Dear Reader,
The energy markets are under pressure.
We are able to see that just given where crude prices have gone.
But we are also seeing some divergence where some things are trading a little bit better than others.
For example, oilfield services have been trading a bit better just because even though prices have come down, we are still seeing a pretty consistent amount of activity, which speaks well for that sector of the market.
On the natural gas side, the models have gotten a bit warmer, especially in the U.S.
That’s why you saw a move down in natural gas pricing. But there is still a lot of money to be made on the natural gas front when you’re looking at the underlying flows.
That is going to be a good thing, especially as Freeport comes back online. (Freeport is an LNG export facility that has been offline due to an explosion this past summer. It plans to come online again near the end of the year).
With Freeport re-opening, it’s going to send more natural gas and LNG into Europe. It’s good news because even though the U.S. has gotten warmer, Europe has gotten colder.
So, that’s actually a really good thing for LNG capacity and our volumes heading into the market in terms of maintaining volume.
For now, here are our latest thoughts on the open positions in the portfolio.
On October 21, we recommended Southwestern Energy (NYSE: SWN), which is positioned in two of the largest natural gas basins in the world with more running room.
The company is in a fantastic position to keep driving forward and sending the stock price back over $20 in the coming few quarters.
Natural gas liquids and natural gas have seen their prices rally and remain more robust today since the shale revolution kicked off in 2011.
The company sold its Fayetteville assets for about $1.865 billion, which helped to clean up its balance sheet and set SWN on a better foundation.
The sale was completed in 2018 and allowed the company to begin an aggressive balance sheet repair.
Once they got to a good footing, they went out and did a very accretive deal in buying GEP Haynesville LLC for about $1.85 billion.
This provided a significant uplift to their natural gas portfolio, and it moved them closer to Henry Hub and away from the bottlenecks that still plague the Northeast.
SWN has been able to increase its production of natural gas at the best possible time to capture strong pricing and send estimated revenue growth higher.
Lately, the increased volume of LNG speaks well for Southwestern.
With prices being pushed down, you’re seeing a huge demand for our exports, including SWN.
But because production went up, you’re still getting builds on the supply side and natural gas production companies like SWN will do better than the rest of the energy sector.
Southwestern Energy Co. (NYSE: SWN) is a buy up to $7 per share.
On November 19, we recommended Mosaic Co. (NYSE: MOS), the largest U.S. producer of potash and phosphate fertilizer.
Mosaic’s strategic position in the Americas means they are the viable and well-placed option for farmers looking to replace Russian volumes and grow yield.
When we look at how Mosaic uses their capital, we see they’re reducing leverage, keeping CAPEX flat, and returning cash to shareholders.
Management expects to retire the remaining $550 million of long-term debt that completes their goal of $1 billion of long-term debt reduction.
The Capex expenditures expectation this year remains unchanged at $1.3 billion, and all remaining free cash flow after these commitments will be returned to shareholders through dividends and share buybacks.
The company’s sensitivity to price will provide upside potential for its revenue and strength of earnings in 2023.
Given the market shortages, mixed with Chinese export controls and limited Russian/Belarus exports, Mosaic will be the beneficiary of price appreciation in North America, Brazil, and India.
They see an uplift to margin of about $40-$50 a ton in a flat pricing environment, which is unlikely to occur given the broad shortfalls in the market.
This comes from some of their costs improving while shortfalls persist providing a floor in prices with clear upside that falls directly to the bottom line.
This puts a lot of upside potential to earnings as the price of fertilizer rises over the planting season.
Recently, MOS has been bouncing around. But it’s driven more by seasonality than by a drop in demand.
It’s a slow season for fertilizers. As it trades between $48 and $55, this is typically when, if you’re a buyer of MOS, you start selling and then just rinse and repeat.
Mosaic Co. (NYSE: MOS) is a buy up to $50 per share.
That’s it for this update.
We will continue to publish investment ideas and analyses you can’t find anywhere else.
Keep an eye for your next issue and recommendation coming to your inbox soon.
We’ll send you a flash alert if any of our open positions require immediate action.
Our next portfolio update will be on January 5.
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Enjoy your holidays!
Best regards,
Freedom Financial News
