Apache's (APA) diversified portfolio of oil and gas production has largely saved the company's stock price from being tromped on as in the case of formerly pure-play natural gas company Chesapeake Energy (CHK), discussed in this article.
In Apache's September 21, 2012 UBS Bus Tour presentation (pdf), the company indicated its oil and gas production is diversified as shown below:
- 27% International liquids
- 23% North American liquids
- 19% International Natural gas
- 31% North American natural gas
With this diversification, Apache can emphasize and deemphasize its resources based upon market economics. When the price of domestic natural gas is low, as currently, the company can switch its efforts toward oil production and international gas production, etc., thereby reducing the influence of negative market segments and emphasizing the impact of positive market segments.
In its Q2 2012 earnings call held on August 2, 2012, Apache noted it has delivered nine consecutive quarters of growth in production and had almost $4 billion in revenue in Q2. The company also noted year-over-year fracking costs are down about 25% and is also seeing some softening in rig costs. Apache indicated it has 9 billion barrels of oil equivalent net un-booked inventory and 67,000 assessed future drilling locations. The company also noted its is optimistic regarding its expected performance in the second half of 2012.
Apache's stock price, while up for the year, is down from its peak price of $112 which was hit in the February time frame as shown below:
With Apache's diversified portfolio, cheery outlook for the second half of 2012, earnings release in the rear-view mirror and stock price having support in the $80 range, a bull-put credit spread is considered for the company. A bull-put credit spread may be entered for a net credit by selling one put option and purchasing a put option further out-of-the-money. The goal is for the price of the stock to be greater than the strike price of the short put option at expiration such that both options expire worthless and the initial net credit is retained as profit.
Using PowerOptions, a variety of bull-put credit spreads for October expiration are available for Apache as shown below:
The 2012 77.5/80 bull-put credit spread looks attractive with a potential return of 13.1% (191.6% annualized) and with a separation between the stock price and the strike price of the short put option of 6.2%. The position may be entered for a net credit of $0.29 by selling the APA 2012 Oct 80 put option for $0.65 and purchasing the APA 2012 Oct 77.5 put option for $0.36.
Apache Bull-Put Credit Spread Trade
- Sell APA 2012 Oct 80 Put at $0.65
- Buy APA 2012 Oct 77.5 Put at $0.36
A profit/loss graph for one contract of the position is shown below:
For a stock price at expiration above the $80 strike price of the short put option, the position is fully profitable and realizes the 13.1% potential return (191.6% annualized). For a stock price at expiration below the $77.5 strike price of the long put option, the position sustains a total loss, however, the position should be rolled prior to experiencing a loss.
A management point of $82.80 is set for the position. If the price of the stock drops below $82.80, then the position should managed for a roll or an exit.
Look forward to hearing your comments below!