We now find oil trading above $91/barrel, but commodities in general are near recent lows and commodity equities are at yearly lows - some multi-year lows. The fears in the markets are becoming real, and more so by the day. There is more talk of Greece exiting the Euro, Spain needing a bailout and Europe's slow growth affecting China's growth. What is even more terrifying is the fact that all of this talk is actually becoming reality and the latest batch of Chinese numbers indicate that growth is off and that their appetite for commodities is stalling. We have seen this before, where China takes a pause, but with Europe teetering on the cliff it is hard to say just how big of an impact all of this will have on commodity markets if either one of these large economies has their growth rates fall any further.
Coal
Peabody Energy (BTU) closed up $0.02 on Friday to finish at $23.88/share on volume of 4.8 million. This is one of the best in the coal industry, which to many investors already burned by the downturn in coal equities may not be saying a lot, however it is not a place where one should be gravitating towards just yet. The best in the industry are always taken down last, much like the worst employees are always let go first followed by better and better ones as each new round of layoffs comes around, and although down, we think that this goes south of $20/share before it is all said and done - referring to the downturn that is. One could give a myriad of complicated and intelligent sounding reasons as to why this heads higher, but why waste the time when it can be summed up with two words - natural gas. So far we have been spot on about coal heading lower, so we will continue to follow what is working by doing more of that and at this time that requires us to sit on the sidelines and be spectators.
Oil & Natural Gas
Rosetta Resources (ROSE) is one we would like to highlight this morning as the shares held the $40/share level pretty well on Friday and even finished up $0.08 to close at $40.27. This is an Eagle Ford play, and although the company does have dry gas exposure there they are mostly in the wet gas area. To date their focus has been on the Gates Ranch property with its high liquids production which has helped the company increase revenues and production dramatically. Below these levels is an excellent place to add or initiate positions.
Chesapeake Energy (CHK) finished up $0.23 (1.48%) to close at $15.81/share Friday on volume of 40.6 million. The company has addressed Carl Icahn's disclosure of his stake in the company and right now it appears that it will be a relationship of mutual respect - but if management makes any more big blunders we could quickly see Icahn push for change. There is tremendous value to be realized in these shares if the company can make it through until cash flow positive and not have the commodity markets move against them - but that is asking a lot especially for a company known to speculate in the futures markets. The next 2-5 years they should become more conservative as they move to develop all of these assets, decrease debt and become a real company operating within its own operating cash flow.
With volume of 7.5 million, SandRidge Energy (SD) shares closed up $0.16 (2.53%) to close at $6.48. We have had a few emails and messages over the last few days of readers wondering where to buy into this and we thought it best to address it in an article. To be safe, we would look at purchasing closer to $6/share rather than their current share price. We like the company, but not Europe's and China's problems and unfortunately at this time it appears that whatever happens to those economies will have more of an impact on the company's shares than their operating results. With that said we think it is better to be cautious and diligent in picking an entry point than nonchalant and establishing losses shortly after entering a position.
Copper
Freeport-McMoRan (FCX) had volume of 9.9 million on Friday with shares ending the day at $32.41 which was off $0.16 from the previous close. There might be some hope for the company in regards to Indonesia as it appears the country wants to establish growth, and is looking to their resource sector for it. Knowing this we can envision Freeport having to give up less of an ownership interest should they agree to expand operations there to help with employment. We said we could envision it, but in reality this would only lessen the hit a bit so it will be interesting to watch either way - and we will continue to watch from the sidelines still as the risk is very real and we do not want to try to guess the damage. It has paid to be on the sidelines the past few months with this one and so we shall remain on the sidelines until this becomes so cheap the risk/reward ratio becomes intriguing - and we are still a bit off of those levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
