This morning, after the DOE announced that the inventory for natural gas was well below market expectations, I expanded my position in EnCana Corporation (Ticker ECA) and established a position in Chesapeake Energy Corporation (Ticker CHK). At the end of the day I have a combined ~5% position in these natural gas-related companies. I expect these positions to remain in my IRA for at least one year, unless natural gas prices continue to fall or the stock prices appreciate back to near 52-week highs. I may establish additional positions related to natural gas that could increase my exposure to 10-20% of my IRA.
This morning the US Energy Department announced that natural gas inventory increased by 8 billion cubic feet, lower than the anticipated 19-25 Bcf. While inventory remains well above historical averages, my take on the data is that the recent declines in rig count is (1) slowing the growth of inventory, and (2) the market estimates likely are too high for future inventory increases. At this time of year the inventory of natural gas typically increases due to milder weather, but with the glut of inventory many producers have been shutting down rigs, as highlighted in my previous article.
Natural gas prices remained weak during the day. However, I believe the lower than expected inventory build combined with rig closures likely signals more balance between supply and demand and could even lead to a higher rate of draw down of inventory during the summer if the weather is unseasonably hot. All that said, natural gas prices may not appreciate materially until next year, as highlighted by Goldman Sachs today.
Under my Sagflation theme I expect more volatility in prices, thus I would not be surprised if natural gas prices do not remain around $2 for long.
Showing posts with label Natural Gas. Show all posts
Showing posts with label Natural Gas. Show all posts
Thursday, April 12, 2012
Wednesday, April 11, 2012
Natural Gas Market Dynamics Suggest Price Rebound
The price of natural gas continues to slide downwards as production remains high and consumers benefit from mild weather, reducing their need for the fuel. This continuing trend would appear unfavorable for many of the natural gas companies, including Chesapeake Energy Corporation (Ticker CHK) and EnCana Corporation (Ticker ECA). Indeed, the stock prices of these companies have continued to slide over the past month as investors worry about the financial impact.
Furthermore, a recent article in the Wall Street Journal highlights that storage for natural gas is expected to reach capacity before the end of the year if production does not slow down and the weather remains mild. This highlights that the price of natural gas in the US is determined more on short-term supply-demand trends due to an inability to store large amounts of the gas. It also highlights that something has to give because companies likely won't simply blow the excess into the atmosphere, accept negative prices, or some other crazy market scenario. Under my Sagflation theme, I expect more volatile prices, especially for commodities, and thus a strong rebound in natural gas prices would not be surprising, in my view.
Investing in a company that produces natural gas would seem foolhardy with the price of natural gas around $2, the lowest in about 10 years, and supply apparently continuing to outpace demand. But, there are signs that drilling is slowing and demand may pick-up. With limited storage capacity, making prices more volatile, this shift in supply-demand potentially precedes a turn-around in natural gas prices later in 2012 and 2013. For these reasons I have begun to build long positions in natural gas companies, initially a small position in EnCana Corp. with a 4% dividend yield.
Let's go through some market dynamics of natural gas:
(1) Demand likely increasing
There are four basic domestic users of natural gas, which are (1) Homes for heating, hot water, appliances, (2) Businesses for heating, hot water, appliances, (3) Commercial for manufacturing, and (4) Electricity production. The only one of these four segments that has grown over the past decade is electricity production. The first two segments have remained relatively flat due to improved efficiency through better furnaces and insulation. Industrial demand has slid, most likely due to the shift of manufacturing overseas.
An increasing number of electric power plants may shift to natural gas as an alternative to coal as the price for natural gas falls. Energy analysts at Sanford Bernstein estimate that electric utilities may increase consumption of natural gas by 13.5% in 2012 as they switch from coal. This is likely driven by the falling price of natural gas. As discussed on the Wall Street Journal, the market is already pushing electricity producers towards building additional gas-fired plants. But, referring back to the fact that natural gas prices are set more based on short-term market dynamics than long-term, there is greater risk relying solely on gas-fired plants because prices may increase dramatically in the future.
