According to the recent TIM (Trade Ideas Monitor) report for the week of October 9-15, 2009, market sentiment in the U.S. became even more bullish. The TIM Sentiment Index (TSI) was up 3.87 points in North America to 59.32 (see the youDevise website for additional information on the TIM report). The TSI Worldwide Index was down 0.96, but remained bullish at 53.60 (a reading above 50 is bullish). Six sectors were bullish, while three were bearish and one was neutral. Total new long ideas as a percentage of all new ideas sent to investment managers by way of the TIM increased 2.69 points to 71.22%.
As for individual securities in the U.S. and North America, WW Grainer Inc (GWW), O'Reilly Automotive (ORLY), and Pfizer (PFE) were stocks with long broker sentiment, while Chesapeake Energy (CHK) and Safeway (SWY) had short broker sentiment. In general, the information technology, financial, and energy sectors had long broker sentiment, while the utilities had short broker sentiment.
A new proposed SEC plan will overhaul oil and gas reporting rules that have existed since the 1970. The new rules will boost the proven reserves reported by oil companies, and in the process boost their shares and potentially increase interest in takeovers (see Financial Week article). The plans will essentially allow companies to book reserves from “unconventional” oil and gas sources, including oil sands and coal-bed methane. Some deep-water projects that to date have not been allowed to be described as “proven” will also now be included. Furthermore, firms will be able to publish data on what are called “probable” and “possible” reserves, where recovery is not as certain. The new rules obviously don't change the amount of oil and gas that is available worldwide, but they will help investors better calculate future cash flows and thereby place a proper valuation on a company. Needless to say, the oil companies are in favor of the new rules.
The plan will affect both U.S. and international companies that report under SEC rules, which often includes most of the larger international firms. Those with the largest non-traditional sources of future production are most likely to benefit. Analysts expect that Royal Dutch Shell is likely to benefit the most among the oil majors given that they are investing capital to retrieve crude from bitumen-soaked soil in Canada, as well as extract natural gas in coal beds in Australia and China, both of which can now be included as reported proven reserves. ConocoPhillips (COP), Exxon (XOM), and BP (BP) have also invested in non-conventional sources of oil. The reporting of non-traditional proven reserves could also have an impact on acquisitions and takeovers. As mentioned by Neil McMahon, analyst from Bernstein:
“We believe that these rule changes could be the catalyst for a wave of acquisitions, with those companies with the largest unproved resource bases making juicy takeover targets for some of the larger cash-rich majors.”McMahon feels that Marathon Oil (MRO), with investments in oil sands and shale, and British gas producer BG, with its stakes in the deep-water Brazilian fields and a new 25% stake in Chesapeake Energy (CHK) and the Fayetteville shale, are potential targets. In fact, given that the changes will make the SEC rules more in line with European rules, the impact on UK-listed firms, among others, is expected to be positive.
The rule changes are likely to apply to 2009, and not 2008 year-end reporting since the SEC is still in a consultation period and has not committed to a time line for implementation. Given that the market is forward looking, share prices may nonetheless begin to see the impact of the proposed changes which are expected to be approved and put into place quickly.
As a result of high prices, new reserve finds, and better technology, natural gas production in the US is up 8% this year, with growth expected to continue as new wells come on-line in Texas, Oklahoma, and Louisiana, and new reserves are scheduled to be taped in Appalachia and Canada (see WSJ article). Unfortunately for the natural gas companies, demand is not growing as fast, up only 5.5% - the Pickens Plan notwithstanding. US LGN import have already been down given the higher prices paid in Asia and Europe which have caused shipments to be diverted (see previous post). As long as production in the US stays high, with reduced avenues for exports and steady demand at home, prices will be pressured to fall. Then again, we may be getting near a tipping point as prices approach $8 per million BTU, a point that analysts believe producers will cut production, with the tighter supply driving prices back up in a form of a self-correcting mechanism.
