Yesterday we were asked about our outlook for oil and despite the recent weakness we are still bullish of crude long-term. In the mid to near term time frames we believe that the price will remain stable allowing many of the E&P names to continue with their development plans unabated. We continue to believe that natural gas will be in oversupply in the next few years, especially until the United States is able to export natural gas on a meaningful scale.
Oil prices have been hanging in strongly, even with the growth worries in China and Europe, mostly due to the Quantitative Easing programs the US Fed has been implementing. The sure way to make money here is to buy companies which are increasing production and focusing on higher margin production of oil and natural gas liquids. One cannot go wrong with production growth, especially if prices hold steady, at a minimum.
Oil & Natural Gas
The production growth story is why we like Rosetta Resources (ROSE), SandRidge Energy (SD) and Kodiak Oil and Gas (KOG). Sadly Rosetta did not get within our buying range recently and yesterday we saw shares rally strongly higher to close at $47.77/share as shares rose $2.26 (4.97%) on strong volume of 1.9 million shares. We really like the company's prospects in the Eagle Ford in Texas where Gates Ranch is really turning out to be a company maker. The company is increasing its natural gas liquids production and they still have plenty of dry natural gas acreage to drill should those prices increase. The company has an aggressive drill program and continues to post impressive production gains and exploration success, which at this point is essentially step-out and infill drilling.
Kodiak is a name which draws both praise and ire from investors as it is a highly levered name to the Bakken play and has risen strongly over the past year or so, reaching levels many believe are overpriced. We simply look at the facts and try to decipher where that shall take the shares, and looking at the company's shares right now it sure does appear we will go through $10/share sooner rather than later. As oil producers in the Bakken are better able to transport their oil and natural gas out of the area they will see transportation prices fall while revenues increase along with profits (almost penny for penny) as they realize higher prices as more markets are opened up for them. Kodiak has a lot going for it as it continues to have success via the drill bit and realizes higher prices for their production going forward.
SandRidge Energy has plenty of acreage to drill for the foreseeable future and although production growth via the drill bit has lagged here recently we believe that moving forward they will meet all of their goals. The company continues to have success in building out their infrastructure while simultaneously maintaining the successful drill program they have been carrying out in the Miss. Lime play. We shall know more this quarter regarding their acreage added earlier this year in Kansas and that should be a news headline that shall move the shares. The company continues to see low leasing rates due to the knowledge and effort to be successful in the play and we still anticipate having a transaction close in the area this year which should give us an idea of the real price of this acreage on the company's books.
Murphy Oil (MUR) saw shares jump $4.74 (8.05%) to close at $63.74/share on volume of 9.2 million shares. Shares were stronger due to the company's announcement that they would be spinning off their retail assets to create two separate companies which should be better able to focus on their core businesses. This is a trend we have seen among the larger oil and gas plays and it has been successful in creating shareholder growth. Investors obviously liked the move and so too did analysts. It is our opinion that if we were holders in any of these companies which are splitting assets up that we would gravitate towards the E&P portion rather than the new retail and refining spin-offs as history dictates that.
Yesterday saw Cliffs Natural Resources (CLF) rise $2.93 (7.12%) to close at $44.07/share. This continues the trend higher for the shares, with the major catalyst being higher natural gas prices. The company also found strength when news broke concerning growth in China's steel demand and if both of those stories continue forward (natural gas prices rising and holding gains coupled with steel demand growing in China) then shares shall continue on the current trajectory higher. We are bullish commodity stocks in general and those who sell the raw materials that both China and the world need to fuel economic growth.