap multiple and has some really good exploration properties in the pipeline. We like the company's exposure to the Utica, which we have stated numerous times will be a company maker for many of the E&Ps active in the area, and for companies the size of Devon it will be a driver of growth going forward. One point to highlight about Devon's projects are that they are all near infrastructure already in place and will not have the issues like some of the Bakken producers are experiencing being forced to sell below market prices (Michigan may be the exception here for Devon).
We want to throw out another name this morning which is a bit riskier than our other plays, but a company which has been undergoing a transformation lately. The company is GMX Resources (GMXR), a previous high-flier on their natural gas holdings, but now a Bakken play. They were late to the Bakken, but somehow were able to get some decent acreage which has to-date had good results from wells they have drilled. In a short period of time the company has moved the majority of their company from natural gas to oil, no small feat in the current environment let alone based on the size of the company. This is risky play, but the reward could be quite nice. We see $1+ to the downside but $3-5 on the upside should oil prices hang in there and the company continues to experience exploration success in the Bakken.
It appears that Peabody Energy (BTU) may have lost out on the Tavan Tolgi coal mine which only a short while ago seemed to be theirs. Now the Mongolian government thinks that they will be able to develop the project themselves, and all of the foreign entities are now left looking in at what might have been. This could have been quite nice for the company as it put them near one of the largest coal consumers in the world, China, and a ready market for their product.