We should see a bit of a rally in the commodities markets, however the China news should have more of an impact here than it will on the general markets. Investors need to remember that as Europe solves its problems, so too does it solve one of China's biggest - as it is China's largest trading partner. We would look to trade in this market, setting up only one possible long-term trade for those worried about investing in Chesapeake (see third paragraph for more on this). Today, and possibly this week, shall be a trader's market and for the time being only short-term trades will be being entered by us.
Oil & Natural Gas
There were not too many fireworks at the Chesapeake Energy (CHK) annual shareholders' meeting on Friday. There were many reports and updates throughout the day, but it seems there was to be no finale for all the fireworks already set off. Chesapeake announced prior to the meeting that they would be shedding assets across their holdings and even getting rid of what many viewed as non-core assets (i.e., the pipelines). Shares closed Friday at $18.36/share, having risen $0.51 (2.86%) on volume of 31 million. The stock still has risk, but on a market pullback it very well could be a buy.
For those who were playing Chesapeake for the move towards higher margin production, we think that we may have a better way. This is not our favorite play for this trade, but it is another one to add to our list. Rex Energy (REXX) is highly skewed towards dry natural gas, but has some very good acreage in the Ohio Utica and has added more, which we believe will result in the inverse of the current situation. We think that at current prices this is an interesting entry point for half of one's position and to keep the other half of their firepower ready for a pullback to the $9/share levels. Volume for Friday was 969k and the shares closed at $10.16 having risen $0.04 (0.40%).
Kodiak Oil & Gas (KOG) opened lower on Friday, fought back above $8/share but could not hold it. We were disappointed that this did not hold, but technicals will not matter today, as the stock will go over $8/share and now what matters is by how much over $8 it will get. Friday's volume was 4.5 million, in line with the three month average, and the shares closed down $0.14 (1.73%) to close at $7.97/share.
SandRidge Energy (SD) closed at $6.34/share having risen $0.07 (1.12%) on volume of 10.5 million. The market appears like it will be moving higher, and the beta is high on this issue so this could be an 8-10% move type of day. With that said, it might be a good day to play the in-the-money calls on this one for the current contract as the time decay has pretty much already played out so you can leverage up with little to no premium paid during the day. We have played this before, and whether we play it this morning will depend upon where the shares open up…if too high, then we will sit on the sidelines, if not a strong move upwards we might look at buying.
Patriot Coal (PCX) seems to be losing investors' confidence. It is getting uglier by the day, and when you are the weakest in a weak industry this is to be expected. We are still waiting to see if the company can make it, and that will require a corporate update so we can see where the company currently stands. During a prolonged downturn we have serious doubts that this one makes it through the cycle, but stranger things have happened. The company was one of the biggest loser on the New York Stock Exchange on Friday, falling $0.18 (9.73%) to close at $1.67/share.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SD over the next 72 hours. If we do initiate a position in SD today, it will most likely be via the current month's call contracts which are in-the-money (and most likely just a trade for the day).