Furthermore, if a recent ruling by the EPA stands-up, then more utilities may be forced to shift to natural gas as a greater amount of the externality costs associated with the use of coal, and its larger release of carbon dioxide, are captured in the price of electricity. However, I believe this ruling is unlikely to stand-up to scrutiny by Congress given the outrage from the coal producers.
Another potentially major driver of demand in the near-term is increased exporting of the fuel as more ports come on-line with the ability to export the fuel. To export natural gas is to invite political scrutiny, and some debate about the advantages and disadvantages of creating a world market for natural gas. However, producers likely push hard to open up new markets that are willing to pay three to four times the price in the US. Simple market dynamics suggests that if the US does begin exporting natural gas, and thus creating more of a world market, the relatively low prices in the US likely rise and the relatively higher prices in Asia likely decline.
Longer-term an increasing number of industries may begin relying more heavily on natural gas, should manufacturing in the US continue to pick-up. Additionally, a device that allows fueling of cars with natural gas from the home may eventually prove a major driver of natural gas demand. A stimulant to home refueling could be a tax incentive towards purchasing the home device.
(2) Drilling for dry natural gas slows
There are signs that drilling for natural gas has slowed. Baker Hughes recently announced the company expects lower operating profit in the first quarter due to rapid transition in drilling away from natural gas towards oil. Indeed, the rig count for natural gas has fallen to a ten-year low of 647, relative to the 2011 high of 936 and all-time high of 1,606 in 2008. With production down around 60% from the all-time high, and continuing to decline, I believe natural gas prices should turn around.
Chesapeake Energy Corp, the second largest producer of natural gas behind Exxon Mobil Corp, has allocated approximately 85% of capital expenditures in 2012 toward crude oil and liquid natural gas resources, up from 10% in 2009. Comstock Resources (Ticker CRK), with 85% of its reserves in natural gas, has shifted to oil production with 77% of its 2012 drilling budget devoted to oil production. Devon Energy Corporation (Ticker DVN), with about 60% of its reserves in dry natural gas, has cleared much of its rigs out of natural gas production sites and has said the company is not "investing in new wells in a $2 market."
While a significant amount of natural gas continues to be produced as a by-product of oil drilling, this highlights that the trend is downward in natural gas production. It also potentially creates excess supply in the NGL market and may ultimately result in a strong rebound in natural gas prices when demand picks up.
Furthermore, a recent article in the Wall Street Journal highlights that storage for natural gas is expected to reach capacity before the end of the year if production does not slow down and the weather remains mild. This highlights that the price of natural gas in the US is determined more on short-term supply-demand trends due to an inability to store large amounts of the gas. It also highlights that something has to give because companies likely won't simply blow the excess into the atmosphere, accept negative prices, or some other crazy market scenario. Under my Sagflation theme, I expect more volatile prices, especially for commodities, and thus a strong rebound in natural gas prices would not be surprising, in my view.
Investing in a company that produces natural gas would seem foolhardy with the price of natural gas around $2, the lowest in about 10 years, and supply apparently continuing to outpace demand. But, there are signs that drilling is slowing and demand may pick-up. With limited storage capacity, making prices more volatile, this shift in supply-demand potentially precedes a turn-around in natural gas prices later in 2012 and 2013. For these reasons I have begun to build long positions in natural gas companies, initially a small position in EnCana Corp. with a 4% dividend yield.
Let's go through some market dynamics of natural gas:
(1) Demand likely increasing
There are four basic domestic users of natural gas, which are (1) Homes for heating, hot water, appliances, (2) Businesses for heating, hot water, appliances, (3) Commercial for manufacturing, and (4) Electricity production. The only one of these four segments that has grown over the past decade is electricity production. The first two segments have remained relatively flat due to improved efficiency through better furnaces and insulation. Industrial demand has slid, most likely due to the shift of manufacturing overseas.
An increasing number of electric power plants may shift to natural gas as an alternative to coal as the price for natural gas falls. Energy analysts at Sanford Bernstein estimate that electric utilities may increase consumption of natural gas by 13.5% in 2012 as they switch from coal. This is likely driven by the falling price of natural gas. As discussed on the Wall Street Journal, the market is already pushing electricity producers towards building additional gas-fired plants. But, referring back to the fact that natural gas prices are set more based on short-term market dynamics than long-term, there is greater risk relying solely on gas-fired plants because prices may increase dramatically in the future.
