Follow Up to Trade Alert - (OXY) January 2, 2015

 

I really wanted my first Trade Alert this year to be in the energy sector. It is a rare chance to buy top quality at bargain prices with bond type yields.

You can buy the Occidental Petroleum (OXY) February, 2015 $70-$75 in-
the-money vertical call spread anywhere within $4.00-$4.50 range and have a reasonable expectation of making money on this trade.

If you can't trade options, just buy (OXY) stock outright for the eye popping 3.80% dividend. You are getting nearly junk bond yields here with a potential 50% gain in the stock going forward.

If you are even more conservative, buy the energy basket ETF, the Energy Select Sector SPDR (XLE). Baskets always have lower volatility than single stocks. There are a lot of belles at the ball, but you can't dance with all of them.

While a student at UCLA in the early seventies, I took a World Politics course, which required me to pick a country, analyze its economy, and make recommendations for its economic development.

I chose Algeria, a country where I had spent the summer of 1968 caravanning among the Bedouins, crawling out of the desert half starved, lice ridden, and half dead.

I concluded that the North African country should immediately nationalize the oil industry, and raise prices from $3/barrel to $10. I knew that Los Angeles based Occidental Petroleum (OXY) was interested in exploring for oil there, so I sent my paper to the company for review.

They called the next day and invited me to their imposing downtown headquarters, then the tallest building in Los Angeles.

I was ushered into the office of Dr. Armand Hammer, one of the great independent oil moguls of the day, a larger than life figure who owned a spectacular impressionist art collection, and who confidently displayed a priceless Faberg? egg on his desk. He said he was impressed with my paper, and then spent two hours grilling me.

Why should oil prices go up? Who did I know there? What did I see? What was the state of their infrastructure? Roads? Bridges? Rail lines? Did I see any oil derricks? Did I see any Russians? I told him everything I knew, including the two weeks in an Algiers jail for taking pictures in the wrong places. His parting advice was to never take my eye off the oil industry, as it is the driver of everything else. I have followed that advice ever since.

When I went back to UCLA, I told a CIA friend of mine that I had just spent the afternoon with the eminent doctor (Marsha, call me!). She told me that he had been a close advisor of Vladimir Lenin after the Russian Revolution, had been a double agent for the Soviets ever since, that the FBI had known this all along, and was currently funneling illegal campaign donations to President Richard Nixon.

Shocked, I kicked myself for going into an interview so ill prepared, and had missed a golden opportunity to ask some great questions. I never made that mistake again.

Some 40 years later, while trolling the markets for great buying opportunities set up by the BP oil spill, I stumbled across (OXY) once more (click here for their site at http://www.oxy.com /). (OXY) has a minimal offshore presence, nothing in deep water, and huge operations in the Middle East and South America.

OXY's substantial California production is expected to leap to 45% to 200,000 barrels a day over the next four years. Its horizontal multistage fracturing technology will enable it to dominate California shale. The company has raised its dividend for the eleventh year in a row, to 2.90%, and has a sub market earnings multiple of only 13.7 times. Need I say more?

The clear message that came out of the BP oil spill is that onshore energy resources are now more valuable than offshore ones. I decided to add it to my model portfolio. Energy is one of a tiny handful of industries I am willing to put my money in these days (technology, industrials, and health care are the others).

Oh, and I got an A+ on the paper, and the following year Algeria raised the price of oil to $12.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.

Don't execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.

If the price of this spread has moved more than 5% by the time you receive this Trade Alert, don't chase it. Wait for the next one. There are plenty of fish in the sea.

Here are the specific trades you need to execute this position:

Buy 24 February, 2015 (OXY) $70 calls at...............$11.30
Sell short 24 February, 2015 (OXY) $75 calls at.........$7.10
Net Cost:...........................................................$4.20

Potential Profit: $5.00 - $4.20 = $0.80