Buy Alert: February 3, 2015
Buy Alert: February 3, 2015
Option Strategy:
Buy WPX Energy (WPX) May 15, 2015 $12.50 calls for $1.85 or better.
Commodity Outlook: Oil
The unusual oil market buying at $44.50 that I pointed out in last Wednesday’s update is turning has turned into something more. WTI crude is rallying over $51 this morning- a 14% upturn off the recent lows!
Now, here are the questions every oil trader is asking…
“Is the bottom in for oil? Or is this just a short-term spike in a longer term downtrend to the $30 area?”
To be frank, it’s still very tough to say.
But here’s the deal…
A number a very important fundamental shifts are occurring in the oil market.
First of all, US oil directed rig counts are dropping like a stone. According to Baker Hughes (BHI), 90 rigs were shuttered last week alone. That’s the biggest one-week rig reduction since BHI started keeping track of the data in 1987!
And that’s not all…
Major oil companies are announcing massive capital expenditure cuts. For example, BP is cutting spending by nearly $3 billion in response to low oil prices.
What’s it all mean?
While the global oil market is still oversupplied in the short-term, long-term fundamentals are moving in favor of oil market bulls.
How will oil prices respond?
While this week’s oil bounce is welcome, we’re not going to get outright bullish on the commodity just yet.
Given the short-term oversupply situation, it’s likely that WTI fluctuates around the low- to mid-$50 area for some time to come.
Here’s what we’ll do instead…
Resource Company: WPX Energy (WPX)
As you know, mid-cap shale oil producers have been annihilated over the past six months. Investors dumped the entire industry due to bankruptcy fears.
Whether bankruptcy fears are legitimate or not, selling was so extreme that a large swath of the independent oil and gas industry is trading at least 25% below book value.
Take WPX for example…
Despite the fact this company has over half of their 2015 oil production hedged at $95 a barrel, shares have been taken to the woodshed. WPX is down 41% over the past six months.
But here’s the deal…
Now that investors are getting a better idea of where crude’s ultimate bottom is, they’ll likely start buying these oversold names at a deep discount.
Keep in mind, WPX has a price to book ratio of 0.59. In other words, the company is trading 40% below book value!
What’s more, the company has ample cash and a reasonable debt load, which secures its survival in this low commodity price environment.
So here’s what we’ll do…
Buy the WPX May 15, 2015 $12.50 calls for $1.85 or better.
The current bid/ask spread for this contract is $1.55/$1.75.
Do not pay more than $1.85!
Our official entry price for performance tracking is $1.75. Your price may be higher or lower.
Exit Strategy:
Remember, we want WPX to trade higher. Our first profit target is $16.00 and our second is at $18.00.
The risk control price for this trade is $9.90. If WPX trades below that level, conservative investors should consider closing this trade to preserve capital.
Category: Commodity Trading