Furthermore, if a recent ruling by the EPA stands-up, then more utilities may be forced to shift to natural gas as a greater amount of the externality costs associated with the use of coal, and its larger release of carbon dioxide, are captured in the price of electricity. However, I believe this ruling is unlikely to stand-up to scrutiny by Congress given the outrage from the coal producers.
Another potentially major driver of demand in the near-term is increased exporting of the fuel as more ports come on-line with the ability to export the fuel. To export natural gas is to invite political scrutiny, and some debate about the advantages and disadvantages of creating a world market for natural gas. However, producers likely push hard to open up new markets that are willing to pay three to four times the price in the US. Simple market dynamics suggests that if the US does begin exporting natural gas, and thus creating more of a world market, the relatively low prices in the US likely rise and the relatively higher prices in Asia likely decline.
Longer-term an increasing number of industries may begin relying more heavily on natural gas, should manufacturing in the US continue to pick-up. Additionally, a device that allows fueling of cars with natural gas from the home may eventually prove a major driver of natural gas demand. A stimulant to home refueling could be a tax incentive towards purchasing the home device.
(2) Drilling for dry natural gas slows
There are signs that drilling for natural gas has slowed. Baker Hughes recently announced the company expects lower operating profit in the first quarter due to rapid transition in drilling away from natural gas towards oil. Indeed, the rig count for natural gas has fallen to a ten-year low of 647, relative to the 2011 high of 936 and all-time high of 1,606 in 2008. With production down around 60% from the all-time high, and continuing to decline, I believe natural gas prices should turn around.
Chesapeake Energy Corp, the second largest producer of natural gas behind Exxon Mobil Corp, has allocated approximately 85% of capital expenditures in 2012 toward crude oil and liquid natural gas resources, up from 10% in 2009. Comstock Resources (Ticker CRK), with 85% of its reserves in natural gas, has shifted to oil production with 77% of its 2012 drilling budget devoted to oil production. Devon Energy Corporation (Ticker DVN), with about 60% of its reserves in dry natural gas, has cleared much of its rigs out of natural gas production sites and has said the company is not "investing in new wells in a $2 market."
While a significant amount of natural gas continues to be produced as a by-product of oil drilling, this highlights that the trend is downward in natural gas production. It also potentially creates excess supply in the NGL market and may ultimately result in a strong rebound in natural gas prices when demand picks up.
Saturday, April 7, 2012
Is the Market at a Pivot Point?
A bullish investor would likely argue that the US economy is improving and should continue to improve without additional stimulus. A bearish investor, like myself, argues that the recent improvements in the market are more a result of monetary stimulus than real economic improvement. This week the markets faltered somewhat on the perception that the Federal Reserve may not provide additional stimulus. Was this weakness a momentary blip or a pivot point?
Clearly I have been wrong to date on the markets. While my strategy of maintaining a relatively neutral balance between long and short has avoided any catastrophic losses, my edging towards more weighting of short positions by the end of the quarter clearly hurt the performance of my IRA. For the month of March my IRA declined 1.2%. For the quarter I managed to squeak out a small gain of 1.9%, largely due to healthy performance by my high yield bond positions. This performance has under-performed the markets by a fairly wide margin. On an annual basis, my IRA increased 15.2%, aided immensely by my weak performance during the first quarter of 2011. I guess I am just a slow starter.
So, pivot point or bump in the road?
The job data released on Friday of 120,000 net new jobs created in March was another conflicted data point. It was well below the expected number of over 200,000 and potentially portends declining job growth, and thus weakening economic growth. But, does the number increase the likelihood of additional monetary easing, floating the market higher? So, the question in my bearish mind is: Over the next few months, is the market driven by weak real economic activity or excessive liquidity? Longer-term, I believe the market must ultimately succumb to fundamentals, it is just a matter of how long the Fed allows us to keep digging a deeper hole.
