Commodity producers are nearing interesting levels which we think are nearing buy zones. Oil has been hit hard lately along with a host of others and even at those levels many companies can be extremely profitable and fund their operations. If oil falls to $80/barrel, well then we need to take the situation a bit more seriously but we believe that money is going to begin to find its way into the market as the year progresses. Europe will need to print money to fix their situation, China will have to spend more of their reserves to keep the economy growing at their projected rates, and the U.S. will have to keep the easy money policy for probably longer than expected as Europe has taken so long to get their house in order. If we avoid a recession, then prices are most certainly headed higher with the changes described above.
Thompson Creek (TC) had a rough day again yesterday as the shares fell a further $0.43 (9.27%) to close at $4.21/share on volume of 17.2 million. The company priced the $200 million financing, but the stock is getting killed as management has had to backtrack from previous statements in regards to their new mine. When they closed the acquisition, free cash flow was supposed to be able to support the development of the mine, now they have cost overruns, are unable to fund the development via internal cash flow and are forced to raise funds from outside sources and dilute shareholders. So yes, if we were shareholders, or had been, we would probably be selling here too as management seems to have lost its ability to execute - with that said, we do believe that they are moving in the right direction by pursuing this diversification of the business but we are disappointed with the execution.
Oil & Natural Gas
Chesapeake Energy (CHK) was hit with another Reuters exclusive, but this one seems to be more of the same. As we have pointed out in our other articles, the reason the program could not be ended earlier is because Aubrey finances his portion by the year and does it two years at a time in some cases, so the fact that this happened did not surprise us, nor the fact that he did it around the same time a Utica JV was announced. If the company is going to be drilling, he will be too so funds will be needed. This is not news, and investors simply need to make a judgment call regarding cash flows, the price of natural gas moving forward and whether the company will be worth more in the future than they are today to make an investment decision. At this point we feel that Reuters and Forbes are simply muddying the water.
EXCO Resources (XCO) rose $0.65 (9.18%) to close at $7.73/share after receiving an upgrade form KeyBanc Capital Markets. Volume was two times their three month average with 12.7 million shares traded. The upgrade was early morning and the chart moved from the lower left to the upper right, an impressive feat in any market but especially so in yesterday's market. Other than the upgrade, it appears the shares are rising as investors are playing the recent rise in natural gas prices - and this is not the only natural gas entity we see this happening at.
SandRidge Energy (SD) had a good day yesterday, rising off of the lows to actually close near its open. That cannot be discounted especially as it seemed that short sellers were running around rampant but maybe they moved on now that the general market is showing signs of weakness and there are other places, far better places in fact, to bet on lower share prices. Long-term we think this is an easy double, even a triple is likely and if it were more we would not be surprised. It is because of this that we continue to follow this stock and it is on the short list of being added to our long-term holdings.
Vale (VALE) closed at $20.90/share after having fallen $0.54, or 2.52%. The shares set a new 52-week low during trading yesterday at $20.46/share, and based on the close the company now sports a yield of 5.3%. Volume was higher than normal registering at 28 million. Although Vale is taking a beating right now, we believe that this may be one of those companies which can pop once the global economy turns, but that will require China and the developing world to increase their growth rates, which probably hinges more on Europe than many think. So do not discount the headwinds faced by the company when looking at potential entry points.