Chevron leads the pack Chevron Corporation (CVX) posted third quarter earnings on Friday of $7.8 billion, more than double the $3.8 billion in earned in Q3 of last year, despite some production problems in this year's Q3. As of Friday's close, Chevron was also the highest-rated integrated oil company in VectorVest's universe, with a VST ranking of 1.37 (on a scale from 0 to 2). Recall that VST (Value, Safety, Timing), VectorVest's master ranking, is comprised of a weighted average of its Relative Value, Relative Safety and Relative Timing indicators, with Relative Value underweighted and Relative Timing overweighted.
Hedging the 8 highest-rated integrated oil companies The table below shows the VST rankings for Chevron and the next 7 highest rated integrated oil companies. It also shows the costs, as of Friday's close, of hedging 7 of these stocks against greater-than-20% declines over the next several months (one, Transglobe Energy (TGA), was too expensive to hedge at that decline threshold). First, a reminder about what optimal puts are, and why I've used 20% as a decline threshold; then, a screen capture showing the current optimal puts to hedge one of these integrated oil companies, Exxon Mobil Corp. (XOM).
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). I have used 20% thresholds for each of the securities below. Essentially, 20% is a large enough threshold that it reduces the cost of hedging, but not so large that it precludes a recovery.
The Optimal Puts For XOM
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of XOM against a greater-than-20% drop between now and April 20th, 2012. A note about these optimal put options and their cost: to be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice, an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.
Why There Were no Optimal Contracts for TGA
In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with Transglobe Energy (TGA). On Friday, the cost of protecting it against a greater-than-20% decline over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for it.
VST rankings and hedging costs as of Friday's close
The integrated oil companies below are listed in descending order of their VST (Value, Safety, Timing) rankings as of Friday's close The hedging data is as of Friday's close as well.
|VST Ranking|| |
Cost of Protection (as % of position value)
|(SU)||Suncor Energy, Inc.||1.35||5.55%*|
|(TGA)||Transglobe Energy||1.33||No Optimal Contracts|
|(MUR)||Murphy Oil Corp.||1.31||6.03%**|
|(XOM)||Exxon Mobil Corp.||1.30||2.12%**|
|(IMO)||Imperial Oil Ltd||1.30||11.4%***|
*Based on optimal puts expiring in March 2012.
**Based on optimal puts expiring in April 2012.
***Based on optimal puts expiring in May 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.