CEA Monthly Issue – July 2015
Commodity: Crude Oil
No doubt about it, it was a rough month for the price of crude oil…
The essential commodity plunged from $60 a barrel all the way down to the $52 area- a 13% downturn over the past few weeks.
See for yourself…
What sent crude crumbling?
As you’re likely aware, the Greek debt debacle had both the equity and commodity markets in a tizzy the past few weeks. Rather intense volatility entered the marketplace as investors factored in constant news flow concerning the situation.
However, the steep crude downturn in late June and early July came from a sudden bout of China growth worries, not Greece.
You see, over the past few weeks, Chinese stocks have fallen precipitously. In fact, the Shanghai Composite plummeted by as much as 30% in recent trading.
Take a look…
The steep pullback in Chinese stocks has crude oil investors getting increasingly nervous over the health of China’s economy. After all, the country is one of the biggest crude importers in the world. So if their economy takes a turn for the worse, it stands to reason the country’s crude demand would decline meaningfully.
And since the global crude market is already oversupplied, a Chinese demand slowdown would only magnify the problem.
But here’s the deal…
The recent surge of China growth worries is blown out of proportion.
The late June pullback in Chinese stocks was likely just a much-needed correction after an incredibly strong rally. Fact is, even after you account for the recent downturn, the Shanghai Composite is still up 78% over the past year!
Compare that to the S&P 500, which is up 8.5% in the same time frame.
Clearly, China’s markets are very strong. Therefore, any worries over the health of the country’s economy are purely speculative at this point.
And that’s precisely why the abrupt downturn in oil is providing a great buying opportunity for select oil exploration stocks.
Let me explain…
With WTI crude back in the low $50 range, a large swath of US oil exploration stocks have fallen precipitously in recent weeks.
But there are a select few that bucked the recent weakness in oil and held up very well…
One of them is Newfield Exploration $NFX. Newfield is an independent oil producer with operations in the Rocky Mountains, Mid-Continent region, and Texas. The company also has a small international operation in the South China Sea.
Here’s what I like about this $5.9 billion market cap company…
First of all, despite the 13% downturn in crude since June 24th, 2015, $NFX is only down 4% in the same time frame.
Clearly, $NFX displayed exceptional relative strength in the recent pullback in WTI- a very good sign.
What’s more, $NFX is up 34.7% year-to-date, making it one of the best performing independent oil and gas producers in the market this year.
But here’s what’s most important…
Newfield has a strong capital structure with ample liquidity. Given the current state of the oil market, it is essential to focus on energy companies with a solid balance sheet.
As of the most recent quarterly earnings, the company had $783 million in cash along with a $1.8 billion credit facility. What’s more, current assets outweigh current liabilities by a near 2:1 ratio.
Given Newfield’s strong 2015 share performance and its strong financial position, the company is a leading contender for additional upside as 2015 progresses.
So here’s what we’ll do…
Let’s add Newfield Exploration $NFX to the Commodity ETF Alert portfolio at current prices. You can add the company to your portfolio and any price under $35.25.
Here are some more details on our purchase…
Technically Speaking:
As you can see, $NFX is holding up quite well despite the recent uncertainty in crude oil prices. This relative outperformance is a good sign for $NFX going forward!
WHAT TO DO NOW:
Newfield Exploration is trading at $34.87
Buy $NFX up to $35.25 per share
Our profit target is $44.00 or more
Risk Control Price is $31.39 (or a 10% stop loss from your entry point)
Category: Commodity Trading
