Prepared to Be Depressed

 | Jan 16, 2014 | 12:00 PM EST
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An overview reveals that energy has been a lousy space this week. It seems opportunity abounds almost everywhere except in the oil patch, particularly as earnings begin to come in fairly well and the January swoon that most analysts predicted just hasn't materialized.

I watch my favorite companies trade and keep coming back to the same cautious approach, even though many of the fundamentals continue to be good.

Crude prices are steady and strong, despite a scary drop to support in WTI at $91. That's an indication from the commodity that the quarterly reports from domestic E+Ps are going to be stronger on production growth while weaker on margins. That could be the start of a very worrying trend for U.S. producers. I am concerned that while the EIA sees shale production growth through 2020, we will get effective crests a lot sooner than that. Can we do to the boom of shale oil what we did to the boom of natural gas from shale? Almost undoubtedly, we will. 

But forgetting about the fundamentals, particularly the long-term fundamentals for a moment, we get an even view into the space by just looking at the market action and individual cases of some of the many stocks I follow. Reading through this group of stories will have you as depressed about the sector as I am.

Apache (APA): After partially shedding Egyptian liabilities and selling another $7 billion in assets, Apache dropped its debt load almost $2 billion in 2013 alone. Its continued concentration in the Permian basin and in select Gulf of Mexico resources all point to a strong 2014. Yet Apache has been a certifiable trading dog since December. Is it just the Citi downgrade? No. This morning we learned the extent of storms in West Texas on fourth quarter production: down 134,000/boed.  That's a bad omen for the group.

Anadarko (APC):  If you were to cherry pick the strongest oil opportunities in the U.S., only one company would have its finger on the pulse of almost every one and it would be Anadarko. With premier assets in Colorado's Wattenberg, the Texas Eagle Ford, Marcellus and with deepwater Gulf of Mexico, this might be the one oil company to own if you could only pick one. But the dark side continues to be overwhelming, with Tronox and Macondo. No thanks.

Noble (NBL): It's spending $10 billion in the Niobrara, there's Leviathan in the Mediterranean and an expected 17% production increase through 2017. So why is the stock back in the low $60s? No good reason I can see.

SandRidge (SD): After selling Gulf of Mexico assets for $750 million that now-gone CEO Tom Ward spent $1.2 billion on, you'd like to throw in the towel. But there are improving results in the Mississipi Lime and, gawd, can this one get any cheaper?

Devon (DVN): A lifetime of underperformance.

Cimarex (XEC): A good 17% increase in production helped this one from spinning below $90 a share. There is $1.7 billlion earmarked for development in the Permian, but after seeing this one drop 6% in a day I'm not as hot now on owning it at $100 a share.

EOG Resources (EOG): This one has impressed by not being on this list of underperforming stocks in a relatively steady overall market. Its latest shale-drilling innovation has delivered higher recovery rates, but also improves (decreases) depletion rates as well. It is the strength that probably needs to be bought, if anyone does here. 

While fundamentals continue to say that many of these companies should be strong buys, the market action just refuses to confirm it, at least right now. 

Again, my recommendations remain the same as last week. Keep safely in cash and wait for a stronger opportunity to buy. It will certainly come. 

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