The story in commodities is the rise in natural gas prices which has led to a rally in both natural gas producers' shares and a broad based rally in the coal sector. We are bullish this morning, but recognize that on the horizon a decision will need to be made by utilities as to which fuel they want to burn and that one of the commodities is going to be the loser. Based on production figures that we have we think natural gas will eventually be dropped as there is tons of coal production that has been shut in and smaller numbers of natural gas which has been.
For those making the transition, use cash to make the purchases rather than margin and be sure to use your allocated long-term funds as we believe whether you invest in coal or natural gas that it is a multi-year story on recovering prices and rising share prices. It would be sad to be right and have your broker force you out on a margin call during the first correction on the first leg up.
Oil & Natural Gas
The strength in natural gas has continued to push players such as Chesapeake Energy (CHK) and Encana (ECA) higher. The entire complex is moving higher and although in some cases the rising price will not have much of an impact moving forward in the near-term due to hedges, over the next year we should see numbers improve as the companies roll over into new hedges at higher prices - assuming of course that natural gas prices hold steady and/or continue to move higher.
Much effort has been made in the industry to focus on natural gas liquids and oil plays, but there is still significant production from the previous shale gas boom and increased revenues derived from this production could very well speed drilling in some cases for names like Chesapeake and/or cause a slowdown in asset divestitures. The situation is fluid, and with the new natural gas coming online via the oil and natural gas liquid targeted plays we are not seeing the entire production decay being realized but it is still significant. It will be interesting to see when dry natural gas targeted plays once again become targeted for drilling and how big that move is - if too many moving back towards dry natural gas exploration will results in too much production hitting the market again.
The rise in natural gas prices has helped the companies producing the resource, but the biggest beneficiary has to have been coal. We are no longer bearish of coal, we want to make that official and crystal clear. Our data is indicating that we have broken through levels which break the trend which shares have ridden lower and we may very well have started a move higher on a sustainable uptrend - although much of that depends on where exactly dry natural gas prices head. We will hold off on our purchases at this time until after we get to hear some earnings reports and read over those transcripts of the conference calls. Remember, last quarter we heard that this quarter would probably be weak so we might very well see a sell-off on the news with an opportunity to buy. Natural gas prices have obliterated our timeline on the trade sequence we had set up which called for an investment in Utica shale players with winnings to be invested in coal players. The Utica has taken a bit longer to play out than we anticipated and the coals began their ascent earlier than we anticipated.
We want to see earnings from Peabody Energy (BTU) which closed at $26.85/share after trading up $0.94 (3.68%) yesterday and Alpha Natural Resources (ANR) which saw shares rise by $0.71 (8.30%) to close at $9.26/share. Volume is creeping higher for the sector as a whole and we are seeing many of our day trading readers establish positions which we believe is a positive at this point.
AuRico (AUQ) shares are back to levels not seen since July of this year and after rising $0.32 (4.05%) to close at $8.32/share we believe investors need to pay attention to the $8.50/share level as the next area of resistance. Momentum is carrying the shares higher after a string of good news from the company and so long as the company continues to address the production issues and gold prices hold firm (at a minimum), then we believe shares will reach the double digits with ease. If the results continue to improve but shares lag then we do believe that the company becomes a takeover target, but we would not buy on that possibility alone.