In early trading overseas, Brent Crude is trading above the $114/barrel level and this should be bullish for oil stocks. With Brent rising due to expectations that the US Federal Reserve and other central banks will move to ease in the future coupled with events in the Middle East. Investors seem to be attaching some premiums to oil expecting near-term price appreciation to result from action on the central bank level worldwide and the executive level in oil exporting areas of the world.
We are going to go pretty heavy into the oil and natural gas in today's article as there was a ton of news out recently.
Oil & Natural Gas
ATP Oil and Gas (ATPG) saw its shares fall by $0.95 (72.52%) to close at $0.36/share on higher than normal volume of 23.4 million shares after reports surfaced Friday that the company was preparing a bankruptcy filing. The company has experienced numerous setbacks in the Gulf of Mexico and Mediterranean Sea, all of which have cost the company dearly. The company has good assets, and a solid pipeline but the cash flow just does not support the business model. Most other small operators have abandoned seeking out the $100 million cap-ex drilling locations in deep water in favor of shale plays and other onshore sites with better risk/reward ratios. The bonds here tell the story, and although both the equity and debt have decreased in value at the end of the day only one of them will retain any value and it usually is not the equity side of the capitalization formula.
Kodiak Oil & Gas (KOG) shares rose a modest $0.06 (0.68%) to close at $8.83/share. Volume was 5 million shares and everything looks normal, so why are we writing about the stock this morning? We have been watching to see if shares could close above the $8.80/share level as in the past this have been the first 'step' higher. We have often seen it used as a sort of launching pad to the $9/share level and our belief is that if the stock can hold here then shares should move higher to then test the $9.00/share level. The stock has been building momentum over the past few weeks, and we may very well be seeing the next move up, investors should take notice here.
It is obvious that Chesapeake Energy (CHK) has some issues, but the question is whether the company has the assets and business strategy to overcome them. We have no doubts about the operational side, but the bid rigging allegations and subsequent Justice Department investigation is another story. We also read in Barron's this weekend that there is growing concern regarding the company's reserves and the process by which they are calculated. This will be something to watch going forward, but the best way to figure out the truth is to see how various company's account for the same asset. That would be our advice to studious readers wanting to get to the bottom of this and it will require a bit of research. On Friday the shares closed down $0.63 (3.10%) to close at $19.68/share on volume of 18.1 million shares.
We went bullish on shares in Rex Energy (REXX) at the $10/share level and have seen them rise 30% since that recommendation. If you wanted to gain exposure on a large scale in the Utica as well as to a company which will see significant revenue and production growth via the drill bit then this is the company you want to take a look at. The company is as close to a pure play in the Utica as one will find and Rex will increase their production of natural gas liquids exponentially over the next two years. To put this in perspective for readers, it is possible that five of these wells could double the market capitalization of the company moving forward. We already know that the area has been derisked so this is most certainly a risk we are willing to take. Readers should add shares to positions already established and look into opening positions if they do not already own any. Shares in Rex finished at $12.95/share after trading lower by $0.56 (4.15%) on volume of 710k shares.
Shares in Cheniere Energy (LNG) have risen as the risk-on appetite of the market has returned. We noticed that the company's shares finished up $0.60 (4.27%) on Friday to close at $14.66/share. This has been a terrific trading vehicle for the risk-on and risk-off trades, and one must think that it will continue into the future. If the market begins to show any weakness, we think that it would be prudent to look to Cheniere as a way to hedge against losses elsewhere by using puts, selling calls or potentially shorting the stock (although we never recommend shorting, it is an option).