As Inflation Spikes Squeeze Candidates Remain in the Commodity Space (BTU, CEI, CHK, FCX, PAAS, TECK)

“Team Transitory” at the Fed is coming under increasing pressure. Chair Powell and his core allies seem to be at odds with history right now as inflation data spikes and violates the rules Powell put in place during his Jackson Hole speech in August.

In that speech, he said the situation was under control because inflation was spiking only in a few categories. But, since then, and most recently in the October CPI report, we saw a vast broadening of inflation above the Fed’s comfort zone.

Commodity plays continue to be the most obvious route to investor payoff as this theme evolves. However, that payoff could be the most dramatic in areas where short interest is still high. We saw how this paid off for market participants last February in stocks like GameStop Corp. (NYSE:GME) and AMC Entertainment Holdings Inc. (NYSE:AMC).

Combining high short interest with exposure to the commodity space could represent an interesting intersection for investors looking to close 2021 on a winning note. With that in mind, we take a look at a few stocks that fit this premise right now.

Chesapeake Energy (NASDAQ:CHK) engages in the acquisition, exploration, and development of properties for the production of oil, natural gas, and natural gas liquids from underground reservoirs. The company focuses its acquisition, exploration, development and production efforts in the following geographic operating areas: Marcellus, Haynesville, Eagle Ford, Brazos Valley, and Powder River Basin.

The stock has been a lightning rod for short interest ever since it declared voluntary Chapter 11 bankruptcy last year and was subsequently delisted from the NYSE. However, while shorts keep trying, they appear to be fighting a losing battle right now because the balance sheet is healed and the natural gas market has come roaring back to life, up over 200% since mid-year 2020.

Chesapeake Energy (NASDAQ:CHK) recently announced it has completed its acquisition of Vine Energy Inc. (NYSE:VEI). The transaction was approved by Vine stockholders at a special meeting held on November 1, 2021.

Nick Dell’Osso, Chesapeake’s President and Chief Executive Officer, commented, “We are pleased to integrate the outstanding Vine operations and assets into our portfolio, strengthening our position in the Haynesville Shale with over 900 additional drilling locations, immediately improving our free cash flow profile and accelerating a significant return of capital to our shareholders at a time of favorable natural gas prices. We greatly appreciate the continued support of the talented Vine employees as we work together to ensure a seamless and successful transition of ownership and realize the valuable synergies expected from combining these two great businesses.”

In total, over the past five days, shares of the stock have dropped by roughly -6% on above average trading volume. All in all, not a particularly friendly tape, but one that may ultimately present some new opportunities. CHK shares have been relatively flat over the past month of action, with very little net movement during that period. 

Chesapeake Energy Corp. (Nasdaq:CHK) brought in revenues of $1.6B in its most recent quarter – driving year-over-year top line growth of 44% in the process. In addition, the company is battling some balance sheet hurdles as noted above, but that should be able to heal over time without dilution if the operating environment remains a strong tailwind.

Camber Energy Inc (NYSE American:CEI) is another stock that has picked up a load of short interest over the past several weeks. Shares of CEI got hit hard in late September on a short report from a fund that wanted to drive down the company’s shares to profit from the sell-off.

That has led to lawyers looking for an easy buck, swamping the stock’s newsfeeds with solicitations to participate in class actions. It’s not a good look. But these situations often expire with no real damage to the company’s operations. That sets up a possibly interesting scenario given that CEI is slated to put out its financials at the end of this week. If those numbers continue to show growing real exposure to oil and gas amid a powerful bull market in oil and gas markets, that could help to spark the squeeze.

Camber Energy Inc (NYSE American:CEI) has exposure to oil and gas assets through its majority-owned subsidiary, Viking Energy Group Inc (OTC US:VKIN), which has energy assets located in North America in Kansas, Missouri, Texas, Louisiana, and Mississippi. 

CEI also benefits from the VKIN subsidiary because VKIN has been making strides toward becoming a potential future leader in the emerging carbon capture marketplace after recently announcing that it has entered into an Exclusive Intellectual Property License Agreement with ESG Clean Energy, LLC regarding ESG’s patent rights and know-how related to stationary electric power generation, including methods to utilize heat and capture carbon dioxide. 

According to its release, the ESG Clean Energy System is designed to generate clean electricity from internal combustion engines and utilize waste heat to capture approximately 100% of the carbon dioxide (CO2) emitted from the engine without loss of efficiency, and in a manner designed to facilitate the production, for sale, of precious commodities, such as distilled/de-ionized water, UREA (NH4), ammonia (NH3), ethanol, and methanol.

Camber Energy Inc (NYSE American:CEI) CEO James Doris recently noted, “In my view this transaction positions us as an industry leader in terms of being able to assist with the power generation needs of commercial and industrial organizations while at the same time helping them reduce their carbon footprint to satisfy regulatory requirements or to simply follow best ESG-practices. We are excited to be able to use the platform of Simson-Maxwell Ltd., our recently acquired majority-owned subsidiary, to promote the ESG Clean Energy System.”

Peabody Energy Corp. (NYSE:BTU) is particularly interesting in this moment because it is so indelibly associated with the coal energy space, which received such a public relations blow at the UN COP26 Climate conference earlier this month.

Peabody Energy Corp. engages in the business of coal mining. It operates through its Powder River Basin Mining, Midwestern U.S. Mining, Western U.S. Mining, Seaborne Metallurgical Mining, Seaborne Thermal Mining, and other corporate segments.

Peabody Energy Corp. (NYSE:BTU) is one of the world’s biggest publicly-traded “pure play” coal companies and sold around 133 million tons of thermal and metallurgical coal last year. It also had 7.8 million shares held short as of late October (before the climate conference). Imagine what that number might be now.

Despite the COP26 agreement, China coal demand is projected to hit an all-time high this year, and analysts at BMO Capital Markets see “strong 2022 results due to higher prices and higher volumes” for Peabody as it re-starts its Shoal Creek mine in the coming weeks and ramps up production in the first quarter of next year. Such a shift could represent a squeeze catalyst given the overall tenor of the commodity marketplace.

The stock has suffered a bit of late, with shares of BTU taking a hit in recent action, down about -13% over the past week. Over the past month, shares of the stock have suffered from clear selling pressure, dropping by roughly -46%. 

Peabody Energy Corp. (NYSE:BTU) managed to rope in revenues totaling $929.8M in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top line growth of 35.2%, as compared to year-ago data in comparable terms. In addition, the company is battling some balance sheet hurdles, with cash levels struggling to keep up with current liabilities ($587M against $821.2M, respectively).

Other interesting commodity plays include Freeport-McMoRan Inc. (NYSE:FCX), Pan American Silver Corp. (Nasdaq:PAAS), and Teck Resources Ltd. (NYSE:TECK).

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Published by Alan Masterson

Alan has over 25 years of trading experience in the U.S. equity markets. He began his career in finance working on a program trading desk specializing in over-the-counter stocks. His career progressed from that point to his current position as senior trader on an institutional trading desk. In the evenings, Alan teaches economics at a local community college. He has contributed articles to various publications over the last six years, including feature articles for an economics magazine and various financial blogs. You may contact Alan via his email (alanmasterson@wallstreetpr.com) or his Google+ page (https://plus.google.com/103338576216002376250).

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