Commodities Today: Heading Lower Today But Value In Oil Stocks

Includes: BHP, FCX, HK, PDCE, REXX
by: Matthew Smith

Commodities are under pressure this morning with worries about Federal Reserve tapering and news that Glencore Xstrata is going to take a multi-billion dollar write down on assets relating to the merger. Those types of write downs always rile investors, however long-term we would expect the move to have little effect on the rest of the industry.

We are watching palladium this morning which worked so hard to break above its resistance only to retreat back below it on yesterday's market weakness here in the U.S. and this morning's weakness in Asia and Europe. It is trending higher once again, but once again facing headwinds.

Chart of the Day:

(Click to enlarge)

Source: Kitco

Commodity prices this morning are as follows:

  • Gold: $1370.20/ounce, up by $4.50/ounce
  • Silver: $23.165/ounce, down by $0.001/ounce
  • Oil: $106.05/barrel, down by $1.05/barrel
  • RBOB Gas: $2.9119/gallon, down by $0.0214/gallon
  • Natural Gas: $3.48/MMbtu, up by $0.017/MMbtu
  • Copper: $3.332/pound, UNCH by $0.00/pound
  • Platinum: $1514.50/ounce, up by $5.50/ounce

Diversified Miners

Big miners are down sharply this morning after Glencore Xstrata did in fact take a $7 billion+ write down on new projects in development. It hurts the numbers in the near-term but should help the company moving forward and bring their ratios more in line with the industry. BHP Billiton (NYSE:BHP) is lower this morning in pre-market trading, in sympathy with Glencore and also because the rest of the world is trading lower on fears of Federal Reserve tapering.

We like diversified players so long as they have good exposure to the oil and natural gas markets, or energy in general (ex coal of course). BHP fits this bill, but Freeport-McMoRan (NYSE:FCX) still seems like the best play here based on their energy exposure coupled with the copper exposure and gold kicker. We continue to like that name among the big mining names and think that it is the best play right now as iron ore continues to plague many of its peers and there appears to be little demand growth from China right now.

Oil & Natural Gas

New 52-week lows for stocks we own is never a site we wish to see. We have not sold any shares and continue to believe that this is a short-term downturn which will lead to gains further down the road.

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Source: Yahoo Finance

Halcon Resources (NYSE:HK) continues to be a disappointment as shares were lower again yesterday. It is not all that surprising that shares were lower in that type of market, but it is surprising just how far the shares have fallen in recent weeks. With yesterday's 6%+ drop the shares now trade at $4.76/share which is well below the levels we were buying at in early summer and it must be pointed out that even then the shares looked cheap. There have been some issues with production growth and investors not liking the way that the company has gone about raising capital and equity to fund their ambitious exploration efforts, but we continue to view that as the best path for the company to take. In five years this company will not exist, not because of a poor business plan but rather due to the management team having positioned the company for a sale to a larger competitor. We remain bullish here and have maintained our entire position, however like many others we are a bit shell-shocked right now with the recent price action.

There is a good reason that PDCE has outperformed REXX shares, and shall continue to do so. As REXX's recent performance has closed the gap it has also made PDCE shares much more attractive in our view.

(Click to enlarge)

Source: Yahoo Finance

For readers looking to buy into some of these oil and natural gas E&P plays we are often highlighting we wanted to make a distinction between PDC Energy (NASDAQ:PDCE) and Rex Energy (NASDAQ:REXX), two names we are bullish on right now. We received a question yesterday asking which we would be buyers of for our personal portfolio and the answer is PDC Energy. That is not to say we do not like Rex Energy, but rather that when you put the two companies head-to-head and look at their assets, possible production, drilling locations, and near-term production growth and mix the value seems to be in PDC Energy shares. We still believe that Rex is a great investment, however we have been proponents of buying on dips and the stock has continued to move higher so a large pullback would be necessary to bring it back into line with peers. So right now at current prices we would want to buy PDC shares, which we might even do today, as opposed to Rex shares.

Disclosure: I am long HK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I may initiate a position in PDCE in the next 72 hours as well.