The question, in my mind, is somewhat misleading. To me, the trends of Sagflation continue to act on the economy and markets. Weak real economic growth and more volatile prices is not a friendly investing environment. Debt levels in Europe and weakening economic activity (and political stability) in China may continue to weigh on the markets. The Federal Reserve can inflate the economy for a while, but we are in trouble when the markets begin to question the "realness" of the economic strength. Does this play out as accelerating inflation, falling employment, or both? For now I plan to pursue three steps:
Step 1 - Continue to move the net balance of my portfolio towards short positions.
Step 2 - Opportunistically invest in treasuries, non-cyclical commodities, and consumer staple stocks.
Step 3 - Look for attractive themes, like the aging car fleet in the US and potential rising demand for US natural gas.
The first quarter was surprisingly tame, I doubt the next three quarters can offer the same tranquility.
Clearly I have been wrong to date on the markets. While my strategy of maintaining a relatively neutral balance between long and short has avoided any catastrophic losses, my edging towards more weighting of short positions by the end of the quarter clearly hurt the performance of my IRA. For the month of March my IRA declined 1.2%. For the quarter I managed to squeak out a small gain of 1.9%, largely due to healthy performance by my high yield bond positions. This performance has under-performed the markets by a fairly wide margin. On an annual basis, my IRA increased 15.2%, aided immensely by my weak performance during the first quarter of 2011. I guess I am just a slow starter.
So, pivot point or bump in the road?
The job data released on Friday of 120,000 net new jobs created in March was another conflicted data point. It was well below the expected number of over 200,000 and potentially portends declining job growth, and thus weakening economic growth. But, does the number increase the likelihood of additional monetary easing, floating the market higher? So, the question in my bearish mind is: Over the next few months, is the market driven by weak real economic activity or excessive liquidity? Longer-term, I believe the market must ultimately succumb to fundamentals, it is just a matter of how long the Fed allows us to keep digging a deeper hole.
The question, in my mind, is somewhat misleading. To me, the trends of Sagflation continue to act on the economy and markets. Weak real economic growth and more volatile prices is not a friendly investing environment. Debt levels in Europe and weakening economic activity (and political stability) in China may continue to weigh on the markets. The Federal Reserve can inflate the economy for a while, but we are in trouble when the markets begin to question the "realness" of the economic strength. Does this play out as accelerating inflation, falling employment, or both? For now I plan to pursue three steps:
Step 1 - Continue to move the net balance of my portfolio towards short positions.
Step 2 - Opportunistically invest in treasuries, non-cyclical commodities, and consumer staple stocks.
Step 3 - Look for attractive themes, like the aging car fleet in the US and potential rising demand for US natural gas.
The first quarter was surprisingly tame, I doubt the next three quarters can offer the same tranquility.
Thursday, March 15, 2012
Bought More Gold During a Period of Calm
Given the recent pullback in gold, yesterday I increased my position in iShares Gold Trust (Ticker: IAU) to ~5% of my IRA. The reasons for my increasingly bullish position are the following:
(1) Gold has pulled back almost 10% since its end of February peak.
(2) I do not believe aggressive US monetary policies have ended, and in fact the current policies remain quite expansionary.
(3) I do not expect the US economy to accelerate from here. If anything, I expect at least a few more bumps in the road later in the year. As I detailed in the post about Okun's Law, I believe the current health of the economy is much more about monetary policy driving supply growth, instead of fundamental consumer demand growth.
I am also keeping my eyes on treasuries and may establish a long position if yields on the 30-year rise above 3.5%. If my Sagflation theme plays out then I expect increasing deflationary pressure over the next couple years, unless the Federal Reserve begins aggressively adding to the monetary base through treasury purchases. In either case, I believe yields on the 30-year treasury have at least one more trip well below 3.0%.
Another segment is natural gas. I continue to consider possible plays on the low prices of natural gas, and the likely rebound in prices, in my view. Playing gas prices through an ETF proved quite inefficient and thus I am considering equity positions in natural gas companies. However, I feel a need for patience until the natural gas market firms up a bit more and stocks like Chesapeake (Ticker CHK) and Encana (Ticker ECA) to fall further. At this point I believe these stocks are lifted more by broad market trends than actual fundamentals.
(1) Gold has pulled back almost 10% since its end of February peak.
