Big Printin’ – $CVX: Running on Empty

by Dan January 12, 2016 4:02 pm • Commentary

We have been fairly steadfast that oil related equities are not likely to bottom until crude oil has a vicious rally coupled with a massive change to supply/demand characteristics. Only could any gains be sustainable.  In the meantime we expect to see restructurings, dividend cuts, defaults, bankruptcies etc, etc.  Will this cause some sort of credit event that poses contagion? Your guess is as good as ours, but if history tells us anything, casually dismissing the potential as a black swan event, could bite you in the ass.

Earlier today in a post on Pioneer Natural Resources (PXD) we described their recent capital raise and its leverage ratio that is far superior to many of its E&P peers.  Another group in the oil patch that has shown some reasonable out-performance to crude, and the XLE (the energy select etf) is the large integrated oil companies like Exxon (XOM) and Chevron (CVX). They make up about 30% of the weight of the XLE and remain at least 15% off of their 52 week lows, while the XLE is at fresh lows.

There was some unusual options activity in CVX today that caught my eye as it was very long dated, out of the money, and BULLISH!

When the stock was about $80, a trader paid $4.45 for 5,000 of the January 2018 (two years from now) 100 strike calls to open, or $2.23 million in premium.  These calls break-even at $104.45, up 30% on Jan18 expiration.

CVX pays a dividend that at current prices yields about 5%, so you got that going for you, but remember that the company has not raised their dividend since mid 2014, and the near term risk to the stock is that the company would cut its dividend. That would cause a flight of capital.  CVX halted their buyback, cut jobs and capex, in the last couple years in an effort to support their dividends.  The company has said this is a top priority. And it is for most. The only major oil company to cut their dividend this century was BP, after the Gulf oil spill.

CVX bounced off of support at $80 today, but a break of that level could see the stock fill in the air pocket back to the August lows and long term support near $70:

[caption id="attachment_60192" align="aligncenter" width="600"]CVX 6 year chart from Bloomberg CVX 6 year chart from Bloomberg[/caption]

Looking at the 15 year chart, it becomes apparent how important the $80 support level is, but also that the long term uptrend that it broke in mid 2015 should serve as formidable technical resistance:

[caption id="attachment_60193" align="aligncenter" width="600"]BP 15 year chart from Bloomberg BP 15 year chart from Bloomberg[/caption]

For those who might consider longer dated long premium bullish trades similar to the one detailed above that traded in the market, it could make sense to look to finance this view. For instance, with the stock at $82 the June 100 calls could be sold at .80, reducing the purchase price of the Jan18 calls by 20%.  If the stock were to rally to $100 between now and June expiration this trade would still very profitable, and if the stock is below $100 on June expiration then the June calls would expire worthless and you would have offset some decay.