Today commodity stocks should be flat, as the outcome of the presidential race shall be very important to quite a few sectors, namely oil and natural gas as well as coal. If a long-term buying opportunity appears today we shall nibble, but other than that we want to sit on the sidelines and wait with our cash until there is a better understanding of which policies will be in place for the next four years. The states to watch will be North Carolina, Florida, Ohio and Colorado but now some are saying that Pennsylvania may be in play. It will be an interesting night to say the least.
Oil & Natural Gas
This morning we want to point out two companies which will be impacted by the Chesapeake earnings call. First up is SandRidge Energy (SD) which now must compete with the company for access to capital if they in fact decide to sell-off any of their remaining acreage in the Mississippi Lime. We think that is less of an issue when considering that a sale is not getting done as soon as investors were led to believe. In our opinion we do not think that this is an indictment on the attractiveness of the play, but rather just the political situation here in the Western world. This does make us back off of our claims of near-term price action higher based off of this news, but not long-term for which we do remain bullish on shares. We think that the company's current quarter will be much like the same, solid results with exception wells from the likes of Alfalfa County. The kicker for investors will be the news from the Mississippi Lime Extension play in Kansas.
The second company we want to focus on is Gulfport Energy (GPOR) which was in fact named in the conference call. The drill results that Gulfport has announced to date all appear to be top tier, with their monster wells appearing to be some of the richest drilled in a wet gas shale play here in the United States, and by extension probably the world as well. This is one of our core holdings in the Utica, and our portfolio, so when we see the big players discussing the company in their conference calls and confirming our belief that the Gulfport is in fact in the heart of the play our confidence that this has the potential to be a multi-bagger only increases. We still recommend purchasing Gulfport shares on any pullbacks and think that $50/share is a realistic target, potentially as early as next year depending on the company's ability to drill more wells and get infrastructure in place to tie their wells in.
With natural gas prices rising, and everyone forecasting that production will drop as the natural gas drill rig counts continue to decline investors should focus on the dry natural gas players which will be highly leveraged to any recovery in prices. EXCO Resources (XCO) has been one of the winners with the reversal in prices and has a big financial backer in Wilbur Ross. This will be one of the names to watch day traders push higher as the recover takes hold and good money will be made, but timing will be everything. We would recommend not using leverage simply so one is not forced to exit a position shortly after building it.
Transocean (RIG) saw share rise by $2.58 (5.60%) and closed at $48.64/share on volume of 7.2 million shares after a solid beat by the company on the earnings front even after excluding the one-time issues. The company's cost cutting has been successful, but most importantly is the fact that rig utilization is trending higher and demand is increasing the further we get away from the oil spill in the Gulf of Mexico. We would envision that deepwater rigs will increase in US waters now and competition will heat up with the new players in deepwater (West Africa and Brazil) driving up rates. The stock is trending higher, but needs to break some resistance around the $50/share level for us to feel that the move upwards is indeed still intact as we have been stuck in a trading range between $45-48/share for the last quarter.
A few readers either took offense to, or vehemently disagreed with our analysis that Molycorp (MCP) was headed lower based upon rare earth prices and the valuation of the company when looking at their earnings potential moving forward. It was our view that shares would head to levels below the $10/share threshold and that is in fact the case now. Shares are now trading at $9.77/share and with the company's earnings due out this week we would recommend covering the bearish positions readers may have set up. This is a double digit gain on the downside and we do not want to play the wild card that earnings are here. If one must keep the bearish trade on, please use house money to do so.