Opportunities in energy investing have really never been so focused. With the grand arbitrage in Brent/WTI spreads largely gone, refiners haven’t been so great and need to moderate some before they’ll peak my interest again. Natural gas refuses to play into what should be a growing resurgence of the fuel, at least for the present and oil services companies have been more than a little hit and miss, with the international plays being a lot more interesting than the domestic ones.
So, maybe there’s a lot to position for in the future, but for right now, there’s only one way to trade the space: Look for liquids-rich E+P’s that are showing growth – and doing it with an eye to increasing margins and shedding capex.
I’ve spent almost too much time outlining this thesis in the last several months, but the plus side to my repeating choruses and diligence has been three great candidates that do nothing but continue to trade well: Anadarko (APC), EOG Resources (EOG) and Noble (NBL).
One place that’s been slightly less hyped, largely because results are still slow in coming has been in the West Texas area of the Permian basin known as the Wolfcamp. You can find your hucksters here claiming reserves even more stunning than in the Eagle Ford and Bakken combined and I usually discount such hype, but now that some results are starting to show the potential of Delaware area of the play, I am showing more interest in taking some long-term players here for a trade.
And guess who’s got some prime acreage here? No surprise, EOG is well situated, but maybe it’s a surprise to see Devon (DVN) here as well. Chesapeake (CHK) has terrific acreage but you may never see me recommend them again (well, never say never). But there are three mid cap independents who can leverage a quick increase in production in the Wolfcamp over the next year and see a big rise in their share price: Pioneer Natural Resources (PXD), Energen (EGN) and Cimerex (XEC).
But here’s the problem that all three of these have in common: You won’t be alone in isolating these companies for your portfolio as hot plays. Each of them has rallied strongly in the first half of the year; it seems leaving far less room to run even with some very impressive Wolfcamp results. Pioneer natural, which I have watched in wonder, particularly seems perfection priced today – you could buy it close to $105 a share as recently as April. At $180, I say no thanks. Energen has seen really good results in two of their Wolfcamp rigs and has been making new highs because of it, but at least at $65, it’s not moved 70% in a quarter. This is an investment with proved production that’s coming on line and a solid punt into the Wolfcamp hype.
And then there’s Cimarex. This one was a hot trade in nat gas in 2009 and 2010 that I made quite a few dollars on, then experienced the great fall with nat gas prices moving under $2 mcf in 2012. Since then, Cimarex has done a stunning job that so many E+P’s have undertaken, shifting as best they can from dry gas plays into liquids and crude. In particular, their Wolfcamp acreage is so close to Energen’s that you could reasonably superimpose their results. And for me as a trader, their stock hasn’t participated in the Wolfcamp craze like PXD and EGN – at least not yet. Sure, they’re up big for 2013 already, but they are reemerging from the depths of a natural gas disaster. They’re small enough to remain flexible in a way that Devon cannot, otherwise that would be the one I’d be recommending (although I’m watching you, Devon, always watching).
But for a starter’s play into the very promising Wolfcamp, Cimerex is the one I want today, ready to test it’s old highs at close to $100 a share. Recommended buy here.