Calling a bottom in oil is a fool’s errand. What’s more important here is in trying to gauge how oil will trade AFTER it finds a bottom. And that isn’t looking very constructive, as I’ve pointed out in several columns and on-air.
So, is there anything to trade here in the oil patch? Is there anywhere we can go, even in the short term, to try and make some money from a very volatile group? I’ve outlined some long-term plays I think make sense, in refining and some well-run E+P’s, but those plays won’t yield fruit for months.
I’ve also kept you away from offshore plays and oil services, as these are the last in an off-cycle of oil prices to recover when prices do make a comeback. But, between these two, there’s an idea for a few quick trade ideas for the daytrading gambler out there.
Take Halcon Resources (HK), Sandridge Energy (SD) or Midstates Petroleum (MPO). All of these companies are going to need new financing or out right buyers if they are to survive in a sub-$60 crude environment. So, if you’re looking at these single digit shares, you realize that the value that is left in them is either in the (impossible) chance for a full-scale buyout, or the option on a big oil rally before their operating cash runs out.
We’ve found our cheap crude calls.
On the other side is an oil services company like Schlumberger (SLB), who has yet to feel the lasting pain of oil prices that are likely to stay low for quite a while. Until drilling work really slows and rigs are laid down, SLB will continue to report fairly well. One might even argue for a balanced, well-financed integrated oil company like Exxon-Mobil (XOM) to use as our oil ‘placeholder’, remaining relatively neutral through the volatile swings of the oil market.
We’ve found our oil price puts.
What I suggest for those ready to throw some money at an oil rally, even a short-term technical one, is a pair trade of these two. Buying some of the highest beta E+P’s with bankruptcy risk against the slow movers in a very volatile oil patch.
You’ll find these very cheaply priced producers will move very fast indeed with even the slightest oil rally, while our sell side trade will balance the volatility out. Take care to keep your dollar amounts on both sides of this trade unbalanced in favor of your steadier short interests – I would use 3 dollars of buying in our ‘call options’ to every 4 dollars of our ‘put shares’.
There is, I believe, at least another 6 months before any of our weak E+P’s really face any kind of default or bankruptcy risk, giving plenty of time for an oil market to find a bottom and make a more stabilizing move. I do not think that move will take oil again above $60, but for our purposes, it doesn’t have to – even a small rally in oil will work for our pair trade.
Again, this if for the daytraders only – don’t put one dime into this idea you’re not prepared to lose.