Even with short-term corrections, longer-term price pressure will most likely come from new discoveries of shale, the dense rock formations that have been known to hold natural gas, but for which production had been impractical due to the rock not being porous enough for gas flow. However, technology came to the rescue in the form of using pressurized water to crack the shale and release the gas. The technique is working in the Barnett Shale in Texas and can be used in the Haynesville Shale in Louisiana and Texas, as well as the Marcellus Shale in Appalachia. Altogether, US shale could hold as much as 840 trillion cubic feet of natural gas. Astonishingly, this estimate is equivalent to 140 billion barrels of oil, or more than half the proven reserves of Saudi Arabia. While none of this natural gas will be coming on-line overnight, it certainly seems promising for helping supply some of the clean energy needs of the US going forward. Unfortunately, unless the natural gas companies, T. Boone Pickens, and others can convince Congress of this benefit, it may be a while before demand catches up to production. As a result, Chesapeake Energy (CHK), XTO Energy (XTO), and EOG Resouces (EOG) may have to wait for real price appreciation, or to see the benefits of the massive investments each has been making to tap into the shale reserves.
The threat of Hurricane Dolly disrupting oil and natural gas production in the gulf coast helped to stem the slide in crude oil and natural gas prices late last week, but now as reports indicate that production will be relatively unaffected, both have continued their sell-off. As of mid-day, crude oil was down over $4.50, falling below $127 a barrel while natural gas was off over $0.50, falling below $10 per MMBtu. As I write this post the UNG is down -5.72%, while the natural gas company Chesapeake Energy (which I have been following) is getting taken to the wood shed, down -7.47%. This stock certainly looks sick and is already testing the support I worried about earlier in a post written just yesterday morning. Longer-term fundamentals still appear bullish based on long-term projections in supply and demand, but short-term price activity is certainly weak. The crude market has been known to turn-on-a-dime lately, but trading or picking an investment bottom is foolish at best. Giving up a few points to wait for confirmation of the trend is probably the smarter move. As for now, things are certainly looking ugly in oil, and natural gas seems to be going along for the ride. Both seem to be looking for reasons to go down, unlike just a few weeks ago. It is unclear how much of the current moves in crude are based on the recent passage of the Senate bill aimed at curbing speculation.
As crude oil has sold off over $16 (approximately 11%) in the last four days, natural gas, and the natural gas companies have also taken a hit. As of last week, natural gas prices are down over 20% since July 4, and fell over 8% last Thursday alone. Not surprisingly, Chesapeake Energy sold off with the corrections in both crude oil and natural gas, falling almost $10, or over 15% in the last week.
Well, what a difference a week can make. While Aubrey McClendon continues to buy shares, purchasing another 750,000 shares at $57.25, many of the other parameters and assumptions have changed (guess who bought into the offering at $57.25? - one could speculate that the CEO purchases have been holding the stock up short-term). While crude oil has not fallen below $100 a barrel, it has had a historic one week sell-off. Furthermore, the sell-off in natural gas has been just as bad, if not worse than expected. Natural gas in underground storage increased to 2,312 Bcf, registering an increase of 104 Bcf.
Given the recent price action in crude oil and natural gas, the sell-off in Chesapeake's stock, the dilution from the recent stock offering, and the historical pressure on natural gas prices in late July and early August, it would be easy to sell the stock at current levels and wait for more clarity. In fact, this may be the smart move, even at the risk of selling at a near-term bottom. Nonetheless, for now I will continue to hold what is left of my position, but look to either add or sell in the low 50s as the stock tries to find support in this area. While the recent uptrend appears broken, there is some support in the low $50s, and it will be important for the stock to hold at these levels. Otherwise, there may be a fall to the $40 or even $35 per share level, with some weaker support at $45 per share along the way.
Given his recent purchases, I would expect the CEO to continue to accumulate stock at these levels, but even his buying may be not be enough to support the stock if crude oil continues to break support and suffer the kinds of sell-offs it has recently experienced. A number of funds ratcheted up their exposure to crude oil over the last year and are now beginning to unload their positions and lock into any remaining gains. The right (or wrong) news could once again begin the selling in earnest. Nonetheless, I am still bullish on natural gas long-term. I also still believe in the story and management at Chesapeake, and I still feel that crude oil is not going back to 1990 levels anytime soon, even if the current sell-off continues. Any weather related disruptions to crude oil and natural gas would also be bullish for prices. Yet, I am not as confident in this view as I was just a little over a week ago, and will certainly be watching the price action closely.
