Commodities Today: What To Buy On The Dip And What To Sell

by: Matthew Smith

The recent spike in oil and natural gas names was great while it lasted and fun to watch, but with oil having pulled back below $100/barrel and analysts coming out in the past few days lowering their ratings on many of the names in the sector we have seen an uptick in reader questions regarding what to do now. As has been our game plan since we moved to extremely bullish the shale plays roughly two years ago we are buyers on dips of names such as PDC Energy (NASDAQ:PDCE), Gulfport Energy (NASDAQ:GPOR), Diamondback Energy (NASDAQ:FANG) and Concho Resources (NYSE:CXO). Also today we want to look at the earnings from Caterpillar (NYSE:CAT) and discuss how that plays into our views on the mining sector as a whole.

Chart of the Day:

With oil prices moving lower and the capital outflows taking place, we wonder if natural gas prices will move in the opposite direction as the so-called 'smart money' seeks a "new" play. Looking at the chart it appears we could make a move towards the $3.80/MMbtu level if this decision is made, but it would be a trading move as natural gas continues to be produced even though the market is saturated. That happens when natural gas becomes a by-product of oil and NGLs, and this is all playing into our bigger theory on the energy markets which we have previously laid out.

(Click to enlarge)

Source: CNBC

Commodity prices this morning are as follows:

  • Gold: $1332.20/ounce, down by $10.40/ounce
  • Silver: $22.62/ounce, down by $0.17/ounce
  • Oil: $96.57/barrel, down by $1.73/barrel
  • RBOB Gas: $2.5768/gallon, down by $0.0399/gallon
  • Natural Gas: $3.625/MMbtu, up by $0.044/MMbtu
  • Copper: $3.2805/pound, down by $0.055/pound
  • Platinum: $1437.60/ounce, down by $13.10/ounce

Oil and Natural Gas

As we mentioned earlier in the article we want to be buyers on any dips in these oil and natural gas E&P plays as we are long-term investors and riding what we believe to be one of the greatest commodity bull markets to be centered in America in decades. As this story plays out we think that the market could see further doubles and triples in store for some of these names as our experience has taught us that the end of these bull markets can sometimes deliver the largest gains, especially for those who bought early.

So as the market rotates out of these names we want to be buyers of names in three up-and-coming plays, the Utica, the Wattenberg and what we will call "the new" Permian. The Bakken is hands down a great play, maybe the best, but we think that there are better gains to have from an equity standpoint in these newer plays and have shifted our focus to them on this pullback.

Now that $65/share has been broken it appears that we are due for a deeper pullback and that intrigues us. We think that any pullback should be bought and readers should prepare to see some sideways movement before another leg higher.

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Source: Yahoo Finance

In the Utica we are constantly evaluating names and their recent results, and although we do have some new names we find intriguing we want to stick with those names of a long track record of delivering solid results and a stock chart which goes back far enough to give us some data points to work with. That is why we want readers to focus on Gulfport Energy during its recent pullback and to look at initiating positions around the $61/share level. If we saw a pullback to the $55/share level we ourselves would be adding to our position in our retirement account as we see tremendous value at that level. We should have further drill results coming out over the next few months and investors should pay attention as to how well the company's new strategy of not using resting periods is working out.

Our next idea is focused on both the Utica and the Wattenberg and thus offers some diversification away from the risks of being focused on only one area. Both plays have had issues with midstream partners being unable to deliver the promised takeaway capacity and thus causing production delays, but with the Wattenberg play seeming to have rectified this with new plant production and pipelines which have been fixed we think that the company will be able to meet production numbers from that side of the business while they continue to prove the viability of their southern Utica acreage. In our opinion $65/share offers an attractive entry point for those not already in the shares and $60/share seems to be a good floor for those looking to add to positions on this pullback. So buys anywhere between $60-65/share should do well in the long-term, especially with one analyst raising their price target to $80/share in recent days.

The third and final play we have to cover is the Permian Basin, and there we like Diamondback Energy (a stock we have covered since its IPO) and Concho Resources. There are quite a few reasons to like this area as it already has infrastructure in place and is very friendly to the oil industry. Diamondback is the way to get good leverage in the play while also investing in a company, which makes an attractive takeover target to a myriad of companies due to its current market capitalization of around $2 billion.

The chart for Diamondback seems to indicate clearly where the support is, and it is that support where we would want to be buyers on a significant pullback.

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Source: Yahoo Finance

On the other end of the spectrum there is Concho Resources, which has a market capitalization of over $10 billion and would see its potential suitors limited to only the biggest oil names unless there was some sort of merger of equals - something one does not see much of these days. The company is focused on the Delaware Basin and has been moving its production more towards oil and liquids, which they have been successful in. Readers know how bullish we are on Diamondback and their prospects as well as those in the general Delaware Basin area. These names have risen dramatically recently and we would look to seek entry points in Diamondback around the $43-44/share area and Concho in the $105-107/share range for trading purposes. We would be strong buyers of Concho shares if it were to fall into the $95-100/share level, even though that goes against our momentum rules of a stock breaking through $100/share by going the wrong way.

Mining Equipment

Caterpillar is having some serious issues in the mining equipment segment and this is due to the big mining companies cutting back their capital expenditure budgets that has caused them to open fewer mines (requiring less equipment) and keeping equipment a bit longer before they replace it, which is a practice that has been aided by some industries seeing production dropping and the hours their machines are used falling as well. The coal industry is a perfect example of this and for those thinking that John Chanos was incorrect on his bear case for Caterpillar earlier this year they need look no further than the company's own forecast from this quarter. To put it simply the forecast is rather bleak and when looking at the comparables from the prior year one begins to see the story Mr. Chanos told at the Delivering Alpha conference earlier this year. The top line is suffering, as is the bottom line and there is no silver lining with growth in the Asian business. One should play the miners for the turnaround and then look to Caterpillar as a derivate play because for Caterpillar's business to turn around the mining business must do so first. We are not buyers here.

Disclosure: I am long GPOR, PDCE. 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. GPOR also owns a bit over 12% in FANG.