Chevron (CVX), like many of the oil companies, has suffered because of the lack of demand for crude oil. Stock prices have dropped but this company is well positioned for future growth with projects that are in the pipeline. Look for this company to increase revenue significantly with these projects. The recent surprise in downstream success lifted the stock quickly and I am expecting a short term pullback before it continues to move up.
What Sent the Stock Higher?
Chevron announced earlier that it expected a rise in earnings because of a nice increase in U.S. refining margins and this set off a reactionary bullish move up for 6 straight days. Downstream earnings should be good and will carry the company that otherwise would struggle with lower oil prices. Downstream is good while upstream commodity prices are bad. Over the past quarter oil prices and natural gas prices in the U.S. have seen a sharp drop, lowering the profitability of upstream operations. It's ironic, even though crude oil prices dropped in the second quarter Chevron crude oil sales rose in the same period. The increase in production came from the Gulf of Mexico along with an increase in natural gas. And as I spoke about downstream success, it was all due to the U.S. markets. International production declined while U.S. increased. But I must also mention that the sharp increase was partly do to a $200 million gain from asset sales.
That's a nice surprise for Chevron. While downstream looks positive, long term upstream exploration and production has some nice revenue streams in the hopper. Take a look at these:
Long term Projects in the Works
Myanmar - President Barack Obama has authorized U.S. companies to invest in Myanmar for the first time in 15 years. Chevron is very interested in this region.
Brazil - Brazil's oil regulator laid heavy criticism on U.S. oil company Chevron for an oil spill at an offshore field last November, but said it has no objections to the firm restarting production. Some 3,700 barrels of crude oil leaked from the Frade oil field as a result of an accident that could have been avoided had Chevron followed its own safety procedures.
Iraq/Kurdistan - The company signed a deal with Indian conglomerate Reliance Industries Ltd. in which it would take stakes in two oil exploration blocks in the Kurdish region of Iraq. They have come in right behind Exxon Mobil (XOM). The Kurdish Regional Government has fought with the Iraqi central government long and hard for the rights to manage its own region when it comes to oil and is getting more and more control.
The Options Play
I am taking a contrarian view here in my play. I see a long term trading range for the stock and the present increase is just calling for a pullback even if the stock rises further. So I am looking at a bear put spread and buying my first position (in the money).
- Buy a September 2012 put with a strike of '110' (priced at $4.05)
- Sell a September 2012 put with a strike of '105' (priced at $2.04)
- Net Debit to Start: $2.01
- Maximum Profit: $2.99
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Trade
- The overall economy is not positive and thus subject to dull movement.
- Overall so I see no catalyst to continue Chevron's move up long term.
- Recent bullish movement is short term reactionary based on news of possible better earnings.
- Reaching the top of its present long term trading range.