Editor's Note

The current drop in energy stocks is temporary. Events already in motion will end the decline. There is a market adage paraphrased by Warren Buffett that says, "Be fearful when others are greedy and be greedy when others are fearful."



NEW BULLISH Plays

FRAC - Keane Group - ETF Profile

Keane Group, Inc. provides full-service completions that include hydraulic fracturing, wireline, coiled tubing, and nitrogen units. It also offers drilling and well construction services that include top hole air rig packages and cementing. The company was founded in 1973 and is based in Houston, Texas. Company description from FinViz.com.

Investors are fleeing energy stocks and analysts are talking about $40 oil. This is ridiculous. All the major players, EIA, IEA, OPEC, Wood MacKenzie, etc all believe global inventory levels are declining by 700,000 bpd thanks to the OPEC production cuts. There are challenges where production is increasing. Libya is ramping up production after years of dormancy because of the civil war. The U.S. is ramping up production we well. These facts are constantly quoted by the bears. What they do not tell you is that global demand is expected to increase between 1.2 and 1.4 million bpd in 2017. With the summer driving season now underway, that demand will begin to surge. Inventory levels in the U.S. have declined -19 million barrels over the last 7 weeks. Now that driving season is here they will begin to decline at a faster rate.

In order for U.S. production to increase there needs to be an increase in fracking capacity. Much of that capacity was cold stacked in 2016 after the oil crash. Today there is not enough capacity and prices are surging.

Keane Group is an oil field service company that just came public in January. The dual oil crashes in March and May, crushed the stock back from $23 to $12. When they reported earnings in early May they were reactivating fracking capacity at a frantic pace. They went from 15 operating fleets to 19 fleets over the last quarter and are still in the progress of reactivating the rest.

In late May they announced the acquisition of RockPile Energy, another oilfield service company and fracking operator. The acquisition will increase Keane's fleet of frackers by 26% and it will be one of the largest and most modern pressure pumping fleets in North America. They will have about 1.2 million hydraulic fracturing horsepower available.

The evolution of hydraulic fracturing in the U.S. over the last three years has been remarkable. The horizontal laterals on the wells are longer with most now in the range of 10,000 feet. The amount of sand and chemicals forced into the wells have increase by a factor of four or more, which means more horsepower, bigger sand capability and better technology. The frackers are going to be in high demand for years to come because producers have figured out how to produce oil and be profitable under $50.

Keane's shares have declined from the IPO price but over the last month they have been rising while all the other energy stocks have been declining. This is proof that frackers are in high demand and investors are understanding the production curve.

Expected earnings August 1st.

Weekly inventories are due out on Thursday morning. If there is another big decline the oil price meltdown could end as quickly as it began.

Because this is a new stock, the option spreads are wide and dangerous. If FRAC performs as expected, we will be ok. If not there could be a substantial penalty in stopping out of an option position. For that reason the alternative option position will not have a stop loss.

Buy FRAC shares, currently $15.38, initial stop loss $13.65.
Alternate position: Buy July $17.50 call, currently 50 cents. No stop loss.


Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 at the market open.


NEW BEARISH Plays

No New Bearish Plays