We had a mixed day yesterday in the commodities space and we have been doing a lot of research lately as it pertains to the natural gas and oil plays. It is hard to see the value in the sector right now, as there is very little good news regarding the North American plays due to natural gas prices and financial or ownership issues for many of the exciting overseas plays.
Oil & Natural Gas
When you have reports that natural gas prices are affecting mid-majors, such as Chesapeake Energy (CHK), that is certainly one thing, but when you hear that those same prices are affecting a behemoth such as ExxonMobil (XOM) well that is certainly an entirely different thing. The AP reported that natural gas prices affected Exxon's earnings, and that took us a bit by surprise (see article here). Due to their size they most likely were not totally hedged and probably have had to absorb the recent price action on a portion of their production. Chesapeake is not alone, as ConocoPhillips (COP) also cut back on their natural gas ambitions in the face of low natural gas prices, and this is when prices were some bit higher than current prices. With big names like ExxonMobil and ConocoPhillips in the space the long-term viability of the sector should remain unquestioned, it is simply a matter of how bad the sector gets gutted (if at all) during the near-term pain which is already upon us.
This is really a tale of two companies (which can be extrapolated to include the entire industry) on different ends of the spectrum. Exxon has the financial firepower to keep drilling and producing at today's prices, whereas Chesapeake needs higher prices with their current production mix and heavy debt load. This is the type of news which keeps us bearish on natural gas, and the reality that Chesapeake will be producing more natural gas due to NGL drilling in places such as the Utica and Eagleford, leads us to believe prices will be lower for longer than many currently believe.
We continue to believe that BP (BP) will invest further in North American shale plays as they have a relatively small presence currently. This is a result of their focus on offshore drilling and the fact that their hands have been tied as they were forced to address the mess from the Gulf Oil Spill. We recently saw the company enter into the Utica by obtaining 80,000+ net acres, and this will be just the beginning. The good news is that since most of the best lands are already taken in the best shales, BP will be yet another major supplying much needed cash to the smaller E&Ps. This can only be good news for those companies, and we will be watching for further announcements of BP's movements into shale plays here in North America.
Precious Metals
We are neither bullish nor bearish this morning on gold or silver, simply neutral and holding only that which we have held for years. Today we would not play this market as the Fed will be releasing their rate decision, which should be no change, but no one ever knows what is to be said of during these times. With the election looming, the Fed may very well be on the sidelines for a while, and this would not be good for the PMs as it takes the inflation factor out of the equation. So we shall be a spectator in today's markets as they pertain to gold and silver.
Rare Earths
Molycorp (MCP) has fallen below $30/share once again and currently finds itself at $27.88. The rare earths are having a tough go of it mainly due to Europe's continuing problems which have scared off all of the risk-on capital. The same thing happened to uranium stocks back in '07/'08. It is a reality we have to deal with, but luckily China is working to tighten supply to the best of their abilities. If the global economy can get back on track for consistent growth, we could see another nice run in these shares, but we understand that is asking for quite a lot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
