We have seen various sectors in the commodity space outperform the market in recent days and that is a trend we have to appreciate along with our readers as we are overweight commodities. With what appears is a cold winter setting in, it appears higher natural gas prices are on the horizon rather than lower as had been the fear. This morning we are going to talk about two names benefiting from those higher dry natural gas prices as well as the excitement which occurred in the coal sector yesterday. Lots of interesting stories developing in the commodity space these days, going into the close of the year should be fun.
Oil & Natural Gas
We saw that natural gas rose to highs yesterday, which had a positive effect on many of the dry gas names and those with significant dry natural gas production. Chesapeake Energy (CHK) saw shares rise smartly to close at $20.14/share. Investors saw a 4% move as Chesapeake's unhedged gas production is now becoming more valuable. Looking ahead, and assuming that natural gas prices can maintain the current gains, Cheseapeake could see higher earnings and possess the ability to more easily bridge the cash flow gap that they have. Make no mistake, this will not solve their financial issues going forward but it would buy Chesapeake a little more time and enable them to put hedges in place to de-risk the nature of the company's earnings, revenue and cash flow in the future.
Another benefactor of these higher gas prices is Canada's Encana (ECA) which saw shares rise $0.64 (2.96%) to close at $22.26/share with roughly 6.5 million shares traded. The stock has faced some headwinds recently, but miraculously are trading very near a 52-week high. That is something you cannot say about many big natural gas producers, but it most certainly is the case with Encana. If you believe in dry natural gas's potential moving forward, then Encana is a good play to participate in that upswing while also getting a bit of diversification at the same time. It is far from our favorite play in the oil and natural gas E&P space, but it is a solid company with a good balance sheet and more than capable management.
Coal stocks saw big moves higher after news broke that Chinese steel demand was moving higher. Higher steel demand leads to higher demand for metallurgical coal, as that is one of the major inputs to production (it is not used in the composition, but used in the process for those who do not know). The entire coal complex took off with Alpha Natural Resources (ANR) being one of the big winners. Shares were up another $1.24 (16.96%) to close at $8.55/share on volume of 55.7 million shares. We were correct with our call earlier about the bounce, which we got but it appears our advice to take the 7% gain was too early. We are pleased to note that we did see shares move through the $7.50/share level and did not face big resistance as news flow pushed us through that - which is something we told those holding onto shares to watch out for.
Arch Coal (ACI) was another winner with shares closing at $7.94/share after rising $1.08 (15.74%) on volume of 32.3 million shares. They benefited from the same news, and saw interest in the shares surge as is usual due to day traders' liking the liquidity and ability to leverage up here. Both Alpha Natural and Arch are volatile names, but we are going to look at the charts this weekend and see if we are in a bullish scenario yet. Readers will hate that, but each time we have been bearish we have been correct and every time we have shied away from going bullish we have been correct. When we have said there is a trade to be bullish on here, we have also been correct so we will continue to do what we have as our belief is to do more of what is working and less of what is not.
Which brings us to Peabody Energy (BTU) which rose $2.15 (8.95%) to close at $26.18/share while volume spiked to almost 17 million shares. This is one of the names we will be buying when we do go bullish and we realize we were not buyers at the bottom which is a fair critique by readers. Truth be told, we think this is probably a better buy at $28-30/share than it was at $19/share. It sounds crazy, but it is true. We have also stuck to our plan of buying Utica shale exposure which has saw our holdings in some cases increase over 80%. We will take those profits and diversify into coal once we get some news over there bringing those holdings more in line with what we deem full value. That has been the plan all along, with Peabody being at the top of our coal shopping list.