Commodities were strong until they weren't yesterday and some names still managed to finish green. Our screen went red near the close and that was a bit of a letdown after the session's move higher earlier in the day. We think the sweet spot in the market is in fact the commodity arena and with the central banks and politicians around the world looking to stimulate the economy we should see more easy money in the coming months. Our favorite way to play this is still oil and within the sector we like those companies increasing production via the drill bit.
Oil & Natural Gas
We were a bit surprised to see Plains Exploration (PXP) as the buyer for assets in the Gulf of Mexico from BP, however we were even more surprised when we saw the price tag and the amount that the company would be borrowing to pull off the acquisition. Shares fell $4.24 (10.51%) to close at $36.09/share on volume of 16.9 million shares as investors worried about the company borrowing $7 billion to purchase the assets for $5.5 billion and have working capital left over. To pull the deal off while also minimizing risk, the company will hedge 90% of oil production to lock in today's prices and the cash flow from that production. This could be the road map for possible divestitures from big companies to smaller ones moving forward, especially in the shale plays where we shall see numerous asset sales moving forward.
Talisman Energy (TLM) had its President and CEO step down yesterday and the company announced that a current board member and former CEO of TransCanada will step in and take control. This is good news for the company as we always thought that management was a step behind and left much to be desired. Hopefully the new hire ends the streak of consecutive executives who leave with disappointing results. Shares rose $0.24 (1.69%) to close at $14.41/share on volume of 13 million shares to close within the neighborhood of their 52-week highs. This continues the stock's recent run, and with the Eagle Ford exposure we really are reevaluating our view moving forward on shares.
We are hearing a lot about people wanting to move to bearish positioning of their portfolio, and although we are not thinking that this will be necessary in the oil and natural gas sector we feel obligated to give investors ideas of how to play that should they be in the bearish camp. One idea is Cheniere Energy (LNG) which has been a risk-on stock which tends to follow the ebbs and flows of the market due to the company really being a promise on future earnings rather than current earnings. We shall not be taking part in this trade, but puts or a short would be a way to play this if one were bearish the sector and oil prices moving forward.
Jaguar Mining (JAG) saw shares close at $1.31/share after rising $0.17 (14.49%) on volume of 5.4 million shares on news that the company hired a new permanent CEO. The company has had an interim CEO since the previous CEO was ousted in December 2011. The new CEO has turned around companies and has an extensive resume, but let's be real - so too do every other mining executive of junior miners. Investors should not get carried away with the resume, but instead take a closer look at the production and property portfolio the company has. With that said, it is nice when a company can add stability among their ranks so we understand the bounce yesterday. Looking forward though, investors need to pay attention to our points as even with the best management team in the mining industry it is hard to do anything if you do not have the goods (i.e., properties and/or production)!
With the news out of Asia that Lynas will be allowed to open their plant now, we think that this is a bit of bad news for Molycorp (MCP). Yes it de-risks parts of the business assuming Lynas does get to market because Molycorp may be able to secure supply for their manufacturing division but at the mine level it increases supply and thus decreases prices moving forward. Competition is competition and Lynas we think has a step up on Molycorp. We have previously stated our bearishness of Molycorp but the truth be told we have two unproven producers here when it comes to HREEs which is why we are hesitant to get excited about anyone at this point. We expect ramp-up to be slow at both entities, and thus would not be buyers at these levels.