(2) I do not believe aggressive US monetary policies have ended, and in fact the current policies remain quite expansionary.
(3) I do not expect the US economy to accelerate from here. If anything, I expect at least a few more bumps in the road later in the year. As I detailed in the post about Okun's Law, I believe the current health of the economy is much more about monetary policy driving supply growth, instead of fundamental consumer demand growth.
I am also keeping my eyes on treasuries and may establish a long position if yields on the 30-year rise above 3.5%. If my Sagflation theme plays out then I expect increasing deflationary pressure over the next couple years, unless the Federal Reserve begins aggressively adding to the monetary base through treasury purchases. In either case, I believe yields on the 30-year treasury have at least one more trip well below 3.0%.
Another segment is natural gas. I continue to consider possible plays on the low prices of natural gas, and the likely rebound in prices, in my view. Playing gas prices through an ETF proved quite inefficient and thus I am considering equity positions in natural gas companies. However, I feel a need for patience until the natural gas market firms up a bit more and stocks like Chesapeake (Ticker CHK) and Encana (Ticker ECA) to fall further. At this point I believe these stocks are lifted more by broad market trends than actual fundamentals.
Thursday, March 1, 2012
February Performance
As one would expect given my more balanced portfolio at the start of the month between long and short equity positions, as well as a significant position in high yield bonds, my performance was relatively flat during the month of February. Specifically, the balance decreased 40 basis points during the month, clearly underperforming the best January/February performance by the S&P 500 since 1991. The loss was largely attributable to my position in the ETF BOIL, which attempts to track the price of natural gas. While the price of natural gas at the end of the month was close to the price at which I had purchased the ETF, the actual price of the ETF had declined over 10%. For this reason of inefficient tracking I sold the ETF earlier this week.
My exposure at the end of the month is summarized as follows:
29% Cash
37% High Yield Bonds
22% Equity Short
8% Equity Long
4% Commodities (Agricultural)
The exposure highlights my more bearish view on the markets, with the large cash position and significant short position. The equity long positions are in more defensive industries like consumer non-discretionary and healthcare. The position in commodities is also focused on consumer staples in the form of food. The large exposure to high yield bonds is theme driven, such as rising auto sales. The bonds should continue to perform well if the economy continues to improve, unless interest rates spike. Alternatively, the bonds should perform well if treasury yields remain low or continue to decline, unless the economy falls completely through the floor. At the very least, if I'm going to have some "long" exposure to the economy, I prefer to be higher in the capital structure. My biggest worry is that monetary policies continue to drive equity markets higher.
My exposure at the end of the month is summarized as follows:
29% Cash
37% High Yield Bonds
22% Equity Short
8% Equity Long
4% Commodities (Agricultural)
The exposure highlights my more bearish view on the markets, with the large cash position and significant short position. The equity long positions are in more defensive industries like consumer non-discretionary and healthcare. The position in commodities is also focused on consumer staples in the form of food. The large exposure to high yield bonds is theme driven, such as rising auto sales. The bonds should continue to perform well if the economy continues to improve, unless interest rates spike. Alternatively, the bonds should perform well if treasury yields remain low or continue to decline, unless the economy falls completely through the floor. At the very least, if I'm going to have some "long" exposure to the economy, I prefer to be higher in the capital structure. My biggest worry is that monetary policies continue to drive equity markets higher.
Sunday, January 29, 2012
Old Cars Providing New Opportunities
This month it was widely reported that the average age of cars and trucks on U.S. roads is almost 11 years, the oldest ever recorded. In other words, the average car in U.S. was sold in 2000. While car sales have improved, rising 10% to 12.8 million in 2011, the absolute level remains below the traditional replacement level of around 16 million. Since there is not a large scale substitute for owning a car or truck, investments in mass transit remain modest in this country, a logical conclusion is that people need to begin replacing older vehicles, in my view.
Ford (Ticker F), reported disappointing results relative to analyst expectations, producing an EPS after one-time items of $0.20 versus expectations of $0.25. Weakness in Europe and flooding in Thailand were the primary cause of the disappointment. European sales may continue to slide as the economy deteriorates due to austerity measures aimed at reducing sovereign debt. Asia demand appears healthy with Ford expecting to build seven new plants in the region, although the company expects to cut some production in the region during the first quarter. U.S. sales increased 11% in 2011 and the company grew its market share, the best signal, in my opinion, of improvements in the business. My takeaway on Ford is that company is improving its business but worries about soft demand outside of the U.S. may keep the stock price from appreciating.
