ConocoPhillips (Stock Ticker Symbol: COP)
Rationale: Its refined oil and gas products are in demand around the world. Fluctuations in oil and gas prices will translate into significant cash flow changes (either negative or positive). The outlook for the price of crude oil and natural gas will continue to be positive as long as fossil fuels remain the main means of energy production. An increasing demand for oil and gas is expected in the short-term as there is usually an increase in automobile use in the Northern Hemisphere during seasons of warmer weather. An increasing demand is also expected in the long-term when economic activity recovers from the present downturn. Emerging markets, such as those in China, Vietnam, Brazil, Mexico, and India, will most likely support the price of crude oil as their economies grow in the future. As the largest natural gas producer, this company is poised for the greatest growth among the integrated oil and gas giants if natural gas demand increases. Such growth is possible with natural gas increasingly being used to heat homes and with the automobile industry considering the use of gas-powered engines. Natural gas is seen as an alternative to oil as it is more abundant and produces less air pollution when combusted.
Risk: Substantial drops in energy prices due to supply shocks, falling demand with increasing use of alternative energy sources (wind, solar, nuclear).
Temporary hedging for COP investment:
Long April 30 Put - puts a floor on losses if stock price drops below $30 per share before April 17, 2009
Short May 45 Call - puts a ceiling on gains if stock price goes above $45 per share before May 15, 2009 - purpose of this sale was to use call premium to pay for the above put option.
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gas powered engines? i'm only hearing of electric. energy stocks still seem pretty risky and i'm not convinced COP (natural gas) is the way to go.
ReplyDeleteinteresting hedging there with the one month gap between the put and call. the only problem is your insurance in april will probably expire and you lose the money you paid to long the put in april.. but then you're not protected in may if the price drops. instead, i'd rather just short the 35 put (52 week low) without holding the stock.. earn the premium ($1?). if it goes below 35, you get in at a good price.. if not, you make 3% a month using less capital too instead of holding the stock and options.. i guess if it goes below $34, you lose out.. but that seems pretty unlikely. your hedging prevents big swings but who knows what COP is going to do in the next two months.