Oil inventory numbers will be out today and we should see some movement in our Utica shale plays after the Chesapeake and Gulfport earnings releases over the past 30 hours. The wells are coming in very nicely there with strong production in the wet gas window and investors will begin to take notice. Investors can think what they want, but it is only a matter of time before the analysts are forced to get over the capital expenditure debate and have to recommend these plays based on the exploration and production success. As this has played out we have been amazed at how prices still remain attractive for those initiating and adding to positions even though we know in many cases that the goods are there. This will be something to watch over the next week as we get more news out of the area with more companies reporting their quarterly results.
Oil & Natural Gas
We are about halfway done with our work on the Chesapeake Energy (CHK) conference call, but the results were as we suspected although we were a bit saddened that the company did not have more to say regarding the Utica oil window. They are bullish on the wet gas section of the play and think that it will be about equal to the Eagle Ford, but will wait for more data before saying the same about the oil window. It is apparent from what the company stated that they are focusing on drilling only where they need to drill to meet production requirements and requirements to get land to HBP (held-by-production) status. Shares in Chesapeake rose $1.67 (9.44%) to close at $19.37/share on volume of 41.6 million shares. The shares were up not due to financial results, but rather that the company is going to get some deals done to raise badly needed money which will help fund the cash flow shortfall this year and next. It is also important to note that the company stated that the cash flow issues for next year are becoming less of an issue. That was quite bullish.
EV Energy Partners, LP (EVEP) will probably be buying a portion of the Midland Permian assets being sold to Enervest, so that may have played a part in the weakness of the company's shares but so too could Chesapeake's comments about the oil window…or rather the lack of comments. We think that during this company's conference call we shall learn a good bit more about the oil window although they have previously stated they are trying to keep a lid on results as they have buyers looking at their data room and there is the hope that a deal can be done before the end of the year. We are beginning to doubt that deadline, but ultimately believe that a deal will be completed with the company doing a tax free transaction for mature oil producing assets. They would also need to buy more properties in order to increase leverage so that could be the reason for the Chesapeake Permian/Midland assets. Shares closed at $53.25/share after falling $1.19 (2.19%) as the company traded 353k shares.
SandRidge Energy (SD) is misunderstood. That is apparent after going through the company's latest quarter. It seems to us that analysts have the story all wrong and simply do not understand the big picture, further evidence that there is extremely too much focus on quarterly results and not enough on building a viable franchise to last years going forward. We think that the results from the original acreage position in the Mississippian play have proven it, now it will be interesting to see if SandRidge can establish their new acreage as being of the same quality throughout. We have said it before and will say it again; This is a $10 stock mispriced at $6/share and will have to rise moving forward.
As the market gathers strength so too does Freeport-McMoRan (FCX). We have seen shares move up over 10%, almost 15% since the Europeans began discussing how they would fix the market recently. The more comfortable the market becomes with risk, the higher Freeport shares can go, and it currently appears that the risk-on trade is creeping back into vogue based on some of the technology stocks which we follow so it is only a matter of time before investors return to the commodity trade.
Shares in First Solar (FSLR) rose $1.62 (8.50%) to close at $20.68/share on volume of 12.9 million shares after it was announced that the federal government would fast track approval for seven renewable energy projects, one of which is the company's Silver State South project in Nevada. As we have previously stated numerous times before, when solar stocks rally we are sellers. The current economics do not justify the technology and were it not for government subsidies and regulations then it is safe to say much of the production being added would not ever have gotten past the drawing board - if even to that point. There are far better returns for one's capital out there with much lower risk, and at the end of the day that is what it is all about.
Disclosure: I am long EVEP.
Additional disclosure: Own stock in EVEP as well as LEAPs at various strike prices.