You can check out a new article called "Chesapeake Peak? - Not Likely" over at the greenfaucet.com site. I will be contributing some exclusive posts to greenfaucet from time to time, in addition to this blog. Check it out. There are some great contributors, articles, and resources.
As a general rule of thumb, crude oil has traditionally traded at a 7-8 multiple to natural gas, or put another way, natural gas trades at a 7-8 times discount to crude. With May crude contracts hitting $116.69 a barrel, and May natural gas contracts at $10.587 mmBtu, is the traditional 7-8 crude oil to natural gas multiple breaking down, or will we see a correction soon? Given the current price of crude, natural gas should be trading somewhere in the range of $14.586 to $16.670. Does this make natural gas a possible trade? It depends on two things. First, do you believe the crude oil / natural gas multiple is valid during a period of increased volatility? Second, will crude continue its march to $120 and beyond, or at least stay above $100 per barrel. Given the beginning of the summer driving season, and the published supply and demand constraints, a price for crude staying over $100 a barrel through the summer seems possible. Even at $100, natural gas should approach $12.5 mmBtu on the low end with the 8 multiple. Recent natural gas finds will add some relief, but this supply will take a while to materialize. Increased use of natural gas to fuel power plants, driven by both environmental concerns with coal and safety concerns with nuclear (both interesting plays in and of themselves), will put further pressures on natural gas supply.
While futures are a natural position, many traders have a bias or preference for equities. Fortunately, numerous stocks with natural gas exposure exist, many of which also include exposure to crude oil. A few of interest including the following:
Anadarko (APC, $68.90, P/E 8.53, Market Cap 32.25B): Involved in exploration, development, and production of oil and natural gas, with proved reserves of 8.5 trillion cubic feet of natural gas. The company is buying back shares and paying down debt, with the stock price currently in an up trend.
Apache (APA, $142.51, P/E 16.99, Market Cap 47.45B): An independent energy company engaging in exploration, development, and production of oil and natural gas, with proved reserves of 14.7 trillion cubic feet of natural gas. The company has a dependent on crude oil prices more than some purer plays, even beyond any multiples. The stock is currently in an up trend.
Canadian Natural Resources (CNQ, $84.50, P/E 17.70, Market Cap 45.65B): The second largest oil and natural gas producer in Canada with proved reserves of 3.8 trillion cubic feet of natural gas. Operating expenses have been a worry, and the stock is strongly levered to oil in addition to natural gas. The stock is currently hitting upper resistance, with a potential double top.
Chesapeake Energy (CHK, $50.39, P/E 19.23, Market Cap 25.90B) An oil and natural gas exploration and production company with 10.879 trillion cubic feed equivalent of proved reserves. As discussed before, Chesapeake Energy is the second largest independent producer of natural gas in the U.S., and recently announced new natural gas discoveries. The company is expecting output increases of 21% this year, and 16% next year. The CEO, Aubrey McClendon, is also increasing his position in the company, purchasing another 1.5 million shares recently, raising his stock total to $1.2 billion. He also recently stated how the impact of the Fayetteville Shale could total $18 billion over the coming decade. Obviously, he believes the natural gas story, as well as his company's prospects. The stock is in an up trend.
Devon Energy Corporation (DVN, $118.40, P/E 14.82, Market Cap 52.62B): Involved in exploration, development, production, and transport of oil and natural gas with proved natural gas reserves of 8,994 billion cubic feet and 321 million barrels of natural gas liquids. Recently, the stock is in a strong up trend.
El Paso Corporation (EP, $17.62, P/E 11.48, Market Cap 12.35B): A natural gas exploration, production and transmission operations company, with an estimated 2.9 trillion cubic feet of natural gas equivalents of proved natural gas and oil reserves. The stock is nearing overhead resistance.
Encana Corporation (ECA, $86.23, P/E 16.65, Market Cap 64.69B): Exploration, production, and marketing of natural gas, crude oil, and natural gas liquids. Largest natural gas producer in Canada with 13.3 trillion cubic feet of natural gas. The stock is in an up trend.
