The talk this morning is that oil prices are going to stay put or head lower, but moving higher is not on the agenda according to what we are reading. With demand in the northeast U.S. still not at normal levels due to the recent weather there we recognize that demand and supply are clearly not in balance. And with the growth in oil production in the U.S. and its growth growing at a faster pace than use, prices here shall fall and push down prices abroad - that is until the world economy begins to see green shoots and new economic growth. We believe that this is presenting an opportunity for investors to buy on the cheap and would recommend plays in the Bakken, Eagle Ford and of course the Utica.
Oil & Natural Gas
We listened to and read the transcripts of quite a few conference calls Saturday and Sunday. The SandRidge Energy (SD) call was an interesting one as the company discussed their plans to sell the Permian assets and essentially double down on the Mississippian play. They will not be adding acreage, but rather increasing drilling dramatically by using the proceeds from the asset sales. The shares were down $0.59 (9.67%) on the news to close at $5.51/share as 76.7 million shares exchanged hands. The company briefly described the rate of decline on their wells, the gas to oil ratios and the added risk of getting rid of the steady cash flow from the Permian. They made it clear however that they were not selling the Permian play under duress, but rather in an opportunistic move to capitalize on assets currently selling for a premium. They also think that this will allow them to reach the goal of being able to use operating cash flow to fund operations and their capital expenditure needs.
Shares in Talisman Energy (TLM) have managed to bounce back a bit after their last earnings report. The company cut back on capital expenditures and gave some downbeat guidance on the future which really hurt shares. Friday the stock rose $0.34 (3.13%) to close at $11.20/share with volume of 6.9 million shares. Shares are probably stuck below the $12/share level until the price of oil recovers or the company has some good news to report, so based on our knowledge of the company investors are waiting for the price of oil to recover.
This weekend we were looking at the refiners which have all backed off of their highs over the last few weeks and set up what appear to be trading ranges. Valero (VLO) was one name we were looking at and it will probably be stuck between its current range of $28-30/share until the entire industry begins its next upturn. The good news is that the company was not greatly affected by the super storm Sandy which hit the north east US recently. The company's refining capacity is on the West Coast, Gulf Coast and Midwest and the only operations which they have affected are their retail/branded operations.
Hindsight is 20/20, or as we like to say better than perfect as one cannot only say which stock they would have purchased for the move upwards or downwards but at exactly each bump up and down in the process. In hindsight we were spot on with Molycorp's (MCP) recent price action but unfortunately advised closing the trade before the drop off on Friday. It was something we would have had no way of knowing was on the horizon, and clearly the market was surprised by it. We are of course discussing the SEC probe the company disclosed and caused the stock to get halted Friday morning. The company's shares hit a new 52-week low and the market capitalization is now well below the $1 billion threshold. For those who have followed this stock, they will remember that it once sported a market capitalization of $4 billion+, and that was about a year ago - it reached even higher before then.
Coal stocks continue to retreat, with James River Coal Company (JRCC) seeing another 20% drop in shares. The stock closed Friday at $2.70/share after falling $0.66 during the trading session. Volume was strong at 5.8 million shares. For those confused as to what is going on here, it is simply a correction. Many traders moved in to the shares as a 'cheap' way to trade a Romney win and Obama loss, which obviously did not happen. With this also being the weakest player left in the group of coal stocks which we follow it should also fall harder than the peer group in bad times and rise faster during the good (which happened on the rally leading up to the day after the election). We think that this one continues to deflate until it reaches a range of $2.10-$2.50, as we think the support around $2.50 probably gets broken.