What goes up today will likely go down tomorrow. One day does not make a trend and the longer-term trend is down for this stock.
The bounce in crude prices today was a function of the switch to a new contract when the February contract expired. It also helped that ISIS attacked an oil facility in Saudi Arabia and set some oil storage tanks on fire.
Oil inventories rose by 4.0 million barrels and gasoline inventories rose by 4.6 million to a new record at 245 million. This is not bullish for oil but the severely oversold conditions from Wednesday caused a short term bounce in crude prices. This will pass and prices are going to set new lows in the weeks ahead. I am proposing we take advantage of the bounce to buy puts on an energy stock.
NEW DIRECTIONAL CALL PLAYS
No New Bullish Plays
NEW DIRECTIONAL PUT PLAYS
DVN - Devon Energy
Devon Energy primarily engages in the exploration and production of oil and gas. The majority of their production is natural gas from more than 19,000 wells but they are making a concentrated effort to expand oil production. At year-end they had 689 million barrels of oil equivalent reserves. Company Description
In Q3 they produced 282,000 barrels of oil per day. That was a 31% increase over Q3-2014. That was the 5th quarter they exceeded guidance on oil production growth. That compares to their 680,000 Boepd of total gas and liquids production showing that oil was only about 41% of their total production. However, in Q3 oil accounted for 74% of total upstream revenue.
Devon is a well run company and highly regarded but the price of oil is killing them. They do have significant midstream assets including pipelines and processing facilities in the EnLink Midstream business. They own 70% of ENLC and 29% in ENLK. Those midstream companies generated $270 million in cash distributions in 2015.
The EnLink revenue is supporting Devon through this down cycle in the energy sector. Devon is also acquiring Access Pipeline in the first half of 2016 and that will add to their midstream assets.
If crude prices were to rally long term Devon would be a great company to own. However, in this period of falling oil prices from now until April the company is at the mercy of the declining sector.
On Thursday Devon shares rebounded with oil prices to resistance at $24.50 and then faded. When the switch to the March contract fades and crude prices begin to fall again I expect Devon to revisit the lows under $20 from Wednesday.
Earnings are February 16th so this will be a short-term play.
With a trade at $23.45:
Buy March $22 put, currently $2.19, stop loss $26.65
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