Oil Sector Still Energized

Although this week was the earning season’s peak, reports will be firing on all cylinders next week. There’s plenty of news for investors looking for options trading information. Notable sectors with significant reports include real estate, transportation, and energy. Honing in on energy, more than 40% of the Oil Services HOLDRs (NYSE: OIH) component stocks are on the earnings schedule, along with more than 30% of the Energy Select Sector SPDR (NYSE: XLE).

Of course, the energy sector encompasses a number of industries. So we’ve selected four — oil production, oil services, transmission (pipeline), and refining — each with a representative company that reports next week (all happen to be based in Texas, with three out of Houston). Along with a brief analysis of each heading into earnings, we’ll recommend an option play so you can leverage the expected move.

On to our first energy earnings play …

Marathon Oil

 

Marathon Oil (NYSE: MRO) – Marathon may be dwarfed by the Chevrons (NYSE: CVX) and Exxons (NYSE: XOM) and Shells of the world, but its stock takes a back seat to nobody.  It is up 35% in just two months to sit at its highest point since late 2008 (when oil stood at $120 compared to $85-$90 today).

MRO reports Wednesday before the open, with analysts expecting per-share profits to triple from a year ago. In fact, the Street has been ramping up its forecasts over the past month. Although reports from MRO’s competitors are just starting to roll in, the numbers have been encouraging.

We like MRO because it tends to fly under the radar compared to its larger brethren. Sentiment is mixed, with short interest at a multi-year high and fewer than half the covering analysts rating the shares a “buy.” An upgrade last week could be the beginning of this pessimism unwinding, which should unleash some buying pressure.

Buy the MRO March 45 Call at less than $2 to play not only earnings but the overall uptrend.

National-Oilwell Varco

 

National-Oilwell Varco (NYSE: NOV) — This oil services company, founded in 1862, provides a variety of services for oil and gas drilling and production.  NOV reports earnings Thursday before the open, with analysts expecting a penny per share less than a year ago. The oil services sector is off to a solid start this season, with heavyweights Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) both handily beating on the top and bottom lines.

NOV’s earnings track record is impressive, as the company hasn’t missed an estimate in more than five years. And its performance after earnings is equally noteworthy. In the past two quarters, for example, the stock has gained nearly 7% in the week after reporting.

NOV has been a monster on the charts, nearly doubling in price over the past five months to sit at a two-year high. Nevertheless, the stock is still about 30% below its all-time high set in 2008, so there’s room to run.

Look for NOV’s earnings success to continue and for the uptrend to remain intact.  Buy the NOV February 70 Call at less than $4.

Spectra Energy

 

Spectra Energy (NYSE: SE) – SE provides natural gas transmission, distribution, and storage services in the U.S. and Canada. The pipeline company reports earnings on Thursday before the open, with analysts expecting a modest 21% increase in per-share profits from a year ago.

Although SE has missed the past two earnings estimates (by one and two cents), the stock has actually gained ground immediately after reporting.  That tells us that expectations were muted heading into earnings.

The stock has been in an uptrend since late August, recently rising in a series of higher highs and lows. The overall gain has been solid, though unremarkable, so the shares are far from overheated heading into earnings.

Sentiment is generally positive toward SE thanks to a trend of increasing bullishness. We expect that to continue, keeping SE on its orderly path higher.

SE is far from an exciting stock. Pipelines tend to be that way. But that’s OK with us. We’ll take a modest increase after earnings and a continuation of the uptrend.  Buy the SE March 25 Call at less than $1.25 to capture the move.

Tesoro

 

Tesoro (NYSE: TSO) — This refiner reports earnings on Wednesday after the close. Competitor Valero Energy (NYSE: VLO) beat on both the top and bottom lines last week, an encouraging sign.

Analysts expect TSO to lose between three and seven cents per share, which compares quite well to the loss of around a buck a year ago. The company usually does well in the earnings confessional, missing just two of the past eight quarterly estimates. The shares have fared well following the past two reports, gaining an average of around 6% in the week after earnings.

The stock has been on a huge run, gaining more than 70% in five months.  Some feel the stock is overdone and ripe for profit-taking. Others claim that higher oil prices would hurt refiners, as drivers reduce gasoline consumption. Of course, oil prices have cratered of late, taking some of the pressure off.

We like the fact that TSO is under loved. In fact, just one quarter of covering analysts rate the shares a “buy.” And short interest is near an annual high.  That tells us that TSO could surprise the Street.

With the stock bouncing off key technical support and sentiment skeptical at best, we like TSO’s prospects in the short run.  Buy the TSO Feb 18 Call at less than $1.50