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Tom Armistead
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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
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  • Reacting To California Resources Earnings Conference Call

    The transcript for California Resources (NYSE:CRC) 4Q 2014 earnings conference call is now available. The following points emerge:

    • Hedging is in place through the end of the 3rd quarter.
    • The stock responds to Brent pricing: R2 is in the 80's.
    • Capex can be done from current cash flow sufficient to maintain production at current price levels.
    • Covenants in their bank credit lines are in the process of being modified by a 24 month waiver.
    • The capital structure (debt) was fine at $100 oil: if $60 Brent continues indefinitely deleveraging will be required.

    Oil prices are up substantially from their low point. I've been investing on the basis that WTI (and Brent with it) will return to $100 more rapidly than the market expects. That hypothesis has led to fine profits and I will be continuing along the same lines.

    Valuation and Trajectory

    Morningstar maintains a $17 price target for CRC, based on oil following the futures curve and eventually reaching $90. I think you might need $100 oil to drive a $17 share price.

    In the interest of simplicity, I'm guessing that every $1 increase in the price of Brent will drive CRC shares up by 25 cents. Allowing 4 years to reach the $17 target, annualized gains will be 25%. The reward here is well worth taking some risk.

    Assuming the waivers are completed soon, CRC can tread water for 2 years if oil prices stay where they are. While I regard that scenario as unlikely, I don't want to be around if it plays out that way.

    Swapping Shares for Options

    After studying the options chain, I'm planning to sell my shares and buy the CRC Aug 2015 5/9 vertical call spread in a slightly larger amount. That limits my downside risk, while preserving considerable upside from a recent price of $6.70.

    Having taken profits by paring my position 20%, swapping the shares for options will leave me with my entire initial investment in my pocket, so as to be playing with house money going forward.

    Tags: CRC, Energy, Oil, Options
    Feb 20 9:00 AM | Link | 4 Comments
  • Going Long Wal-Mart

    Wal-Mart (NYSE:WMT) is going down today on the combination of raises for minimum wage employees and less than expected guidance.

    On a PE5 basis the company is very cheap compared to the S&P 500, and trades at a much lower volatility.

    My take: poor employee morale and lack of ability to select associates has created operational difficulties that will be resolved by paying that little bit more. When last I looked at the company I was encouraged at the indications they would be investing in their associates. Now they are doing it, to include education and training.

    I bought Sep 77.5 calls and sold Sep 82.5 calls, to either make a profit if the stock stays above $82.50, or to reduce my cost basis if it goes below that level.

    Tags: WMT
    Feb 19 10:39 AM | Link | 11 Comments
  • 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!
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