EOG Resources (EOG, $134.17, P/E 30.67, Market Cap 33.14B): Exploration, production, and marketing of natural gas and crude oil, with estimated net proved reserves of 6,669 billion cubic feet of natural gas. The stock is in a strong up trend.
Equitable Resources (EQT, $67.96, P/E 32.42, Market Cap 8.30B): Equitable operates an integrated energy company in the Appalachian area, with natural gas production, distribution, and transportation activities, with approximately 2,682 billions of cubic feet equivalent of natural gas. EQT is in a recent up trend.
Noble Energy (NBL, $90.55, P/E 16.63, Market Cap 15.56B): Involved in exploration, development, production, and marketing of crude oil and natural gas in the U.S., with proved reserves of 3.3 trillion cubic feet. The stock is in an up trend after recently coming out of a trading range.
Petroleum Development Corporation (PETD, $77.14, P/E 34.47, Market Cap 1.15B): Involved in acquisition, development, production, and marketing with proved reserves of 593,563 million cubic feet of natural gas. The stock is in an up trend.
Quicksilver Resources (KWK, $41.48, P/E 14.48, Market Cap 6.57B): Independent energy company engaging in acquisition, exploration, production, and sale of natural gas, natural gas liquids, and crude oil, with proved reserves of 1.5 trillion cubic feet equivalents of natural gas. The stock is in an up trend.
Range Resources Corporation (RRC, $71.60, P/E 46.55, Market Cap 10.73B): Involved in exploration, development, and acquisition of oil and gas properties, with approximately 1,125,410 million cubic feet of natural gas reserves. The stock is in an up trend.
XTO Energy (XTO, $67.57, P/E 19.14, Market Cap 34.48B): Company involved in acquisition, development, and exploitation of natural gas properties, with proved reserves of 6.94 trillion cubic feet of natural gas. Recently agreed to pay $600 million for Linn Energy. The company also recently priced $2 billion in senior notes. The stock is currently in an up trend.
From the list, APC, APA, CNQ, CHK, ECA, EQT, and XTO all seem to be on the radar of just about everyone, as these stock are often mentioned by analysts on TV, in the print media, and discussed on the blogs. Each also has a relatively/historically high P/E (each over 16, with the exception of Anadarko). Nonetheless, if the 7-8 multiple holds, those stocks levered more to natural gas, such as Chesapeake, could see even higher valuations.
Natural-gas producers, many from Oklahoma and Texas, are converging on a thick wedge of natural gas-bearing rock called the Marcellus Shale, located from West Virginia to Pennsylvania. Chesapeake Energy, Anadarko Petroleum, and EOG Resources are either already drilling, or planning to drill. The find could be significant, with estimates from 1.9 trillion cubic feet to 168 trillion cubic feet. As comparison, the U.S. consumed a little over 23 trillion cubic feet last year. The locals, while not happy about the gold rush invasion from outside companies, are excited about the leasing prices they are receiving, with acre leases increasing from $5 to $2,000 in the last four years.
Tickers: CHK, APC, EOG
Natural gas, while still seemingly high, is continuing to peak the interest of investors. T. Boone Pickens recently talked about how natural gas is still trading below its normal multiple to oil, which is traditionally 7-8. Given this normal multiple, natural gas should be closer to $14 per MMBtu, instead of under the $10 MMBtu that it has recently traded. Of course, this logic works if you believe oil will stay near $100 per barrel, which does not look like too bad a bet right now.
RealMoney.com is further stressing how one of the largest natural gas reserves in the world in Saudia Arabia is producing dry wells, and companies in the region, such as Total SA, are pulling out. If this gas cannot be acquired, supply will be less than expected.
On the other hand, Chesapeake Energy (CHK) has recently announced new natural gas discoveries. The company is expecting output increases of 21% this year, and 16% next year. The CEO, Aubrey McClendon, is also increasing his position in the company, purchasing another 1.5 million shares recently, raising his stock total to $1.2 billion. Obviously, he believes the story ........ and his company's prospects.
Ticker: CHK
