Seeking Alpha
Long/short equity, special situations, momentum, growth
Profile| Send Message|
( followers)  

The Chinese news gave commodities a boost yesterday and we had some technical issues getting our commodity article out yesterday. We had planned to talk about the stocks listed below which were in fact big movers and if we are to see commodities move higher, and natural gas get to the levels industry insiders like T. Boone Pickens thinks it will be at in the near future then we shall see all of these names rise to test their 52-week highs. A bold statement, but a true statement because those two questions have seriously hampered some of the forward momentum these shares would have enjoyed with their recent exploration successes.

Oil & Natural Gas

Tuesday after we stated our views for the oil price going forward (see here), T. Boone Pickens was on CNBC and discussed his outlook for oil and natural gas. It seems that we are in agreement over the near term price for oil but his natural gas estimate appears to be on the high end based on our numbers. So long as Europe is going to continue to not 'get it' we think oil is stuck in the range of $85-100/barrel and as long as fears of war in the Middle East do not materialize or even creep back into the market.

With all of the liquidity being pushed into the economy by the various central banks around the world we think that oil prices essentially have a 'central bank put' on them and a floor has been established going forward. Simply put, when the purchasing power of the currency you are trying to use to buy products decreases, the price of that product must increase, with all things being equal as economists like to say. QE3 gave a boost to oil prices but much of that was already baked into the price; the buy on the rumor sell on the news phenomenon on display to be sure. We are not surprised by the fact we had a pullback but are a bit surprised by the abruptness and steepness thus far.

It is our opinion that investors wanting exposure to oil and natural gas need to focus on those companies currently increasing production and focusing on natural gas liquids and oil exploration. Dry gas needs to be a 'kicker' in any investment and not the cornerstone of the logic for buying. There is far too much production out there already and it is far too easy to increase dry natural gas production - so prices have a ceiling on them until the US can figure out a way to export via LNG terminals to overseas markets.

For those bullish on the outlook for oil, we recommend Kodiak Oil & Gas (NYSE:KOG) which is our speculative play at the moment. The company is highly levered to the price of oil and has minimal natural gas production. The company remains above $9/share and as long as it does, coupled with the price of oil at least remaining stable, we have to feel pretty good about the direction of the stock. The Bakken exposure is a huge plus and although exploration costs are higher there than other areas around the country, it is mostly oil production so hard to not like the story here. For traders we think that as shares approach $9/share they offer an attractive entry point for trading purposes and when used with stops can provide for some nice day trading opportunities.

Our three names of players which we view as a bit less risky than Kodiak - and we realize some may argue with one of the choices being included here but we view it as safer based on size and asset base - are Gulfport Energy (NASDAQ:GPOR), SandRidge Energy (NYSE:SD) and Chesapeake Energy (NYSE:CHK). All three are involved in increasing their production through the drill bit and all three have found sweet spots in some of their biggest assets. We think that Chesapeake is posting great results from numerous areas across the country, led by the wet gas window in Ohio's Utica and their continued success in Texas's Eagle Ford where they target wet gas and oil. Those two areas will provide the company with the results to diversify their production base moving forward and transform the company from a dry natural gas producer to one with much more 'wetness' to their production.

SandRidge continues to demonstrate that they have taken an underappreciated and not well understood area (the Mississippi Lime play in Oklahoma and Kansas) and have unlocked tremendous value via the drill bit and much hard work. They should be able to piggyback off of Chesapeake's JV news in the area once that is announced and see shares rise in tandem. They have an extremely low cost basis in the area, and as they derisk the land portfolio they create further opportunities for joint ventures, further asset sales via trusts or even the creation of partnerships. The company has indicated that this will not be necessary, but it remains an option and we think the company is able to deliver on their promise of achieving the ability to self finance drilling activities via cash flow in the near future.

With Gulfport it should now be obvious to everyone that they no longer have a potential company maker with their holdings in the Utica, but rather they have an actual company maker with their holdings in the Utica. That is going to be a huge story as we move through the end of this year and into the beginning of next year. They are in a sweet spot in the Utica, with results to date that have made Chesapeake's results look weak! The numbers were mind blowing when we first saw them, and for those willing to look into the next few wells the company will report on, there are some gems on the horizon. Gulfport is in the wet gas window, and it is our opinion that the Utica success will essentially double the size of the company's market capitalization moving forward.

Lastly we still like EV Energy Partners, LP (NASDAQ:EVEP) as our safest play, a retirement investment for us in real life. One cannot go wrong with the yield, currently 5%, and capital gains potential via a sale of their acreage in the Utica play. A trade for assets with long-term producing potential is what we would expect, but be it either cash or trade we see shares moving north of $80/share and somewhere near $100/share long-term based off of the monetization. Currently this is our largest position with the most exposure to the market as we are unhedged on the long side.

Source: 5 Commodity Stocks Moving On News