It is our guess that we will see some sort of bounce in the next week or two in the commodity sector as shares have been beaten down badly over the past few weeks. Greece will have some elections, and Europe will rally around them for appearances as has already started but most importantly we should see the US Fed start talking a heck of a lot more "dovishly." To do otherwise would be foolish, and these are not foolish people. When the market only requires you to say the correct thing, it is usually wise to do so and that is exactly what we expect of the Fed in the weeks to come. The economic data is not good and to discuss raising rates in this environment, or not throwing out a helping hand to markets, would be suicide.
Oil & Natural Gas
Chesapeake Energy (CHK) was up by $0.81 (5.98%) to close at $14.36/share on volume of 38.6 million on Friday. Oil has been down, but natural gas higher, and if not for the awful news flow regarding management and their liquidity situation then it is safe to say that the shares would have recovered much more in recent trading rather than setting new 52-week lows. Management is something you can easily fix, but the liquidity situation is something that is quite serious, and as we previously stated we were not aware that it was as bad as it was at Chesapeake. We knew it was not a good situation, but they had reached a critical point especially when considering their negative cash flow and burn rates. Natural gas continues to show strength, and maybe this can help propel shares higher in the next few months.
Investors should take note regarding Kodiak Oil & Gas (KOG) which closed below the $8/share level. Shares closed at $7.93 down $0.17 (2.10%) on volume of 5.7 million shares. The shares could not break above the $8.30/share level, and after falling to break through twice in the morning the shares started a move lower over the rest of the day and finished close to the daily lows. Oil has fallen over the past month with natural gas rising, and we all know Kodiak is heavy in oil and not so in natural gas. What will be interesting to watch is the higher prices they will realize for oil going forward as new infrastructure is built out in the Bakken and the price deferential they had experienced is corrected. The company should be able to realize 20% higher prices for their oil if it trades around $100/barrel with infrastructure plugging them into the nation's grid.
Freeport-McMoRan (FCX) finished down $0.36 (1.12%) to close at $31.81/share on volume of 18.6 million shares. The stock closed near its lows and the yield is now approaching 4%. We think that this will test and fall through its current 52-week low and that new lows lie ahead for this one. Copper and gold are at lower prices than only a month or two ago and there is still further news to come out regarding their mines in Asia and Africa which will have a new tax structure placed upon them. The only good news we can see is a potential buyout offer, and even that is a long shot as management has stated that they are not interested in selling the company.
The coal industry has been killed lately with 52-week lows hit on a weekly basis. Alpha Natural Resources (ANR) has been one of the leaders lower, and Friday was no different. Shares were down $0.64 (5.55%) to close at $10.89/share on volume of almost 14 million. This is not happening on weak volume and we think that it will set more 52-week lows moving forward. The market capitalization is now just under $2.4 billion and we see these shares moving into the single digits - that is where it is a buy.
Arch Coal (ACI) has also had a rough few months and is already in the single digits in regards to share price. On Friday it too set a new 52-week low as shares finished at $7.20 down $0.23 (3.10%) on volume of 13 million. This was a bit higher than the low it set during the day, but there should be no confusion over how badly this stock is acting. The market cap it down to $1.5 billion and we are not alone in thinking that this one will move downward moving forward.