Riding oil's rebound with pure play permian producers

Wednesday’s shock decline in weekly EIA crude inventory data turbocharged oil’s already strong recent move, with WTI crude quoted at $61.25. This energy group has had a decent run, but today’s performance has been mixed, not the bullish bonanza I would have expected even on a day when all other market sectors were trading lower.

I believe a presentation at Monday’s Ira Sohn Conference by Greenlight Capital’s David Einhorn soured sentiment somewhat on a group that should otherwise be rocketing upward along with the price of oil. An opposite performance compared to the group’s implosion when oil prices swooned from November-January.

Mr. Einhorn attacked fracking (sic) companies for destroying capital and producing substandard returns. First of all, fracing is spelled without a “k,” but, semantics aside,  Mr Einhorn’s message was clear:  The best way to play rising oil prices is by owning oil. That is emphatically, unequivocally untrue. As with any commodity–gold is another great example–the best way to play a commodity price recovery is to buy shares of the producers. It’s not easy to find a perfect comparison to past cycles since the combination of horizontal drilling and hydraulic fracturing wasn’t widely adopted until the end of the last decade.

There was a commodity boom in 2003-2008 that was unprecedented in recent history, so we can look at that. The best benchmark for the price of oil itself is the USO oil ETF, which debuted in may 2006. To represent the oil sector, which was widely beloved by fund managers in the middle of the last decade,  I chose Chesapeake Energy.  no company and manger were as beloved by the Street in the mid-aughts as Chesapeake and its former CEO Aubrey McClendon. From May 2006 to the peak of the last commodity boom in July 2008 Chesapeake shares rose 111.79% and the USO ETF rose 67.49%. So you should have owned the producer not the commodity then, and I believe that is the case in May 2015, as well.

http://www.forbes.com/sites/greatspeculations/2015/05/07/riding-oils-rebound-with-pure-play-permians/?ss=energy