Thursday, May 21, 2009
(Cont'd from above)...

Jim (cont'd):   


In fact, I think that natural gas could be done cratering… even with today’s inventory bill, it might be over… and that puts the price down to $3.60 and I think we are due for a snap back… especially if we have a long hot summer… now, last night there was a very important interview, because it changed my mind about the story.. we had on Michael Linn, from Linn Energy, and he really made me a natural gas believer again as I had been a skeptic… and I now think that I could not leave natural gas… I could not leave it if I tried… Linn said that he thinks that Obama will have to embrace natural gas because he needs a bridge fuel to get to solar and wind… I completely agree… natural gas is 50% cleaner than oil, and more importantly, Ram Immanuel, the sweetheart guy, who is Obama’s incredibly powerful Chief of Staff, has said the same thing.

Linn also said something that I did not expect… that he thinks we are about to see some real consolidation in the industry, that means takeovers… that is a legitimate reason to buy these stocks beyond just the believe in a turn in natural gas…. the other barrier to natural gas going higher has been the shear volume of liquefied natural gas, LNG, that is expected to be imported from the countries that the wonderful Erin Burnett seems to visiting all of the time… places that nobody else wants to go to… and that should happen in the next two years… but Linn pointed out that there are still plenty of problems with bringing in LNG, we do not even know if all of the imports are going to be allowed in.

On top of all of that, Linn pointed out that the shut ins of natural gas, where producers close up their wells when prices are low, is gigantic… that is going to help reduce the gas supply… natural gas could be on the come back… and I waited until the stocks really got hammered to do this piece… I think you now need to take a look at the best play on higher prices in the group… and that is Anadarko Petroleum (APC)… it is a stock that I have been recommending for a long time because it is the quality best of breed… most recently on January 12th when it was at $38.73, I said that you have got to pull the trigger… 12% gain.. much more, of course, if I had told you to get out a week ago… I think the best way to play a really noisy snap back in the price of natural gas...

One potential hitch… if you remember, last Tuesday the 12th, Anadarko did a big secondary offering where they raised close to $1.5b… 30 million shares priced $45.50... the secondary was an unmitigated good for Anadarko the company… as there had been some concerns that the company might run a capital short fall… as much as $600 to $800 million, before it raised the money… the money from the secondary has really allowed the company to clean up its balance sheet… but what about Anadarko’s stock… oh boy, on the day of the secondary it looked like it was a good deal for people who got in at $45.50... as the stock only dropped back to $45, and traded plus or minus… and then it closed near the high of the day at $45.91... so that is a terrific gain in a very volatile market that was not good that day.

But since the stock, since the stock has not held up as well… with a lot of regretful buyers selling Anadarko, as it dropped to the low $40’s… when it comes to secondaries I like to look at the pictographs, that can help us understand if there is too much or too little demand for the stock… when I talk about pictographs, I am not talking about administering the Warshack test… I prefer stock charts to ink blots… and I do not care if Anadarko is bi-polar or manic depressive… I just want to know if it is ready to roll… so I run the Fitzpatrick test as in Dan Fitzpatrick, the man we turn for technical analysis, and my colleague at RealMoney.com, the paid site of TheStreet.com where I am chairman… you have no doubt seen Fitzpatrick on Melissa Lee’s “Fast Money”… and he thinks that Anadarko will probably hold up after the beating that it has taken… according to Fitzpatrick, the people who have regretted buying the secondary seems to have blown out the stock by now… so the stock works on a dip like the big one that we had today.

Alright, how about the fundies… we can get Anadarko today on a pullback to below where we could have paid on the secondary… we like that… but should we… because this stock has the exposure that we need to natural gas bottoming… two words that probably should not be said right after each other… and I do not think that it will turn into a silent but deadly member of your portfolio… even with all of the over supply in natural gas and under $4 per cubic feet, the commodity is too cheap… Anadarko is 65% nat gas, 35% liquids… only has a small part unlike Linn Energy, LLC (LINE), this guy only hedged a small part in 2009, 2010 in nat gas production… 28% and 13%… so this is a way to get a snap back.

Beyond that, the companies has had 10 large discoveries in the last 12 months… that is phenomenal… no other company that I follow has been so great at finding oil and gas… its finding costs are down 8%… balance sheet was repaired… the company has around $2.2b in cash… access to $1.3b in credit facility… a net debt ratio of around 30%… I regard this as one of the best balance sheets in a balance sheet hobbled industry… it has got off shore leases in a lot of places.. Gulf of Mexico, Brazil, China, West Africa, Mozambique, giving it geographical diversification… it is going to drill 12 deep water wells that have more than 100 million barrel of oil equivalent potential… and even though Anadarko is only planning on growing production by 1% to 3% this year during the downturn… the companies incredible track record for replacing reserves… it is really the main reason why I like it so much… it is very important because the future growth… you want to be able to drill for more, not less natural gas going forward… it is like a drug pipeline, if you have a lot of drugs in stage 2, 3, you know the future is going to be good… same thing as what Anadarko has… in the last three years, average replacement rate is over 200%… again, the best that I know.

Here is the bottom line…

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