Two Energy Stocks the Big Money Likes

04/27/2009 11:14 am EST


Peter Way

Founder and CIO, Peter Way Associates

Peter Way, editor of Block Traders' Oil and Gold Monitor, says market makers are looking for higher energy prices, and they like two stocks in particular.

In today's green-dominant "environment," there are still folks looking for crude oil prices to get below $30. We wish them luck, and encourage them to be more aggressive in their sale of energy stocks at lower prices (for us to buy).
Now, in the midst of the monthly "roll" of positions in crude oil futures, June is becoming the front month as the April [futures] officially expired. The final liquidations of those contracts not destined to be filled by actual delivery of product typically provide a brief apparent market price weakness.

Quotes for [the June 2009] contract might even get back to the $50 level, from their $52+ [recent] settlement. June and December crude contracts are important, because their open interests reflect the energy industry's use as a delivery option, rather than simply an insurance or speculative mechanism. Interim months tend to have a larger influence from non-industry onlookers more interested in bucks than in BTUs.

The July to November contracts continue to reflect the purchase of protections against prices perhaps above $80 a barrel. More telling, the energy industry-dominated Decembers provide for the possibility of as much as $74, and no less than $56.

What everyone else can see is a continuation of monthly settlement prices in a curve rising by another $20 out to December11th. That's an annual rate of increase of 14% from the current $50 settlement. Active players in the market apparently see lots of encouragement to believe in the possibility of much higher prices.

So, what we have is a constructive, but not exciting, set of surroundings for energy stocks. Implicit in that picture is a resumption of world-wide energy demands and therefore of economic recovery.

But, to make money today we need to get a lot more specific about opportunities.

Continental Resources (NYSE: CLR) qualifies importantly because of its operating leverage in terms of production potentials or resources per share of stock. At the 2008 crude oil price peak, the stock was more than three times its present $24 price. The shares apparently are enjoying institutional enthusiasm over its potentials in the Bakken oil shale holdings. It ranks above 97% of the other 2,000+ equities on our reward-risk scale.

Southwestern Energy (NYSE: SWN) has demonstrated that volume market-makers know the behavior of its investment followers well. The stock has a long history of meeting its sell targets, with exceptional annual rates of return. Here it ranks better than 95% of our covered stock population. A 9.5% upside target should be achievable as the year progresses. (It closed just below $24.50 Friday-Editor)

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