Opportunities in energy investing have really never been very focused. The grand arbitrage in Brent crude and West Texas Intermediate spreads are largely gone, and refiners haven't been so great, so these shares would need to moderate some before they'd pique my interest again. Natural gas refuses to play into what should be a growing resurgence of the fuel, at least for the present, and oil-services companies have been more than a little hit-and-miss -- the international plays are a lot more interesting than the U.S. ones.
So, in the future, maybe there's a lot to position for -- but, for right now, there's only one way to trade the space. Look for liquids-rich exploration-and-production names that are showing growth, and doing it with an eye to increasing margins and shedding capital expenditures.
I've spent almost too much time outlining this thesis in the last several months. But the plus side to my repeating choruses and diligence has been three great candidates that quite simply continue trading well: Anadarko (APC), EOG Resources (EOG) and Noble (NBL).
One place that's been slightly less hyped, largely because results are still slow in coming, has been in the West Texas area of the Permian basin known as the Wolfcamp. You can find your hucksters here claiming reserves even more stunning than those in the Eagle Ford and Bakken combined. I usually discount such hype, but now that some results are starting to show the potential of Delaware area of the play, I am showing more interest in taking some long-term players here for a trade.
Guess who's got some prime acreage here? EOG is of course well-situated, but maybe it's a surprise to see Devon (DVN) here as well. Chesapeake (CHK) has terrific acreage, but you may never see me recommend this one again (well, never say never). But there are three mid-cap independents who can leverage a quick increase in production in the Wolfcamp over the next year and see a big rise in their share price: Pioneer Natural Resources (PXD), Energen (EGN) and Cimerex (XEC).
But here's the problem that all three of these have in common: You won't be alone in isolating these companies for your portfolio as hot plays. Each of them has rallied strongly in the first half of the year, so it appears they have far less room to run, even with some very impressive Wolfcamp results.
Pioneer Natural, which I have watched in wonder, seems particularly priced for perfection today. You could buy the shares for close to $105 as recently as April -- but, at the current quote around $180, I say "No thanks." Energen has seen really good results in two of its Wolfcamp rigs, and the stock has been making new highs because of it. But, at least at $65, it's not moved 70% in a quarter. This is an investment with proved production coming on line, and a solid punt into the Wolfcamp hype.
Then there's Cimarex. This one was a hot trade in nat gas in 2009 and 2010, and I made quite a few dollars on it. Then it experienced the great fall, with nat gas prices moving under $2 per thousand cubic feet (Mcf) in 2012. Since then, Cimarex has done a stunning job that so many E&Ps have undertaken, shifting as best it can from dry gas plays into liquids and crude. In particular, its Wolfcamp acreage is so close to Energen's that you could reasonably superimpose their results.
Further, for me, as a trader, I focus on the fact that Cimarex's stock hasn't participated in the Wolfcamp craze as have Pioneer and Energen -- at least not yet. Sure, the shares are up big for 2013 already, but they are reemerging from the depths of a natural gas disaster. The company is small enough to remain flexible in a way that Devon cannot. Otherwise that would be the one I'd be recommending (although I'm watching you, Devon -- always watching).
But, for a starter's play into the very promising Wolfcamp, Cimerex is the one I want today. The stock is ready to test its old highs at close to $100 a share. It's a recommended buy at these levels, and I will likely initiate a trade in the next 24 hours.