In an article I wrote July 6 here on Seeking Alpha, I was long-term bullish on ConocoPhillips (COP) and also suggested a short-term income play that came to fruition on July 10, the same day the article was published. Although I did not make the profit I wanted to, I ended up bringing in about 5% as the stock dropped to $52.61 at its low point for the day before I reversed the trade. This is a good example of how an investor can be bullish long term on the stock and still make money with short-term income strategies. Here is the original trade I suggested:
The Options Trade (published July 10, 2012)
The stock is presently trading about 54.37. Looking at the chart it looks like ConocoPhillips has formed a nice ascending triangular base. This is often seen as a reversal pattern. In the short term, I am not convinced the stock has made a long term turn around. There are just too many headwinds it is has to face right now. I am looking at buying (in the money) on a bearish credit spread play.
Buy a November put with a strike of '55.00' (priced at $4.05)
Sell a November put with a strike of '52.50' priced at $2.78)
Net Debit to Start: $1.27
Maximum Profit: $1.23
Maximum Risk: net debit
Maximum Length of Trade: 5 months
Since then, the stock has continued to move up and looks like it could find the momentum to keep moving. Why has it continued to move up? It cannot be because of earnings. Let's explore some other possibilities.
Second Quarter Results were Uneventful
The oil company did what most companies did this quarter - beat earnings, but missed revenue. So there is nothing new here. Revenue fell to $15.17 billion, from $17.67 billion. Adjusted profit dropped to $1.22 a share, while Wall Street analysts expected ConocoPhillips to earn $1.20 a share. This is to be understood with lower oil prices. Production levels may be good, but lower oil prices also mean lower revenue. I believe there is another reason the stock has risen and it may have something to do with the dollar.
Inverse Relationship with the Dollar
Quite often, the relationship between the dollar and the price of oil is overlooked by investors. Since oil (and other commodities) is priced in U.S. dollars, a rising dollar makes buying oil harder in other currencies. When the dollar surges up, the results are a decline in the value of a barrel of oil. They seem to parallel each other. Due to the inverse relationship between petroleum and the dollar, it is fair to conclude that as the dollar weakens, the price of oil will go up. If we look at the US Dollar Index (DXY) graph, we can observe that the dollar has been weakening since the first week of July and this has correlated with the rise in oil prices.
ConocoPhillips' Strategic Actions and Yield make it Attractive
Not only has the dollar been good for oil prices, but I believe there are things about the company that also look attractive. I like ConocoPhillips' divestiture program that is part of a three-year design to help improve returns and create value for shareholders. Here in 2012, it has a capital program of $15.5 billion and another to repurchase up to an additional $10 billion of the company's common stock. One recent sale that will help its bottom line with an after-tax gain of $400 million for the sale of its interest in Naryan MarNefte Gaz and related assets to Russia's Lukoil.
Because of its strategic actions, the company continues to be an attractive investment. In fact, Societe Generale raised its rating on COP from Hold to buy with a price target of $65.00. I like the company's reasoning for this decision. It describes the low interest rate environment with a yield of 4.9% (nearly threefold the 10-year US Treasuries) as an attractive investment all income investors would look at. This alone should make one consider the stock without even looking at its upstream projects.
ConocoPhillips continues to look bullish, as it has moved in a well defined peak and valley pattern since early June. This move is also supported by the indicators. The RSI which shows strength, continues to ride above the '50' market. This is important because a bullish trend should continue to move in this area if it will remain strong. The recent low stayed above '50' compared to past lows and this is even better. The MACD also has remained above the '0' point.
However, if I could observe one sign that mildly concerns me, it is a negative divergence in the MACD Histogram. This is only a mild concern because there is no support for it, it stands alone. Before I would attempt an income play on this stock I would like to see more evidence of direction. The last peak was a significant point. If one looks at a weekly chart, we can see that this last peak has been the high for the stock the last two years. I would like to see a move off this high and see whether it can push through or not. I believe the stock is poised for good long-term growth, but I am not sure about the short term just yet.
The Options Play
The stock is presently trading at $56.46 and it looks like it will get ready to move up again. If I was going to put together a short income play using options, I would wait until I see the stock bounce off the upper peak again or the strong resistance level that it has established. Then use a bearish strategy, since the stock has established well defined up and down movements.
I have no doubt that if an investor buys ConocoPhillips right now it would be a good investment. Not only is the company poised for good growth through its strategic planning and long-term upstream projects, but the investing atmosphere is very favorable to companies with high yields like this one - 4.9% is hard to ignore today. It is worthy of one's investment.