There’s a major energy stock trading on the cheap with a chance for upside. I’ll review an options trade that generates income while I wait for the potential comeback. Last October, Chevron (CVX) announced the acquisition of Hess Corp for $60 billion, a deal expected to complete by the end of June. Some analysts who cover the space suggest that while the deal is slightly dilutive, ultimately the purchase will benefit the company as it reduces the company’s dependency on the Permian Basin alone for “expansion.” I put expansion in quotes because where the integrated oil companies are concerned as they sell oil they must find and develop reserves to replace what they have sold. To truly expand in the long-term they must grow their reserves, rather than simply replace them. While Chevron has seen a higher replacement ratio than many in the industry, the truth is that, like many in the industry the company has essentially been maintaining their reserves. CVX 5Y mountain Chevron, 5 years This dynamic means that the integrated oil companies aren’t growth stocks. That’s OK though because they aren’t priced like growth stocks either. The S & P 500 is trading at more than 25 times earnings. By contrast, Chevron is trading just over half that, at 12.8 times earnings. The trade Chevron’s five-year plan focuses on yield to shareholders as the dividend yield is greater than 4%. Focusing on yield rather than growth — given the extraordinary rally we’ve seen in stocks since late October — may make sense, and some options trades focus on yield over growth as well, such as selling covered calls against stocks we own. With that in mind, I could purchase CVX at $156 and sell the May $160 covered call for $3.10, collecting premium of 2% of the current stock price while offering a modest amount of upside. The objective would be to hold the shares and rinse and repeat, continuing to write calls against the stock as the options previously written expire. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
