Thursday, September 13, 2007

Crude @ $80? What to Buy? I'm going with Coal and Refiners - 2 new positions, and 1 position build

I mentioned last Friday, that coal was looking like a good place to invest now as it looked ready to break out. While the solar stocks for some reason are not reacting very well to this $80 crude print, coal has taken off the past few days, and one would think (logically) so would natural gas... also the low inventory levels announced yesterday will help the refining stocks.

I have added 2 coal names and 1 refiner this morning on their chart breakouts. These are not stocks I would hold for 2 years non stop as they are very cyclical, but they are great for a few strong moves every year. The long term story on coal should be great, but after some profit warnings and a bad supply/demand dynamic the stocks have been out of favor for most of the summer. Keep in mind some coal is also used in metallurgical process, not just the typical 'furnace' coal we think about.

Per a Reuters story on Sept 6th:
  • Coal prices are expected to rise this year and next as a result of decreasing power plant stockpiles and strategic production cuts, two major U.S. coal producers said on Thursday.
  • "We suffered through 2006 and part of this year with an overhang of stockpiles, but it is whittling down," Arch Coal (ACI) Chief Executive Officer Steven Leer told an energy conference.
  • "Demand is up and supply is trending down, so now the trend lines are progressing towards crossing," he said.
  • Earlier, Gregory Boyce, president and chief executive of Peabody Energy (BTU) said prices were up significantly everywhere, for both steam coal and metallurgical, or coking coal, which is used for steel production.
  • "In the U.S. market the improvement this year will continue to accelerate," he told the Lehman Brothers conference.
  • "Production cuts and an increase in demand have put the market in balance," he said, noting that coal from the Powder River Basin (PRB) in Montana and Wyoming is now selling at prices 25 percent higher than a year ago.
  • According to the coal industry newsletter Coal & Energy Price Report, a ton of eastern U.S. coal from Appalachia was selling on Thursday for $44.25 -- up from $43.96 a month ago and $40.75 in March. PRB coal was selling for $11.00 per ton, up from $10.90 in August and $8.45 six months ago.
  • Last year, with stockpiles of coal at power plants relatively high and too much coal on the market, major producers cut back on production, especially in the Appalachian coalfields.
  • Boyce said stockpiles were 11 percent down in the last two months, while more utilities were carrying higher inventories after transportation problems two years had inventories dangerously low.
The 3 stocks in the coal sector I follow are: Peabody Energy (BTU), Arch Coal (ACI), and Consol Energy (CNX).

Peabody Energy is the most diversified and largest in this group; this is a $13 billion company with exposure to Australia. Exposure to Australia means exposure to China. Arch Coal ($5 billion) and Consol Energy ($8 billion) are somewhat smaller players which have more domestic exposure. Also these companies mine different types of coal in different regions of the US. Of the 3, I began positions in Peabody Energy and Consol Energy; Peabody because its the leader along with its worldwide exposure and Consol due to a bit of a better chart than Arch Coal (although another day or two of good peformance for Arch will get it in a great technical position as well)

Now these stocks have rocketed off their recent summer lows, but again the strategy here is not to have too much dead money waiting for a 'value stock' to recover - once you identify the fundamentals you like, you wait for the chart to improve and jump in. To be blunt I am a day late on Peabody Energy as I wanted to see 1 more day of follow through after yesterday's jump to $46; with a burst to $48 today - well it's following through. It's lows in August were way down at $39, and its 52 week high is nearly $56. If the trend continues the stock should be able to retest this area in the upcoming weeks/months.

I am relatively indifferent to the other 2 names - one over the other - but just went with Consol Energy due to technical reasons. (but a new fundamental outlook for the sector trumps technicals any day of the week). Very similar to Peabody, Consol bottomed out in August in the $37 range (aside from a few hours on the washout selling day), now has leaped to $44, and its 52 week high is $50 area. So $50 on CNX and $56 on BTU will be the first target areas. Clearing those old highs would lead to clear sailing beyond....

As for refiners, I chose to add to my current smallish Frontier Oil (FTO) position as it has the best chart in the group I follow. I also have exposure in this group (0.7% of fund) to Western Refining (WNR) although technically it doesn't look so good right now. Old favorite Valero (VLO) also has not broken out yet, and Tesoro (TSO) also is way down at its 200 day moving average. Hence the decision to simply add to Frontier Oil. All these are refiners that can process heavy crude, which is an advantage in price over light crude.

Also, looks like there was an analyst upgrade of Frontier Oil Tuesday, with a price target of $50: "Raivetz said Frontier Oil, which has assets ideally located to access cheap Canadian oil sands production, is the "most profitable refiner" in his coverage group."
  • I initiated 400 shares of Consol Energy (CNX) to make it a 1.7% position
  • I initiated 300 shares of Peabody Energy (BTU) to make it a 1.4% position
  • I added 200 shares of Frontier Oil (FTO) to my smallish 100 share position to make it a 1.25% position.
After such sharp moves up in the coal names, I'd like to see them even out a bit and pullback a tad, where I'd continue to build positions. I'm still not 100% sold on the refiners as the charts in the group stink, save for 1 name.

Long Peabody Energy, Consol Energy, Frontier Oil, Western Refining in fund; no personal positions

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