Turbulent commodities markets have started to recover from last week’s steep decline, which took down the price of silver, gold, oil, grains and other resources.
On Monday, the price of crude rebounded 3.6 percent to $100.69 in New York, halting the steepest weekly drop since the height of the financial crisis in 2008 – a reversal on strong export data from Germany and an encouraging payroll report in the US.
Which aspect of this week’s cycle reflects the way forward, the upside or the downside? Have commodities, which have outperformed stocks since the beginning of the year, finally reached their peak, or is there more room for growth? Once the impact of ‘speculative’ money is stripped away, many sectors of the commodities market – and certainly those in energy – will be characterized by strong demand and tight supplies, says Shawn Reynolds, lead energy analyst with Van Eck Global. The New York-based money manager, with about $20 billion in assets, focuses on energy and natural resources. “If we look out over the medium to longer term, the core energy commodities are in a tight structural position that is not going to go away,” he says.
Demand will remain strong, given strong growth in China, India, Brazil and other emerging markets, and a recovery in developed economies. And supplies will remain constrained. “We aren’t going to run out of oil in our lifetime, but the days of cheap oil are over,” he says.
Demand will be lead by the growth of China. Even as growth slows in Beijing and other major cities, there will be plenty of construction in more rural western provinces, which will boost demand for energy and construction materials, he says. And given rising anxiety about the safety of nuclear power, the growth of that industry could be diminished by as much as 80 percent worldwide, benefiting oil, gas and coal.
Here are eight companies that Reynolds says stand to benefit from the rising demand for energy:
Unconventional gas
A technology known as hydraulic fracturing has allowed engineers to tap previously inaccessible natural gas reserves. The technology is based on using explosives to fracture rock deep below the surface of the earth – and then forcing fluids into the newly created fractures, displacing the gas and making it easier to capture. The technology has facilitated horizontal drilling techniques that have opened new opportunities for exploration and mining. And the process of fracturing itself has become much more sophisticated, boosting the range of a site from a few to thousands of feet.
“This is a story that is in the late innings but we still feel there are several companies that can still benefit from having acreage in the sweet spot of the largest shale gas plays in the US,” Reynolds says.
Picks:
Cabot Oil and Gas, a integrated oil and gas company based in Houston, with reserves in the Rocky Mountains and Appalachia. (COG, $54.37) with a price target of $65.
Petrohawk, a Houston-based oil and gas explorer with properties in the Southwest. (HK, $25.72), with a price target of $33.
Unconventional oil
Oil explorers are using hydraulic fracturing to tap previously inaccessible oil reserves as well. This process has been used to exploit vast oil reserves in the Bakken oil field in North Dakota and Montana, in a tale told by the New Yorker magazine last month.
Picks:
Brigham Exploration, the Austin, Texas-based explorer, was featured prominently in the New Yorker story on the Bakken reserve, the largest oil discovery in North America since Prudhoe Bay in Alaska. (BEXP, $29.70) with a $45 price target.
Pioneer Natural Resources, based in Irving, Texas, explores for oil and gas in the U.S., South Africa and Tunisia. (PXD, $94.28) with a $120 price target.
Whiting Petroleum, an oil and gas explorer based in Denver, operates domestically. (WLL, $65.31) $85 price target.
Newfield Exploration, based in Houston, explores for oil and gas in the U.S., China and Malaysia. (NFX, $70.17) $85 target.
International exploration
With a market cap of $38 billion and roots that go back to 1959, Anadarko is older and larger than many other explorers. It has built up a global network of explorations, with operations in the U.S., China and many parts of Africa. Reynolds says the domestic operations balance out the “high impact, high risk” investments outside the US. Anadarko (APC, $76.93) Van Eck has a price target of $100 on the stock.
Diversified oil service companies
Reynolds says oil services companies in the US and the international market should benefit from increased capital spending, which is facilitated by higher oil prices that justify increased investment.
Pick: Halliburton: Based in Houston, the company has suffered through plenty of hits to its reputation, the most recent of which is link to the failed Deepwater Horizon oil spill. (HAL, $48.21) with a $65 target. But the company – with a market cap of $48 billion – has the scale and expertise to take advantage of opportunities around the world. “We clearly believe there is a significant level of upside from here and think the pullback last week provides extremely compelling opportunities to add to exposure,” Reynolds says.
