C.M.O. 7.31.2009
Credit Market Overview
July 31, 2009
With the U.S. G.D.P. numbers due out shortly this morning one area where investor’s focus will be drawn other than the stock market will be commodities, those things that are used to make those things that make other things and ultimately make those things a healthy, employed and deleveraged consumer buys.
For the majority of people all of that boils down to the price of a barrel of crude oil. Regardless of whether this is the correct interpretation or not the USD proxy characteristics make “erl” a popular vehicle on which to haul a combination of sentiments.
The energy complex is just that however and away from the “Texas Tea” party there are back stories upon back stories. The current glut of natural gas has prices in that market trading at life of contract lows in the futures markets and the recent shale gas discoveries makes one wonder why so much effort is focused on turning corn into ethanol and the Mid-East into a parking lot when with a lot less than $787BN dollars we could employ gazillions of people, build a nationwide distribution network and run the country on stuff.
Electric utilities, cars, you name it, if it runs on fossil fuel, it can run on fossil fuel and natural gas is a fossil fuel. A cleaner burning, more efficient, energy independent solution. Obviously with suggestions like that it’s clear why I’m not in D.C.
There is so much natural gas around that Chesapeake Energy “expects that rising pipeline and gathering system pressures during the next few months will likely result in involuntary natural gas production curtailments”.
Natural gas is not the only energy source piling up. Piles of coal are making new mountains in Appalachia. The industry is expected to cut production by 50MM tons this year after cuts already made in the spring.
Coal, used for power and heat long before anyone drilled a well and the amount of it around, is more a reflection of the current economic environment than ill-advised energy policy and as such will feel the effects of this morning’s number more in line with those watching the price of a barrel of oil.
CHK has moved in line with the prospects for recovery this year hitting its low on March 2nd at $13.50 with the CDS levels peaking on the 9th of that month at 841bps. From there a simultaneous high/low was hit on June 11th with the stock and CDS at $24.31 and 595bps respectively. CHK’s CDS is at the low for the year, closing last night at 580bps but the stock has not yet regained it’s 6/11 high. Not being able to sell your product will do that for you.
Of the coal producers, MEE reported better-than-expected 2Q results this week earning $0.24/share while ACI lost $0.11.
The charts of both MEE and ACI looked similar to CHK until the earnings were released. MEE is approaching its June 11th high with CDS falling off precipitously while is struggling to get near its June high levels.
Enjoy the weekend.
Jim Delaney
