Investors Pushed This Permian Basin Company Too Low

Yesterday was the worst day the stock market has had all year. China allowed its currency, the yuan, to fall to its lowest level against the dollar in 10 years, and it sent the S&P 500 below 2,900. While the rest of the market was dropping, Concho Resources Inc. (NYSE:CXO) was slowing its descent.

CXO is an independent oil and natural gas company with operations throughout the Permian Basin. The company’s poor earnings announcement came out Aug. 1, the same day President Trump tweeted about new tariffs on Chinese goods. Falling oil prices and CXO’s poor report caused the stock to drop 22% in one day.

I think that move is overdone from a technical perspective, and some of the negative reactions to CXO’s earnings report are based on old news from the Permian Basin.

Concerns About Lower Production

Many oil companies in the same area as CXO are dealing with lower-than-expected production. The company, along with many others, planned to increase production by placing wells in closer proximity. In its accompanying investor presentation, the company acknowledged that some of its wells were place too close together, which reduced efficiency. This is certainly bad news, but it’s also old news.

The Wall Street Journal, reported on this phenomenon in March. The real news in CXO’s second quarter earnings report was its earnings miss. The company reported non-GAAP earnings per share (EPS) of $0.69, missing consensus estimates by 6.76%, making this its third EPS miss in a row. According to Zacks the company did beat revenue expectations, but evidently that couldn’t counterbalance all the negativity in the market last week.

I believe the 22% drop was way overdone, partially because investors should have already been aware of the production issues in the Permian Basin. CXO simply had a poor earnings report at the worst possible time, and the technical picture looks less dire now that some time has passed.

Slowing the Rate of Descent

If you look at the chart below, you can see that CXO gapped lower again yesterday, but it didn’t lose as much ground during the day as it did on Thursday and Friday of last week. That might be because the last time CXO was this low, which was back in 2016, it formed support around the $70 level.

Concho Resources Inc. Daily Chart
Daily Chart of Concho Resources Inc. (CXO) — Chart Source: TradingView

Before the recent drop, CXO had been interacting with resistance at its 50-day moving average. I’m not suggesting it will push back up to those levels, but once it finds a bottom, it doesn’t have any recent resistance. It may bump up against the $81-$82 range, its intraday high after it gapped lower last Thursday.

I think selling a put write well below CXO’s current levels should give traders an opportunity to collect income on this oil and natural gas stock.

Sell to open the CXO Aug. 16th $65 put at about $0.30.

Note: Be sure you are opening the monthly CXO options that expire on Friday, Aug. 16, 2019.

About Naked Put Writes

A naked put write is a bullish position in which you expect the price of the underlying stock to increase.

Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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