Should One Be Bottom Picking Nat Gas and Coal?
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Posted 18 June 2012 - 11:06 PM
I will have a couple major posts coming on the fossil fuel energy scene, the shale oil or tight oil story. Suffice to say that it is evolving. There has been a pretty through trashing of the energy sector stocks, especially coal. Of late it seems to have brought out the bottom fishers. Even I am sniffing around, participating is discussions on Seeking Alpha, researching the topic and so on.Typical of these articles is this one, which frankly lacks in the micro-analysis necessary now. Some of the comments are worth a read. Right now this still feels like a derivative trade rather than an all in, and I used one Tetra Tech (TTI) , see post yesterday. There is also a real pick up in insider buying in these energy service related stocks. Accordingly I have drawn a list of resource and energy related stocks to trade around my longer term Tainter theory. Until the bogus fuzzy thinking risk on trade is flushed once more, I would wait.I would advise everyone interested to read Citi GPS report Energy 2020. I will be drawing on this and several others regularly. I am mostly looking for maladjustment opportunities. Shale oil is also a potential re-industralization story. This report holds out the promise of energy independence, and details the issues and challenges. An interesting read for sure, but when you read the fine print on executing this, it is right out of Jospeh Tainter complexity theory. One needs to also ask how a corrupt, casino economy can pull off the trillion dollar high cost investment necessary for American energy independence.My comment at Seeking Alpha on nat gas:There are two domestic energy problems: huge inventories of coal, which compete with nat gas at 3.00, and huge inventories of nat gas. Coal producers have cut back 8%, and I think Appalachian coal is gone forever. EIA reports NG production is still up 3% YoY, that’s not enough of a cutback.In part this is because liquid plays throw off nat gas along with the oil and those plays are active. There is still too much nat gas byproduct from the surge (600 active rigs there ) in liquid shale drilling still going on. Meantime forward nat gas futures are already 3.32 on the Jan, 2013, and 3.42 in July, 2013.That pretty much makes this a weather bet. The Sept futures are 2.55, so a blistering summer with lots of switching or a big GoM hurricane could give this one a pop. Without that, the whole industry faces a financing problem if they don’t already. The banks are in deep on this fiasco. To me the forward winter futures seem to be factoring a normal winter, and decent reduction in nat gas supply.As far as the nat gas equities, it is hard for me to see a distress bottom when bad boy CHK is stilling trading at 17, with lots of players trying to pick a bottom. If that went to a single handle, that would be the cue that real blood was running in the streets.On oil service companies, we are getting a raft of analyst downgrades and drilling rigs reductions. Marshall Atkins is expecting a 25% reduction (about 500) of total rigs by the end of 2013 and is using $65 oil. Given that nat gas drilling has already collapsed that means the burden will fall mostly on the liquid gas plays where 1405 of the 1971 employed rigs are located. These plays require $50-$80 oil to be feasible, so no doubt if $65 materializes so could the 500 rig loss. But once rigs come off the extra oil production needed for keeping equilibrium also comes down. Old fields like Saudi Arabia’s Ghawar are not healthy, and I discussed Brazil.Therefore I think 500 rigs pulled and $65 oil will be too pessimistic. I also think the oil service stocks in general have already discounted that level, and anything more from here will be an big overshoot. With the analysts lending a hand, I am hoping the current ridiculous risk on trade evaporates with the latest Fed spectacle and sets up a terrific entry into these names.
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