When it comes to commodities these days it is undeniable that natural gas is driving the entire complex having spillover effects to other commodities and really flexing its muscle here. The recent rally here has pushed up those players in the oil and natural gas sector with some names that had previously been written off seeing renewed investor interest in their shares. It is our opinion that many of these names are a buy if natural gas prices can continue higher or at least settle down somewhere between $3-4/mcf as most have already embarked on plans to diversify their production bases across natural gas liquids, oil and their current dry natural gas. It is all in the production mix, and should prices be able to reach that $3-4 area one must remember that the companies can generally hedge at higher prices moving forward (although to what extent that does depend upon the futures market.
Oil & Natural Gas
We have previously discussed how the rising price of natural gas will affect Chesapeake Energy (CHK) and Encana (ECA) which both continue to see their stock prices rise smartly, and today we will take a bit of time to review this and look at a few other names. First though, we want to give readers something to pay attention to when Chesapeake holds their quarterly conference call. Obviously everyone will be listening to any news about property sales but of far more importance we believe will be management's decision of whether to lock in natural gas prices here for at least a portion of their production or whether they are going to continue forward unhedged. We would like to see a portion of natural gas production hedged, simply to give the company guaranteed cash flow from those assets and help alleviate the fears in the market that the company will never get to positive cash flow in order to organically finance their capital expenses. It is our opinion that if the company can demonstrate a bit of conservatism in this regard then we could very well see shares tick higher on the news as it would appear that Aubrey's cowboy days are over.
There are a few other names out there which might be of interest to our readers, including Southwest Energy (SWN), Exco Resources (XCO) and Range Resources (RRC) which are more heavily skewed to dry natural gas production and exploration than many of the other names we have discussed in our articles recently.
Southwestern Energy has hung in relatively strongly as investors have bet that a turnaround would occur in the sector and believed that this well run company would be able to navigate through the storm and maintain shareholder value through the process. The company has not been marred by the missteps of many competitors, having run a very conservative company with management being decisive in their plan moving forward. The hedges here have served the company and investors well, and unlike Chesapeake the company has managed to not be tempted to take them off for quick trading profits. Our thinking has always been if you wanted to get natural gas exposure then you buy stock in a company which produces it and if you wanted to get exposure to futures markets then do it yourself or go to a hedge fund rather than encouraging companies to engage in such risky trades.
Range Resources is another play which we like based off of management and the balance sheet. The company is nowhere near as aggressive as peers and its management has been able to guide the company through the tough times. There will still be bumps ahead, but the company's assets are situated near natural areas for export facilities, lots of infrastructure and in close proximity to some of the largest natural gas markets in the United States. Their natural gas assets are in some of the most prolific shales and we also like the fact that the company is in the process of adding exposure to natural gas liquids and oil production to diversify the revenue stream. It also has the added benefit of helping in such measurements as ROI the company's margins. When one finds a situation with a good management team and improving metrics, it is generally a good time to look at opening a position - and with Range we would give our blessing to our conservative readers initiating positions.
Of interest to our readers seeking more risk, we would direct your attention to Exco Resources which is backed by legendary investors Wilber Ross. The company's shares have rallied all the way up to $8.93/share and it appears that Mr. Ross's prediction that his investment in the company would be successful even when he was down big shall materialize. He was a bit early to the party, mistiming the buy, but as always appears to be correct on the big picture. We have always respected the man, and for full disclosure he has gotten the best of us before in a small company back during the tech crash, for his ability to find value across a host of industries and understand the way the markets will play out years into the future. Tough to bet against a guy in the resources sector when he has made a killing in steel and coal, with either trade being a career maker for any one individual and the fact he has done it many other times as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.