Taking into consideration the macro thesis of an aging fleet of vehicles in the U.S. and the Ford-specific data points suggesting earning should remain healthy, albeit muted, I believe the best investment position is in Ford debt and U.S. commodity suppliers.
Ford (Ticker F) - My ~4% position in Ford debt (CUSIP 345370BJ8) offers a yield of about 6%, attractive in these markets when considering there may be some upside in price, in my opinion, should the company continue to improve.
US Steel (Ticker X) - My ~8% position in US Steel debt (CUSIP 912909AD0) should benefit from growing automobile demand within the US. An additional demand driver is steel requirements in domestic oil and liquid gas drilling. Costs for US Steel should decline due to the lower price for natural gas, to which management has increasing switched from coal. In a November 2011 presentation management stated they felt natural gas would provide cost saving at or below $5 mmbtu. Recently the cost of natural gas has fallen to around half this price. These factors of anticipated growth in domestic automotive sales, oil and liquid gas drilling, and falling natural gas prices are the reason for my relatively large position in US Steel debt, which is yielding over 8% at current prices. The dividend yield on the stock price of US Steel is below 1% and the PE on the 2012 consensus EPS estimate of $2.48 is about 12x, interesting but not yet exciting in my opinion. I do not expect management to increase the dividend until the price of the company's debt recovers, again suggesting that the better position is in the debt as opposed to the equity, in my opinion.
Ford (Ticker F), reported disappointing results relative to analyst expectations, producing an EPS after one-time items of $0.20 versus expectations of $0.25. Weakness in Europe and flooding in Thailand were the primary cause of the disappointment. European sales may continue to slide as the economy deteriorates due to austerity measures aimed at reducing sovereign debt. Asia demand appears healthy with Ford expecting to build seven new plants in the region, although the company expects to cut some production in the region during the first quarter. U.S. sales increased 11% in 2011 and the company grew its market share, the best signal, in my opinion, of improvements in the business. My takeaway on Ford is that company is improving its business but worries about soft demand outside of the U.S. may keep the stock price from appreciating.
Taking into consideration the macro thesis of an aging fleet of vehicles in the U.S. and the Ford-specific data points suggesting earning should remain healthy, albeit muted, I believe the best investment position is in Ford debt and U.S. commodity suppliers.
Ford (Ticker F) - My ~4% position in Ford debt (CUSIP 345370BJ8) offers a yield of about 6%, attractive in these markets when considering there may be some upside in price, in my opinion, should the company continue to improve.
US Steel (Ticker X) - My ~8% position in US Steel debt (CUSIP 912909AD0) should benefit from growing automobile demand within the US. An additional demand driver is steel requirements in domestic oil and liquid gas drilling. Costs for US Steel should decline due to the lower price for natural gas, to which management has increasing switched from coal. In a November 2011 presentation management stated they felt natural gas would provide cost saving at or below $5 mmbtu. Recently the cost of natural gas has fallen to around half this price. These factors of anticipated growth in domestic automotive sales, oil and liquid gas drilling, and falling natural gas prices are the reason for my relatively large position in US Steel debt, which is yielding over 8% at current prices. The dividend yield on the stock price of US Steel is below 1% and the PE on the 2012 consensus EPS estimate of $2.48 is about 12x, interesting but not yet exciting in my opinion. I do not expect management to increase the dividend until the price of the company's debt recovers, again suggesting that the better position is in the debt as opposed to the equity, in my opinion.
Thursday, January 26, 2012
Natural Gas Prices Near a Bottom?
Today I established a couple positions to increase my exposure to the natural gas market. The natural gas market has sold off significantly, dropping from over $5 MMBtu to under $3 in the past year, recently hitting the lowest level in over ten years of $2.32. Over production has been the primary cause of the price decline, but a warmer than usual winter has also contributed to lower demand during the typically seasonably stronger demand winter months.
