Hess And Covered Calls: A Compelling Opportunity

Sep.23.11 | About: Hess Corporation (HES)

Oil stocks have been taking a hit over the past several months due to the drop in oil prices and now many names are offering a compelling valuation. At least at Hess Corporation (NYSE:HES) CEO John Hess thinks so, as he recently purchased over $10 million dollars worth of his own company's stock at around $57 per share.

With the last few days of the market selling off, Hess has now dropped to around $52 and presents a compelling opportunity for investors. While the dividend (<1%) is much less than many of the other integrated oils, there are many other metrics that make them look cheap at current levels.

The current and forward P/E ratio sits under 7x, with 2012 earnings estimated at $7.75 per share. We realize that as the global economy slows down, oil prices are likely to remain weak. With a book value of $55, one could argue that $52 is a great value and we would tend to agree.

Technically speaking, the stock appears to be nearing strong support at around $49-50 per share going back to the summer of 2010.
Chart forHess Corporation (<a href='http://seekingalpha.com/symbol/HES' title='Hess Corporation'>HES</a>)

Given the market's volatility, we believe an opportunity exists to buy the stock even cheaper using a buy-write strategy, aka, as a covered call.

Buying the stock at current levels and selling a $50 call ($5.70) against your position gets you in the stock at a net cost of $46.30 ($52- $5.70). If called away at expiration, ie ,stock is above $50 on November 18th (expiration), you will have made nearly 8% in 57 days. If the stock is under $50 at expiration, you own the stock at $46.30 which we believe is a great value over the long term. It's a win-win situation in our opinion. Make sure before executing the trade you are familiar with writing covered calls.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.