Bulls & Bears

Independent Stock Analysis covers an awful lot of ground and two months have passed since we overviewed the landscape.  Perhaps an updated survey would be helpful.  In addition to specific stock opportunities, let’s consider natural gas trumping oil, the precious metal complex strength, our coal position and just where is China at this time?  First and foremost, JJ Butler is a practitioner in the markets. 

ISA’s long held enthusiasm over the oil price continues to make new lows.  Booming stateside supply and terminally declining OECD demand have reversed the ‘net export’ model.  Meanwhile, WTI prices in the mid $80’s are marginally economic for producers.  Energy stocks are plentiful but oil producing company’s are surprising rare.  Should the facts change and ISA’s interest in oil bubble up, the go to oil name would be Northern Oil & Gas (NOG) which printed a new 52 week low this morning.

E&P’s always produce both oil and natural gas and the industry stampede from gas to oil has been remarkable.  Gas in universally hated.  We’ve watched as associated gas production and the backlog have kept a recovery at bay.  Recently ISA has become more constructive on natty, pointing to the rig count and producer capex spending plans going forward.  As for a catalyst, natural gas needs just a bit more time for declines be manifest and for winter to be at least modest.

Natural gas names are plentiful.  The punch list:  Low cost, dry natural gas producer at a good valuation.  One company, old friend Ultra (UPL), stands out as the lone favorite.  We’ll have more on UPL in the future as we wait for winter…

This summer ISA spent a great deal of time looking at the depressed and very small coal sector.  The expectation was to find a strong company in a liquidity squeeze (short term debt vs long term assets) for a possible multi-bagger win.  Unfortunately, the weak sisters trading at 1X potential cashflow are operational dogs.  Instead ISA likes smallish Cloud Peak Energy (CLD) to be the sector leader.  Income MLP’s Natural Resource Partners (NRP) and Alliance Resources (ARLP) are good income names.  Remember, ISA remains wary in general of the income meme.

We try to avoid getting distracted by ubiquitous scary charts while respecting the action.  The fundamentals for precious metals are outstanding and the activity since the election stands out.

Franco-Nevada (FNV) is the best long term gold or royalty business bar none.  The fine and conservative management has set the company for growth into next decade.   Vital in my opinion is the exploration upside (culture and history) completely financed by others.  Silver Wheaton (SLW) is my favorite for this particular leg of the bull run based on valuation (a tax issue depressing shares) and an expectation for silver to outperform gold.  With their balance sheets, the lowest of costs, free cash flow, growth profiles, asset diversification and management attitudes these business’s are more safe than a diversified list.

ISA continues to monitor China with great interest.  The optimum path for the Western investor to participate in the industrialization of emerging markets is to sell them what they need.  Teck Resources (TCK) trumps in the industry.  The small players are always short on scale and the super-majors have run up against the law of large numbers while being iron ore dependent.

China has disappointed economically for quite some time.  China posts upbeat data amid leadership change at Marketwatch.

“China bears take note…

The SSEC shows the potential for an inverse head-and-shoulders pattern….If the next decline fails to make a lower low before it starts to rally again, the potential for a trend reversal is in place.”

5 thoughts on “Bulls & Bears

  1. Excellent thread, Mr Butler. Everyone should be reminded, that the next recession cycle is due in the not to distance future. The boom and bust cycle occur every 4 years and 7 months, which would indicate a recession about November of 2013. The recession could be bad and extended.

    Whatever happens in WDC, it will not lead to concrete reforms. Without structural changes, there will be a run on PMs and the US Dollar. CommieCare, will have a crippling effect of GNP growth, with growth averaging less than 2% per year. Because of Govcare, the trend to off-shoring is very likely to reverse again.

    Politically, this nation will see nothing but rancor over the next four years, with our national debt exceeding 20 trillion or more. Between now and 2017 we shall either have a major finical crisis or extremely high inflation. I strongly suspect inflation could run at 2 to 3% per month.

    On November the 6th, America committed economic suicide. It is already in the moral and ethic wards and soon shall be transferred to ICU…

    GL to all; may God bless you and America!

    • Thanks, Hans.

      All investors are reminded to look pragmatically at the world, rather than through a lens which is colored by a political view.

  2. Great info and summary. One question re: NOG: It has fairly high debt; if we go over the fiscal cliff in 2013 and the USA (world?) goes into a recession, is its balance sheet strong enough to hold out through a difficult time? I know that you are NOT saying to buy NOG today. I am only putting it on my watch list, but normally for a stock to even be on my watch list, it has to have a strong balance sheet. Its low current ratio and higher debt at this point on caution (not red) flags for me. Thanks again!

  3. Two years ago NOG had it’s Bakken acreage position, minimal production and $200 million in cash. Since then NOG has burned through the cash, and borrowed and another $368 million to multiply production (and add a bit the acreage).
    The debt is not out of line. First, liquidity/refinancing is not an issue as the $300 million was recently issued and matures in 2020, with the balance on the revolver.
    Second, note Q3 EBITDA was $63 million (double year over year) for a run rate north of $250 million. Meanwhile the growth will slow but continue to be hyper-robust, growing the cash flow. Depending how the investor measures it, the debt to cash flow ratio is not too far over the modest 1:1 ratio. NOG is perhaps a year away from cash flow exceeding capex requirements, something they have planned and timed fairly well. Third, NOG stays strongly hedged for the next year and modestly hedged for the year after. (Hedges as insurance). Fourth, NOG can’t run out of money; they can easily stop capex by not participating in AFE’s as a non-operator. Interestingly ‘capex behind the pipe’ would keep production growing for another quarter.
    Fifth, NOG is an asset play. Note the recent XOM and CLR Bakken purchases and the discount to peers.
    Latest release: http://www.northernoil.com/sites/default/files/Earnings%20Release%202012-Q3.pdf

    The Canaccord presentation explains the simple business model: http://www.northernoil.com/investor-relations

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