Today we are going to focus mainly on oil and natural gas as there is a lot of news out of there lately and we want to throw out a few ideas for diversification of the portfolio for the readers who are worried about positions in Chesapeake. We have stated for some time that Chesapeake is not a buy as natural gas prices were headed lower, and that line of thinking has saved us from painful losses. The fact that the company took off many of their hedges only quickened the fall and probably has made it more dramatic than it otherwise would have been, but it is important to note that because of this cash flows have been negatively impacted and the company is scrambling to fix this folly. We believe that they will come out of this the wiser, and certainly with some battle scars but we do not think that they will be forced into bankruptcy. Of course when one enters a debt death spiral all bets are off, so thus the attention to the entire industry today.
Oil & Natural Gas
Chesapeake Energy (CHK) ended the week on a low note. Shares closed Friday's regular trading down $2.37, or 13.8%, due to language appearing in their quarterly reports filed with the SEC. Volume surged to 86 million as people became worried that a cash crunch was taking place and the company would be unable to proceed with their asset sales due to their current loans and other debt instruments. The fear was that the company may have entered a death spiral, but within an hour the company announced a new $3 billion credit facility from two investment banks, one being Goldman Sachs. Shares rebounded a bit in after hours trading, and the company announced that they would hold a conference call on Monday morning before the market opens, but the damage was done. It will be interesting to see what the company has to say, but the damage is done and credibility here is shot.
Magnum Hunter (MHR) fell $0.24 (4.99%) to close at $4.57/share as the company announced before the market open on Friday a secondary of $35,000,000 at $.450/share. The underwriters also have a 30-day option to purchase up to 5.25 million for over-allotments. It is a lot of dilution for current shareholders, but it will help the company further develop the Williston and Eagle Ford as well as potentially redeeming all or part of the Series C Preferred Stock. The company also priced senior notes for an offering of $450 million.
EXCO Resources (XCO) has been performing pretty well lately considering that they are light on NGLs and oil exposure. The company is progressing with monetizations via a potential joint venture or sale of their conventional assets. They are also looking to add acreage in the Permian. Like most of its peers, EXCO is focusing on moving towards the wetter production and has big backers, such as Wilbur Ross. This combination is probably what has been helping push the stock up lately as investors move back in as many think that natural gas prices have bottomed. We are not in that group, but thought it necessary to point out what it looks like as the market sentiment changes so that if we are correct and the move will take place later that we know what it will look like.
Encana (ECA) might be a better place for one to place capital if Chesapeake has become too volatile. The shares finished Friday down $0.46 (2.12%) to close at $21.20/share on volume of 8.8 million. The company offers the exposure to dry natural gas, and is drilling in higher margin areas now, but what differentiates the company from Chesapeake is the fact that they still have hedges on and have a far healthier balance sheet. A lot of their exposure to unconventional plays are in Canada so it does offer investors a bit of exposure to other markets for what that is worth. Due to the Canadian factor you will have to deal with the dividend withholding, which for some might be too much of a headache but has never deterred us.
ConocoPhillips (COP) finished $0.72 lower at $52.50 Friday on volume of 31 million. We think that the company, along with others making the transition from integrated back to E&P status will heat up the M&A space as they look to beef up now that they have one focus. ConocoPhillips has already been active, and we expect more of the same, either through joint ventures or via property acquisitions. It is important for the big boys to replace reserves, and not just replace but grow so this is a trend which will have to develop and look for plays in the Bakken, Eagle Ford and Utica to take part in industry transactions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.