PXD: Circling the Wagons

by Dan January 12, 2016 2:00 pm • Commentary• Trade Ideas

You know the drill, just as risk assets overshoot fundamentals on the upside, they can do so on the downside.  In instances like 2000 in tech stocks, in 2008/2009 in financial stocks and with crude oil and related stocks since late 2014, the sector that was ground zero for the melt-down is usually last to bottom and drags down most if not all of the more sound players in the wreckage.

Regular readers know that commodities and energy stocks are not exactly my specialty, but like most of you I am keeping a close eye on the devastation, looking for data points that reveal anything about the current return environment, and looking for trading opportunities in outliers, both long and short.  Which is why Pioneer natural Resources (PXD) an E&P company who last week sold 12 million shares at $117 raising $1.4 billion caught my eye.  What’s interesting about this dilutive raise is that the company chose not to raise debt

PXD already has $2.7 billion in debt but that’s not nearly as levered as many of its E&P peers (e.g. only about 15% of PXD market cap is in debt vs peer Anadarko APC which is a $19 billion market cap company with about $16 billion in debt and only $2 billion in cash).  PXD has fared far better ytd than APC, down 13% vs 24% respectively, but worse vs the XLE, the S&P Energy Select etf which is down 9% on the year, with the relative strength of large integrated companies like Exxon (XOM), which makes up nearly 20% of the weight helping out.

I suspect there are a couple ways to look at finding opportunities in the oil patch. The obvious, but dangerous trade is too keep shorting the weak players that are akin to Pets.com and Lehman Brothers until their equities are worthless. Or you can look for a sort of baby with the bath water trade, where even the less levered oil plays puke as people give up on the the entire sector. Or you could look the other way and hold your nose and buy perceived strong hands.

The 7 year chart of PXD since its financial crisis lows in 2009 shows the break below the uptrend last summer, the failure at that uptrend that is now technical resistance, and what appears to be a re-test of the August 2014 lows at the psychologically important $100 level:

PXD 8 year chart from Bloomberg
PXD 8 year chart from Bloomberg

I guess there are a couple ways to think about this chart.  It could bang around $100 support and the trend line up at $150 for a while.  I would say that it would take a sustained rally in crude oil for the stock to establish a new range above the breakdown level at $150, and that there is little support below $100 till about $80, the 2012 low.

Sentiment in PXD is surprisingly bullish, with short interest at only 6% of the float, and the stock having a slew of analyst upgrades since the capital raise (BMO Capital. Barclays, Citi & Deutsche Bank), now at 36 Buys, 8 Holds and No Sells.


Options prices are high by normal standards, with 30 day at the money implied volatility (blue line) at 52%, but its  important to note that 30 realized volatility (white line – how much the stock is actually moving) is at 57%, making options prices look fair:

[caption id="attachment_60174" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Options open interest has exploded to 1yr highs as volume as increased also to new highs, while total put and call open interest is nearly evenly matched at 68,000 contracts, but at least a third of this open interest will expire on Friday’s expiration:

[caption id="attachment_60178" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

My View: If the stock can hold in and around the August low (about 106), playing for a counter-trend rally back to the 2009 uptrend near $150 is likely a higher probability bet with crude already at $30, down more than 50% from its 52 week highs than playing for a break:

[caption id="attachment_60177" align="aligncenter" width="600"]PXD 1yr chart from Bloomberg PXD 1yr chart from Bloomberg[/caption]

Whats the trade?  I think it makes sense to see how the stock acts at the August lows before establishing a directional view given the recent crashy price action in crude oil. If the stock did hold key support, I might consider a defined risk way to play for a counter-trend rally back to the $130 area. Right now with the stock just above $110, the Feb 110/130 call spread is about 6.20. It is about 35 deltas. That means at 106 it would be closer to $5. That’s a decent risk reward at that point but still out of the money and you’re not getting a lot of premium protection with the sale of the 130 call.   As one would expect, long premium directional trades in this space are not cheap, but for the most part the stocks are realizing the high levels of implied vol.  The main risk here is getting the direction right, but having a sort of gradual move higher that would crush vol (options prices).  And frankly there is nothing worse.  We would look to target Q4 earnings on February 10th, but for now we wait and watch.  Stay Tuned.

If we were to play for a breakdown in an E&P stock we would chose a weaker player, with a far worse leverage situation who would be near a very dilutive fundraising, that’s not PXD.