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Energy Sector Notes, Week Review and 2/11-2/15 Preview

I’ve been lazy making my energy sector notes, but I’m trying to get myself back in the habit of writing at least once a week. I use this site as a way to organize, so it is really just a record of my trading thoughts. Please don’t take any of this as trading advice, because it isn’t meant to be that. It’s mostly just random things kicking around in my head about energy stocks and the sector.


This market can really test your patience sometimes. During January, my plan was to let the SPY climb up to the 260 level and then try to get a position short for a retest of the lows. That never materialized. Instead, the market ripped right through 260 and shot all the way to 273.50. After seeing that incredible strength, I decided this past week to scalp long thinking the market had a fairly clear path to 280. Everything was going well until Wednesday when SPY hit the 200 day moving average around 274. It rejected and the market got kicked down to 268. I’m not too worried about the small pullback, as it seems to be just a normal move. It’s important that SPY stay above the 260-263 range for now, as well as above the 50 day moving average around 261. If the market can hold the 50 day, then I think we probably continue on to 280 and avoid any breakdown. I’ll continue to scalp to the long side next week until the market says to stop doing it (which would be a break of 260-263).


Once the overall market direction is established, now to the energy sector, XLE and XOP. The big cap energy names are definitely doing better than the small caps, especially the smaller E&P names.  The XLE still looks strong even after this week’s pullback and the action on Friday afternoon was bullish. The XLE made a move exactly to the 50 day moving average and bounced hard, almost closing green and forming a nice hammer candle. I think we definitely play off that low of 62 next week. For me, the most important point for the XLE is still that 61.30 level. If we do somehow break that 62 low very early on Monday morning, I’d look to try a long at 61.30 and then see how it played out on any bounce over/under 62. It’s a trade you could cut at 61, but if it does regain 62, it could run a long way up. Great risk/reward.


The XOP is the index that really concerns me. Friday’s drop took it all the way to a 50% retracement of the big runup from Christmas. It bounced intraday along with the XLE, but it still finished down about -1.5%, or about three times more than the -.5% decline of the XLE. The E&P names are definitely showing relative weakness. A couple weeks ago I was very bearish on the group, but I adjusted my view last week once the SPY showed it was firmly back in the 260-280 range. I’m not yet ready to move back to the bearish camp. The line for me on the XOP is 27. If it can hold that level and the SPY holds the 260-263 range, then I think we are fine and should get a sustained move higher. If it moves under 27, then I’ll have to rethink my entire view of the sector.


If I decide to take some long swing trades, I’ll definitely be looking at the smaller Permian names, specifically: Parsley (PE), Matador (MTDR), Centennial (CDEV) and Jagged Peak (JAG). The pipeline capacity issues seem to be resolved enough that spreads are not hurting the Permian players as badly as they were a couple months ago. My main reason for trying to get into these four names, with an XOP around 27, is because I think any of the four could easily be a buyout candidate in a down market. My favorite of the bunch is Parsley. I’d like to see PE and MTDR around 16, CDEV around 11 and JAG around 9.50. I think you could comfortably play those against the December lows and probably even add if those lows get retested. If the picture looks really bad on a move toward the lows, then just cut the positions. Entering something like PE with a $2 stop for a $4+ profit is a decent trade, especially at this kind of value and with the possibility of getting bought out.


I’d also take a shot at Devon (DVN), Apache (APA) and EOG Resources (EOG) if the sector drops back toward the December lows. None of them are any kind of buyout plays, just good value with enough volatility to make the risk worth it. Anadarko (APC) is also on the radar, but the story there is very negative and it seems to be the one stock getting the wrath of the whole sector. Things could get really ugly on that one and it will likely be one of my last buys.


One of my favorite stocks right now is Hess (HES). I am still kicking myself for not buying that down near 37. Hess got an extra push down during that December crush when one of the Exxon vessels got intercepted by the Venezuelan government. Exxon and Hess are joint partners in a huge development offshore Guyana and the discovery is absolutely monstrous, and it seems to keep getting bigger. That $20 bounce (almost 50% run up) was mostly due to that play and the surprising thing is that most people aren’t that familiar with it. I doubt we see HES anywhere under $45 again for a long time.


There aren’t many earnings reports this coming week. The only ones I’m really interested in are Occidental (OXY), Marathon (MRO) and Pioneer (PXD). Pioneer has been volatile on the last couple of earnings releases. Looking forward to what they say on the Permian capacity issues.


I’m not really interested in the services companies right now. I think Capex spending is getting cut by almost everyone and services is going to bear the brunt of that, possibly for longer than some expect. Most of that information was already priced in on the December move. I would have loved to have had Schlumberger (SLB) down around 36, but the recent run really doesn’t make it much of a value anymore. Same for Halliburton (HAL). I’d probably scoop a little SLB if it moved back to the 39 range, HAL around 28 and NOV around 26. One services play that I find interesting strictly on a technical view is Patterson UTI (PTEN). It has based out nicely between 11.50 and 13 and appears ready to breakout to the upside. Helmerich (HP) is also doing well evidencing some strength in the drillers.  PTEN would probably be a nice long play with a stop set on the other side of the 50ma around $12.


The worst stocks in the sector right now are probably the natural gas stocks. These guys just can’t catch a break. Even with the extremely cold weather, there just isn’t any excitement for natural gas. Just too much of it out there. I like Range Resources (RRC) and I’m tempted to move in here around $9. I think RRC was the first stock on my board to reach the December lows, APC was also pretty close. Sometimes all I’m looking for in my trading is an extremely stretched stock that is ready for a bounce off of a defined low. RRC definitely meets those requirements right now. Antero (AR) seems to be a disaster hitting new lows and EQT appears to have some internal issues with the Rice guys still trying to take back the company. The clear quality name in natural gas is Cabot (COG), but I really wouldn’t get interested in that unless it somehow got under $22.


Ok, well that went on a little longer than I wanted, but I think I covered most of the stocks on my board. I’ll put together this week’s trading plan and try to post some thoughts on that early Monday premarket. And thanks @Texan4Life, I needed something to prod me back into writing, much appreciated.



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