With the issues in Europe taking center stage once again, watch for commodities to be particularly weak in the next few days. It would be wise to construct a list of quality names to nibble at as prices come down and get premier names at or near 52-week lows. If those issues pay dividends, that is all the better. It is becoming more and more apparent that the world's central banks are going to need to re-inflate in order to get us out of this mess, and that really means only one thing for commodity prices, a trend higher.
Oil & Natural Gas
Chesapeake Energy (CHK) was hit hard last week and the only good news for shareholders is the fact that when the market was taken out to the woodshed, their shares rose as they had already taken their beating. Volume is still coming in high, with over 34 million shares traded on Friday as the shares closed at $17.39, up $0.20 or 1.16%. It is obvious that the natural gas business is a drag here with no hedges on anymore, and even for companies with hedges it is getting rough. Natural gas prices are rising, however they are considerably below where many in the industry currently have hedges for the next two years, so we would need to see a rally of 50% or so to get Chesapeake back to industry levels for gas sales via some of their hedges.
SandRidge Energy (SD) rose $0.17, or 2.46%, to close at $7.08/share. We listened to the conference call on Friday, and although we did miss a few of the questions in the Q&A session, we came away from that conference call very encouraged. They had great results in exploration, with two really good wells in Oklahoma and demonstrated that Kansas has upside potential as well. The company added land cheaply and two things are becoming quite obvious to us, first is that SandRidge is the leader in the Mississippi Lime play and second is that they probably have the best infrastructure and knowledge in the play. The company should be cash flow positive by year end 2014, and they have the capital to get them to that point. We sold our trading position on Friday as the stock was rallying and the general market was falling, knowing that this weekend would be tough due to the European elections. It was a decision we made on the spot because of the numbers and not something we had previously contemplated. We will look to add a long-term position when the portfolio needs to be rebalanced on the long end.
Vale (VALE) is a company which has had our attention for some time. If we are going to have a pullback like we suspect due to renewed worries regarding Europe, then Vale might be an interesting long-term investment should it fall further. Shares fell $0.71, or 3.19%, to close at $21.54 on Friday with volume coming in at 30.5 million. The yield is already up to 5.3% and the shares continue to trade near 52-week lows. Obviously economic fears are holding this one back, and until China or the US begin to increase their growth rates, it shall remain a laggard, but it will be a laggard which pays one 5%+ to stick around. We continue to watch this one to add to our long-term portfolio.
Investors should watch Molycorp (MCP) this week as they report first quarter 2012 earnings on May 10th. The company has been doing well lately in regards to their numbers and guidance, so investors may be in for another surprise. It will also be an opportunity to get the word out that prices in China are in fact rebounding and China continues to tighten their grip on the rare earth industry in the country. It will also be interesting to see what the company has to say about their progress in getting Mountain Pass back up, and their heavy rare earth exploration program.
Freeport-McMoRan (FCX) reports today, which should give investors a bit of insight moving forward in regards to the company's business and potential pitfalls in Asia and Africa. We do not expect them to say a lot, but they should at least hint at how they expect this to impact the business, which will tell us their expectations of how it should affect the share performance. The issues with their mines in Asia and Africa are the two big issues facing the company right now, and what we perceive as being a roadblock for shares to move higher. Yes there is commodity price risk here, but the political risk is scaring investors and as soon as this is removed from the equation shares will be freer to move along with the market and Freeport's peers.