Seeking Alpha

Tom Armistead's  Instablog

Tom Armistead
Send Message
I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
My blog:
Tom Armistead's Instablog
View Tom Armistead's Instablogs on:
  • Occidental Petroleum: Effect Of Crude Oil On Share Price

    This is a follow up on my post from yesterday, where I looked at Exxon Mobil (NYSE:XOM). I took 10 years of monthly price data for the S&P 500, NatGas, Brent and Occidental Petroleum (NYSE:OXY) and dropped it into a multiple linear regression calculator. Here's a chart:

    The visual fit demonstrates the connection, and the correlation at 0.88 is better than I would have expected.

    OXY has Middle East operations, and the California operations (spun off late last year) were also sensitive to the price of Brent, which gave a slightly better correlation than WTI.

    NatGas is a puzzler: the formula suggests that a lower price is better for OXY than a high one. It could be that the Chemical segment uses it for feedstock. At any rate, that's what the software developed as a relationship.

    A weakness of this approach is that OXY has been divesting assets, to include US mid west gas assets as well as the California operations that now trade separately as CRC. So going forward the equation developed may not be as useful as the correlation implies. Also, they have been working on selling other assets, which may enhance market expectations and lead to rapid share price moves on rumors.

    Brent would need to be in the $80 area to support the current OXY share price, according to the formula. After tinkering with various hypothetical levels for Brent and scratching my head for a while, I plan to sell August 87.5 calls over my existing LEAPS position. Brent would need to be at $90 to drive OXY up to the strike price, according to the formula.

    Long-term View

    Demonstrably the share prices of OXY and XOM respond to the short term moves in the price of Crude. Factually the value of the shares depends on oil prices extending out decades into the future, which are unknowable. If we can't predict the next 3 months, how can we do better for the nest three decades?

    On a common sense basis, existing wells and fields will continue to decline, while emerging middle classes and economic growth globally can be expected to increase demand. With that in mind, holding the majors while extracting income by means of covered calls seems like a sensible strategy.

    Tags: OXY, Oil, Energy, Options
    Feb 15 9:16 AM | Link | Comment!
  • Exxon Mobil: Effect Of WTI On Share Price

    This is interesting and reassuring, I thought I would post it here. Many investors hold Exxon Mobil (NYSE:XOM), and question the desirability of holding it at current oil prices.

    I took ten years of data for XOM, WTI and the S&P 500, monthly, and dropped it into a multiple linear regression calculator. Here's the result:

    The fit is visually good, and the correlation isn't bad.

    With the S&P at 2,097 and WTI at $52.78, the formula suggests a value of $89.37 for XOM, not that far from its current price of $93.37.

    Looking out a year from now, futures suggest WTI at $61.76: Keeping the S&P constant, XOM would be $91.68. $80 oil, $96.37; 100 oil, $101.52.

    After looking at this, I plan to hold my XOM position, but will be selling covered calls at 95, probably the July expiration, I should be able to get about $3 for them.

    Tags: XOM, Energy, Crude Oil, WTI
    Feb 14 6:59 AM | Link | 4 Comments
  • Squeezing The Cards On Carbo Ceramics

    Carbo Ceramics (NYSE:CRR) has made a nice upward move, more or less in sync with the rally in oil. At least for now, the price of the stock seems firmly tied to the price of the underlying commodity. Certainly there is a logical relationship.

    By way of analysis, I did a scatter chart of CRR's share price against WTI, using data from mid 2008 to the present. Here's the chart:

    The software provides a formula for the regression. R2 at 0.57 demonstrates the connection, but is not particularly impressive. Applying the formula, Friday's price of $51.69 for WTI implies CRR at $37.57, close to the actual close of $36.19.

    Looking at futures, February 2016 Crude traded Friday at $60.86. According to the formula, CRR would be in the $47 area. That's a 29% gain from the current share price, and sufficient to justify the assumption of considerable risk.

    Upside vs. Downside Risk

    Looking at the downside, the biggest risk is getting a panic attack and selling at the bottom. Over the past ten years, WTI has closed under $35 a total of 7 days, under $40 a total of 25 days, and under 50 a total of 133 days. I would wait for about a year before concluding there has been a paradigm shift.

    On the upside, WTI has spent 458 days above $100 during the same time frame. So the odds, based on this line of reasoning, favor $100 oil over $50 oil. Patience is required.

    After going over this for a while, I feel as if the upside:downside risk ratio is about 3:1, with the most likely outcome that CRR will be at or above $47 at this time next year.

    Big Insider Trade

    William C. Morris is a director at Carbo, after an extremely successful career on Wall St, at J.W. Seligman. Charities of which he is a board member sold massive amounts of CRR in the $150 area during 2011.

    His wife recently spent over $1 million buying shares of CRR at prices averaging less than $35.

    Who's to Blame?

    BIS came out with a study, which was covered by both CNBC and the Financial Times, intended to analyze the cause of the oil rout. CNBC with their usual perspicacity claims the report blames the Saudis. The Financial Times, noting that BIS says oil is acting like a financial asset, connects the dots and adds some information about the size of the futures market compared to the market for physical oil.

    I continue to read articles on oil, and have yet to see anything on who the big winners and losers were in the futures trade. Nobody is talking.

    Paradigm Shift?

    I don't think so. I see speculation and manipulation in the futures market, and mis-allocation of capital. Specifically, there was a lot of money attracted into loans to shale oil producers, some of which are not going to be repaid.

    All of that is business as usual on Wall Street.

    Tags: CRR, Oil
    Feb 08 10:35 AM | Link | 1 Comment
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.