Buy Alert: May 6, 2014

| May 6, 2014

Buy Alert: May 6, 2014

 

Option Strategy:

Buy Boardwalk Pipeline Partners (BWP) September 19, 2014 $16.00 Calls for $1.70 or better.

 

Commodity Outlook: Natural Gas

The ongoing US natural gas inventory deficit situation is rather remarkable. As I’ve mentioned in previous trade alerts, working gas in storage is well below seasonal norms right now.

In fact, last week’s EIA inventory report revealed storage levels are still 50% below the 5-year average for this time of year.

What’s it mean?

With inventories this low, there will be an extraordinary quantity of gas flowing through pipelines and into storage caverns this summer.

Remember, the US needs approximately 3.6 trillion cubic feet (tcf) of natural gas in storage by the end of October. Currently, there is just under 1 tcf in storage.

Here’s a company that’s well suited to benefit from this year’s massive inventory rebuilding effort…

 

Resource Company: Boardwalk Pipeline Partners (BWP)

BWP is a master limited partnership (MLP) in the business of natural gas transportation and storage. The company has 14,450 miles of pipe and 207 bcf of storage capacity.

As you may know, with an MLP business structure, companies are required to pass 90% of net income onto shareholders in the form of distributions.

Investors were walloped in early February when BWP announced an 80% cut to distribution payments. Shares dropped from $24.00 all the way down to $12.00 on the news.

But now BWP is regaining lost ground. Shares are currently attempting to break back above a highly important technical level at $16.00. The technical situation alone makes BWP’s bullish potential promising.

But there’s more…

I’m seeing some very interesting trading activity in BWP. Yesterday, a large trader purchased nearly $14 million worth of long-dated out-of-the-money call options in the name.

The size of this trade tells me someone with substantial resources thinks something good is brewing with BWP. Maybe the company is planning on selling some assets. Or it could be as simple as increasing bullish sentiment for the entire pipeline industry this year.

Whatever it may be, BWP is a solid bullish bet at these levels.

So here’s what we’ll do…

Let’s buy the BWP September 19, 2014 $16.00 Calls for $1.70 or better.

The current bid/ask spread for this contract is $1.40/$1.65.

Pay no more than $1.70 per contract!

Our official entry price for performance tracking is $1.65. Your price may be higher or lower.

 

Exit Strategy:

Boardwalk Pipeline Partners

Remember, we want BWP to trade higher. Our first profit target is $20.00. This level represents the halfway point between current prices and the $24.00 gap down starting point set in early February.

We may see additional upside if BWP announces some game changing news over the next few months. In such a scenario, BWP may jump to our second profit target of $24.00.

Remember, with a September expiration, we have plenty of time to see BWP reach these lofty targets.

The risk control price is $13.90. If BWP falls below that level, conservative investors should consider closing this trade to conserve capital.

 

Category: Commodity Trading

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