This morning we are seeing oil prices recover a bit as commodities got hit pretty hard yesterday. Blind buying in this market is not the way to go and we would look to add to positions in our high growth production companies in the oil and gas sector. One would probably do themselves a favor by steering clear of those entities with large debt loads and focus on those entities with solid balance sheets and nice cash reserves. This will ensure that if we do go into another downturn your investment will be insulated to a certain extent.
Yields in Europe continue higher and the dollar continues strengthening, which is not exactly good news for commodity stocks. Investors will have to continue to watch Europe in the days ahead, but the earnings season is starting to kick into high gear and that may have more bearing on where we go in the next few days than anything else, especially when one looks at the names releasing numbers. They have little to do with the commodity space, but everything to do with general market sentiment.
Oil & Natural Gas
The big news resulting from yesterday's trading session was that China was and probably shall remain a big buyer and investor of energy. We saw two deals yesterday in the oil patch which caught our eye as China's two largest oil companies made deals to secure energy resources.
First we saw Canada's Nexen (NXY) rise $8.84 (51.82%) to close at $25.90/share as volume skyrocketed to 141.3 million shares. China's CNOOC will buy Nexen, and it must be noted that this is the company's largest merger attempt since the failed Unocal bid a few years back. This is a strategic deal and makes sense on many levels, especially as one considers just how much production and energy reserves China needs to lock up in order to feed its energy demands.
China's other large oil company, Sinopec, bought a 49% interest in Talisman Energy's (TLM) North Sea assets for $1.5 billion. This pushed Talisman shares up $0.68 (6.24%) to close at $11.58/share on volume of 15.5 million shares. Roughly a third of the purchase price will be used this year to repurchase shares which we do not necessarily agree with based on management's performance over the years but one must hope now that the company has put in a bottom and this argument would be mute. We were shareholders for some time in Talisman and tripled our money, but management always left something to be desired with their inability to really capitalize on the asset portfolio. They made a big push into oil, shunning natural gas only to have to rush to natural gas at the peak of the market. When they finally achieved success there they were forced to shift strategy back towards oil production and that is what has plagued shares. Looking back we realize that even when they were a step ahead they were a step behind, and that is no way to go about business.
All of this news helped Chesapeake Energy (CHK) turn in a solid day when many came under pressure. Shares rose $0.24 (1.40%) to close at $17.44/share on volume of 17.1 million shares as investors anticipated what the Chinese activity would or could mean for Chesapeake's assets. The stock initially opened lower, but he chart moved from the lower left to the upper right as this thinking quickly spread among traders yesterday. We still think that the company sells assets and also believe that the Chinese will play some role in helping Chesapeake alleviate some of its debt issues.
Taking a quick look at Vale (VALE) the shares are down to $18.36/share after falling $0.72 (3.77%) on volume of 13.1 million shares. The yield will now come into play here and should help support shares from falling too much further. The China news should provide a small boost to shares this morning, but nothing more as it will be more of a relief rally after recent losses here.
Much like Vale, we see Freeport-McMoRan (FCX) having fallen back down from its recent gains. Shares finished down $1.15 (3.41%) yesterday to close at $32.62/share on volume of 19.3 million shares. China might give shares a bit of a boost today, but longer term we need to see better economic data coming from there in order to really push shares higher, that is one belief we are unable to shake.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.