By: Moderatore on Mercoledì 01 Ottobre 2003 14:56
---------------------------- Christopher Edmonds
As Winter Approaches, an Energy Bull Returns
By Christopher Edmonds -- RealMoney.com -------------------
Marshall Adkins, director of energy research at Raymond James and a member of the TSC Energy Roundtable, has always been one of the more colorful energy pundits featured in this column. And, more often than not, he's been right.
Case in point is earlier this month when we profiled Adkins' short-term cautious stance on the energy markets.
That's cautious with an emphasis on the short term. Adkins now thinks investor sentiment is about to shift, resulting in energetic results for investors in the oil patch.
Storage Grows, Stocks Swoon
Adkins argued in early September that energy stocks were likely to take a breather in September, as the lack of natural gas demand for either air conditioning or heating would likely lead to large builds in natural gas inventories, which in turn, would put pressure on energy-related equities. That didn't mean he wasn't still bullish longer term, just that the timing of the next rally would be pushed back.
"We continue to trek down what we believe is the long road of a multiyear secular upturn in the oil patch," Adkins said in early September. "However, most long trips are not completed without encountering some bumpy patches in the road. This is exactly what energy investors should be braced for in the upcoming weeks as we enter the September shoulder period."
He was right. In fact, over the last two weeks, the Energy Information Administration reported record natural gas storage growth for September -- over 200 billion cubic feet in a two-week period and both natural gas prices and the stocks of providers felt the pinch. From its peak in early September, the Philadelphia Oil Service Index, or OSX, lost nearly 5% of its value. Likewise, natural gas prices dropped from just over $5 per million British thermal units to just under $4.50 at their lows last week.
A recent chill across the Northern tier of states, the Rockies and even into the Southeast helped spark a rally in natural gas prices on Monday. However, with another big storage build expected when the EIA reports its weekly data on Thursday, September will likely turn out just as Adkins predicted -- a soft month for energy stocks.
Chilly Temps, Warmer Stocks
However, looking ahead, Adkins' opinion is now decidedly more bullish. "We believe that the energy markets are setting up for a meaningful improvement in sentiment as we move into mid-October," Adkins told clients on Monday. "The catalysts for this positive sentiment shift should be the bad news being priced into the stocks; smaller gas injections through October; investors shifting focus to the possibilities of winter natural gas shortages; the positive impact of recent OPEC production cuts; and the potential for sector rotation by investors out of sectors that have performed extremely well year-to-date and into the energy sector, which is essentially flat for the year."
Adkins also noted that history is on his side. "The oil service index has seen meaningful rallies in four of the past five October time periods."
And again, part of that prediction is based on the potential for surprisingly low storage builds in October. "Not only do we think the large gas injections will fade in October, but it is possible that late October injections could come in well below expectations," he said.
Picking in the Oil Patch
Adkins believes as sentiment in the oil patch improves, energy stocks that "were beat up the most should move up the most." Hence, his list of favorites include a number of names that felt the pressure of higher natural gas storage levels in September.
Included on his list are three drilling companies: Grey Wolf (GW:NYSE) , Nabors (NBR:Amex) and Patterson-UTI (PTEN:Nasdaq) . In addition, he adds Maverick Tube (MVK:NYSE) and National Oilwell (NOI:NYSE) as two oilfield service names that should recover as the cycle accelerates. On the exploration and production front, Adkins likes names that have the ability to grow production on a per-share basis, noting that many are trading at relatively low multiples of cash flow and asset value. His list includes Pioneer Natural Resources (PXD:NYSE) , XTO Energy (XTO:NYSE) , Denbury Resources (DNR:NYSE) , Remington Oil & Gas (REM:NYSE) , Ultra Petroleum (UPL:NYSE) and Comstock Resources (CRK:NYSE) .
Adkins rates all these stocks "strong buy" and his firm has or expects to receive investment banking business from all of the companies mentioned.
Just as temperatures begin to cool, Adkins is again warming up to energy stocks he thinks will be hot as winter arrives