Numerous producers have started to cut production, including Chesapeake Energy Corp., ConocoPhilips and Occidental Petroleum. While more production cuts are likely needed to balance supply and demand, I believe the price of natural gas likely begins to stabilize and may even bounce back above the $5 mark during the next year. The reason for my optimism includes the production cuts, the potential for either a colder weather pattern in the next month or a hot summer, and the likely increasing use of natural gas at lower price points. At under $3 I believe natural gas becomes a much more attractive fuel alternative for companies able to switch between natural gas and higher priced coal. Longer-term, the low natural gas prices should attract new uses for the fuel, including transportation, heating, electricity and industrial production.
So I have established the following positions:
~3% position in Penn Virginia Corp. Sr. 7.25% Notes 4/15/2019 (CUSIP 707882AC0) - This company is having difficulties and its stock price (Ticker PVA - $4.76) has dropped significantly. Lower natural gas prices have obviously not helped but the company has been investing in oil production, increasing revenue from oil relative to gas. Management does not instill confidence with a lawsuit outstanding for over-paying the previous CEO and CFO. In addition, the company has slipped a bit on production relative to guidance, calling into question execution. That said, management is out talking to investors, which is usually a good sign of their confidence about the future of the business. The company does not have any significant debt due until 2016 and has adequate liquidity. While the stock may ultimately prove a better bet, I decided to establish a position in the senior debt at a yield north of 9%, a more comfortable risk/ reward balance in my view.
~2% position in ProShares Natural Gas ETF (Ticker BOIL) - This is 2x leveraged ETF that tries to track movements in the natural gas futures markets through derivatives. This position is purely focused on the price on the natural gas. Because it is leveraged I have purposely kept the position relatively small.
Also, yesterday I reduced my position in silver slightly after a significant increase in silver prices due to the remarks by the Federal Reserve yesterday. Basically, the Fed stated its intent to keep interest rates low for multiple years and has not ruled out additional quantitative easing, both reducing the value of the dollar and increasing the value of precious metals. I plan to put money back into silver if the price retreats again.
Numerous producers have started to cut production, including Chesapeake Energy Corp., ConocoPhilips and Occidental Petroleum. While more production cuts are likely needed to balance supply and demand, I believe the price of natural gas likely begins to stabilize and may even bounce back above the $5 mark during the next year. The reason for my optimism includes the production cuts, the potential for either a colder weather pattern in the next month or a hot summer, and the likely increasing use of natural gas at lower price points. At under $3 I believe natural gas becomes a much more attractive fuel alternative for companies able to switch between natural gas and higher priced coal. Longer-term, the low natural gas prices should attract new uses for the fuel, including transportation, heating, electricity and industrial production.
So I have established the following positions:
~3% position in Penn Virginia Corp. Sr. 7.25% Notes 4/15/2019 (CUSIP 707882AC0) - This company is having difficulties and its stock price (Ticker PVA - $4.76) has dropped significantly. Lower natural gas prices have obviously not helped but the company has been investing in oil production, increasing revenue from oil relative to gas. Management does not instill confidence with a lawsuit outstanding for over-paying the previous CEO and CFO. In addition, the company has slipped a bit on production relative to guidance, calling into question execution. That said, management is out talking to investors, which is usually a good sign of their confidence about the future of the business. The company does not have any significant debt due until 2016 and has adequate liquidity. While the stock may ultimately prove a better bet, I decided to establish a position in the senior debt at a yield north of 9%, a more comfortable risk/ reward balance in my view.
~2% position in ProShares Natural Gas ETF (Ticker BOIL) - This is 2x leveraged ETF that tries to track movements in the natural gas futures markets through derivatives. This position is purely focused on the price on the natural gas. Because it is leveraged I have purposely kept the position relatively small.
Also, yesterday I reduced my position in silver slightly after a significant increase in silver prices due to the remarks by the Federal Reserve yesterday. Basically, the Fed stated its intent to keep interest rates low for multiple years and has not ruled out additional quantitative easing, both reducing the value of the dollar and increasing the value of precious metals. I plan to put money back into silver if the price retreats again.
Subscribe to:
Posts (Atom)