Going Back to Natural Gas

I am slowly venturing back to severely pared positions in natural gas, with additions to XTO Energy (XTO) and my favorite EOG Resources (EOG). This is step 1 of a rebuild, and I hope to see lower prices in the near future on a general commodity selloff.

XTO Energy - frankly I don't like the chart and it's been lagging the peer group so I am considering perhaps changing to another name in the future, in my "basket approach" to natural gas. This chart is much worse than just about every peer I am tracking, so I am wondering if there is something company-specific I am missing.

That said, I had cut back severely on its run up (which also lagged the peer group), so I am sort of throwing a dart here since there is no real technical support here around $61. But its retraced 13% in 5 sessions (down from $70) and I am taking it back to a 1% exposure. I sold nearer to $66, so I am getting back some of that exposure (not all) Certainly looks like we could have downside to $56 (200 day moving average) if you looked solely at the chart.



EOG Resources - on the other hand, everything I read on this company excites me; they really seem to be hitting home runs in terms of production expansion. The stock has pulled back nicely to a first support level, the 50 day moving average right near $130 so I am adding here, as the stock is down from $145 level five sessions ago (10%).

I sold a layer out around $138, but have not had a huge position here since it's been on an incredible run since last February and I've been tapping feet impatiently waiting for a meaningful pullback to build a position. I'd love to see this one falter more so I can add at lower levels. But for now we are moving her back up to a 1.4% exposure.



The 3rd name in my basket, Cabot Oil & Gas (COG) has not weakened to the point I want to buy, nearer to $57. That's a good thing from the perspective that the stock is showing a lot of relative strength, but not a good thing for someone who wants to buy more at lower prices.



My top candidate to replace XTO Energy in my basket of natural gas is probably Cimarex Energy (XEC) which simply refuses to sell off in a meaningful manner. When a stock appears this strong even when its peers sell off this gets my interest. I had considered buying this in the past but it's just not sold off to a level I want to buy. So my thought process is when XEC next sells off, I'll be buying - temporarily have 4 natural gas positions for my basket, and then sell the weakest of the group (technically) which is XTO, on the next energy run. That way I still only have 3 names in my basket.



I am hoping to see similar weakness in the coal names soon (at LEAST pulling back to their 50 day moving averages) but thus far nothing... another bullish sign for the group.... in fact I am using this as my leadership group.... i.e. if we get a more serious correction, I'll wait to see the market take the coal stocks out to the back of shed to whack them on the knee caps before feeling safe to venture back into the market in a larger sense on the long side. The "generals" (leaders) are always the last to go, and unlike the last cycle where the fertilizers were the generals, it appears the coal names have taken the mantle of "strongest group". So we want to see the strongest group blasted.

Disclosure: Long all names except Cimarex Energy in fund; long none in personal account

Comments

[User 145472]

As a small operator and observer of E&P companies, I agree with Trader Mark's takes on these companies.

[DaveW]

Hi Mark,
Is Rex Energy Corp. (REXX) on your radar? A small domestic natural gas company with proven reserves in the Illinois basin, Appalachian basin (Marcellus shale) and the Permian basin (Texas/New Mexico). I'm primarily in for the dual purpose of natural gas exposure and speculative exposure to the Marcellus.

www.rexenergy.com/

[TraderMark]

Hi Dave,
Had not heard of it, and its market cap is smaller than what I typically cover. Doesn't mean it won't be the best natural gas stock in the coming year or 5 years - just smallish. There are so many of these E&P companies you need to be a full time analyst just to keep them straight. Everyone is running to Marcellus shale - it's like a gold rush. Thanks.

[Prof. Walsh]

I have owned XTO for many years, betting against it and Bob Simpson is a loose/loose. I can read a chart like the next-guy (desks buying today at $ 62/75 DMA) but the recent Bakken acq. is textbook Roberto!

$ 56-$ 58 range and will be loading the boat for my clients!

If one is heavy into R.S., CHK may be a better play (I dont own).

[Prof. Walsh]

p.s. for us XTO longs, the 3-month chart is suitable for framing however if that double-top fails its because the entire sector gets hit.
goodweekend to all thanks Mark.

[Great Wazoo]

XEC has not been at its 50 day ma since January, so unless there is a large correction in the sector, you might not get any. XTO doesn't look too bad here at 62, but it is still too expensive, as are the others you mentioned. APA has a lower P/E, and might do better over the long haul than COG or EOG.