The Plight of Apache
Mel Daris of Seeking Alpha wrote a good article on Apache Corp (APA) and I can sum up the struggle that the company faces in a simple quote from Mr. Daris:
"The usual culprits of slow recovery domestically and the continuing Euro-zone crises are working to see demand for crude diminishing while costs of exploration, development and production of oil, natural gas and natural gas liquids increase."
I must acknowledge the double jeopardy Apache and other oil companies find themselves in. Not only is the demand for oil slowing down which leads to lower prices, but the cost for extracting and refining the black gold is also rising in cost. The end product is lower revenue and tighter margins. This will never lift the prices of the stock and in the near future I do not see a catalyst that will raise the stock.
Oil Prices
I am not of the opinion that oil prices will just rise suddenly without a global crisis we do not know about yet. We do have our European bust with less demand, political tensions in the Middle East, a sudden blow up with Iran-any of these things could cause a crisis and oil could jump in price. But without something like this happening I do not expect an increase soon.
I do see the possibility of prices increasing steadily before the end of summer but maybe into the fall. This being the case, I believe there is an opportunity for an income strategy-playable by year's end.
(click to enlarge)
The Options Play
A Long term option play that is a calendar spread shaped like a bull call spread. Here's what I mean by that. A Calendar Spread is also know as a horizontal spread involves buying an option with a longer expiration and selling an option with the same strike price and a shorter expiration. In the case of the trade we are setting up for Apache, we are looking at buying the following long term options:
- Buy the January 2013 call with a strike of '97.50' (priced at $3.10)
Usually the calendar spread would then create a monthly income whereby the January option owner would sell monthly options with the same strike price. But we are going to do something a little different here. We are going to sell an October 2012 call option at a higher strike
- Sell an October 2012 call with a strike of '100' (priced at $1.04)
- Net Debit to Start: $2.04
Scenarios on How this May Play Out
Scenario #1: The stock does not rise above 97.50 or 100 by October.
In this case, the October '100' call expires worthless and you have the ability to sell more call options on the stock.
Scenario #2: The stock rises above 97.50 but not 100 by October.
At this point, you will have the choice to hold on to the January 2013 option or chase it in for a profit depending upon the price of the stock.
Scenario #3: The stock rises above 100 by the October date.
At this point the October '100' call will be exercised and so will the January 2013 '97.50.' Subtract the price of the debit from the difference in strike prices and we have our profit: ($2.50 - $2.04)= $0.46 This is a ROI of 22.5%
For a 5 month income strategy, 22.5% is not bad.
We need stability in global markets before stock prices increase in value. It does not really matter how much energy one company produces, until this stability takes place, we are not going to have these increases. But as the economy turns, so will oil prices and oil company stock prices will increase.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
