Chevron Corp (CVX) dipped before the markets opened today after warning that third-quarter profits will be substantially lower than the previous quarter. The company offered a number of reasons, saying oil and gas production were negatively impacted by the hurricane and the refinery fire.
In late August, Chevron evacuated workers from Gulf of Mexico platforms due to the imminent threat of high surf and winds from Tropical Storm Isaac, which later turned into a hurricane. Even though the company said at the time production was not affected, evidently it was. Results from its exploration and production business are expected to deteriorate quarter over quarter, in part reflecting foreign exchange losses as well as lower production.
The Aug. 6 fire at Chevron's refinery in Richmond, Calif, was expected to result in lower refining throughput for the company at a time when oil majors are depending on rising downstream margins. This was expected to have an adverse affect on the refinery for months. The Richmond facility has a capacity of 245,000 barrels per day (b/d) and contributes significantly to Chevron's overall refining input in the U.S., which stood at 928,000 b/d in the last quarter.
What does this mean for the stock? I am not expecting the bullish journey to continue. With the combination of low oil prices, a bad quarter generally for the markets, and Chevron coming in substantially weaker than last quarter, I am looking for a bearish move.
Click to enlarge image.
On its extended move up, Chevron appears to be forming a bullish stepping pattern with the second step fully formed. If this is the case, we should see another move up. This is one scenario. The other scenario is we are observing the end to a second leg up, as it moves sideways into the middle band again. This could mean the move up is losing steam now and we are just seeing the beginning of that. The RSI and the MACD both appear very strong and bullish; this is why I say we may be at the beginning of a weakening, if we are there at all.
The Options Play
Since I am expecting a pullback in the stock now, I am taking the position that we are observing the beginning of the slowdown in the stock. For this reason, I will look at a short-term bearish income play to take advantage of this trend reversal. The stock is presently trading at $112.45.
- Buy the December 2012 put with a strike of "115.00" (priced at $5.30)
- Sell the December 2012 put with a strike of "110.00" (priced at $2.70)
- Net Debit to Start: $2.60
- Maximum Profit: $2.40
- Maximum Risk: net debit
- Maximum Length of Trade: three months
Reasoning Behind the Trade
- Substantially lower earnings is not a catalyst for a bullish run.
- The markets as a whole won't be bullish on 2.3% lower earnings expectations.
- Continued low oil prices are also not a bullish catalyst.