Spear: Targeting Energy
08/13/2004 12:00 am EST
"There's always a bull market somewhere and right now that somewhere is the oil and gas patch," says Gregory Spear, editor of The Spear Report. "Make sure you position at least some of your portfolio to take advantage of this wave." Here are his favorites.
"There are also some exceptional small-cap names in the oil patch. We reiterate that investors should consider long-term positions in smaller independent oil and gas producers as 'buy and hold' candidates. They have growth and they have incredible value. Don't sweat the small moves up and down, as long as the price stays in a general uptrend. Buy in gradually, buying more on the larger corrections than at points like right now when prices are relatively high in the trading pattern.
"There is one that merits particular attention, Noble Energy (NBL NYSE). Noble is a surprisingly diversified and international independent energy company. Noble is like a pint size Exxon, one hundredth the size of that Goliath, but developing a unique set of international skills like no other of its size. They operate domestically in the Gulf of Mexico, California, Louisiana, Texas, Oklahoma, Kansas and the Rocky Mountain Region plus Argentina, Ecuador, Equatorial Guinea, Israel, the North Sea, China and Vietnam. Impressive. Recently the company began differentiating itself by moving into deeper water drilling in the Gulf of Mexico. Overall, the company is growing production at a 17% rate.
"In early May, Noble reported first quarter net income of $85 million, or $1.48 per share, a 145% year-over-year increase. Technically, in the last month the stock broke out of a big-picture cup and handle to new all-time highs on excellent volume. This is the technical mark of leadership. The company has been busy getting their story out to brokerages all over the country in the last few months. It has been hard to buy, as it has little volatility and therefore doesn't dip much, so it is a good candidate for an ‘averaging-in’ approach. This is a 'buy and hold' candidate, as long as the overall trend remains intact.
"We also think investors should be aware of the unusual opportunities at play in the gas fields. These opportunities have nothing to do with geopolitics or China. While oil is an international commodity, natural gas is a domestic affair. There is going to be an increasingly apparent crunch in the US, based on declining supply and increased demand due to an irreversible switch-over from coal to clean natural gas in electrical generation plants. In other words, there is a bull market in natural gas and there is nothing on the horizon that we are aware of that could derail it, not even domestic terrorism.
"There is one small-cap stock that stands head and shoulders above the rest when it comes to gas. Chesapeake Energy (CHK NYSE) is the 6th largest independent producer of natural gas in the US. To put that in perspective, they produce about 1/3 the volume of Chevron or Exxon . But when it comes to investing in natural gas, size does not matter. What matters is steadily increasing production and the rate of replenishment of reserves, and Chesapeake led the pack with a 37% increase. The company is growing bit by bit, literally, as in drill-bits. Chesapeake operates 6000 producing wells, geographically concentrated in Oklahoma, western Arkansas, Kansas, and the Texas Panhandle. The firm has unusual expertise in finding gas at depths of more than 2.5 miles, with a 92% success rate at those levels, but they also make plenty of savvy strategic acquisitions. Since 1998 they have acquired almost $4 billion in reserves at an average cost of roughly $1.40.
"Of course, most independent producers like CHK hedge their production, which means they take positions in derivatives to lock in a minimum return and smooth out seasonal price fluctuations. The real question is how well do they do that. CHK's current hedge positions guarantee them $35 for oil and $6/mcf for gas through 2005. That's great market timing work. While that means they won't benefit much from a spike in gas prices, they won't suffer due to price volatility either. In fact, $6/mcf is a windfall rate of return and CHK is 90% in gas— a virtual pure play. That's why, since its low around $5 in the summer of 2002, the chart of this company looks like a tech stock, and that's why it has not started to correct like the rest of the market. We suggest that investors just average in, a little each week for a month or two, and you should get a good average price."