These Trades Could Lead to a Gusher
Oil Drill Sunrise
The volatile trade in the oil patch has largely been driven by external events. First, we had Middle East political upheaval that drove prices substantially higher. Then the horrific destruction and nuclear crisis in Japan, which is expected to decrease global oil demand, caused a sharp decline in crude prices. Yet despite the recent yo-yoing of oil, the price of a barrel of crude continues to bounce around the $100 mark, and that elevated level has helped prompt a spike in oil drilling. That has some options trading investors looking for opportunities in the sector.
According to The Wall Street Journal, oil-drilling activity in the U.S. has accelerated to a pace not seen in a generation. Drilling for more oil also has the support of the American public. According a recent Gallup poll, six in 10 Americans favor increasing offshore drilling for oil and gas in U.S. coastal areas. That’s up from 50% in May 2010. The combination of high oil prices, and the willingness to “drill baby, drill,” could be a boom for oil drilling stocks. Here are five oil options to play the boom.
BHP Billiton
BHP Billition Logo
Mining and drilling giant BHP Billiton Ltd. (NYSE: BHP) just won the second U.S. deep-water permit at its Shenzi field in the Gulf of Mexico since the BP Plc. (NYSE: BP) oil spill last year. The company is one of only two drillers cleared to resume work by the Bureau of Ocean Energy Management, Regulation and Enforcement since BP’s spill. Although BHP isn’t strictly a drilling company, its growing presence in the space makes it a good drilling-boom play. Options trades should be drilling down into the BHP May 85 Call for potential gusher-like returns.
Noble Energy
Noble Energy Logo
The other company that’s been cleared by the government to resume drilling in the Gulf of Mexico is Noble Energy Inc. (NYSE: NBL). In fact, Noble was the first firm to receive approval for new drilling there, and that speaks to its prowess and status in the industry. Noble has already showed it can make big profits even as oil prices were depressed. The company’s Q4 earnings came in much stronger-than-expected, although the top line number came in slightly below estimates. But if the drilling boom does indeed continue, then Noble will be at the forefront. Bullish traders should check out the NBL Apr 95 Call as a potentially profitable bullish play.
Chesapeake Energy
Cheapeake Energy Logo
Chesapeake Energy (NYSE: CHK) is more known for its natural gas drilling operations, but now the company is looking for new oil resource plays located in places like the Rockies. In fact, over the past several years Chesapeake has been switched rigs formerly devoted to drilling for natural gas to emerging oilfields like the Eagle Ford shale formation, which stretches from the outskirts of Houston and San Antonio, south into Mexico. Now that oil prices have skyrocketed, look for more drilling for oil by Chesapeake. Options can play this potential uptrend in Chesapeake with the CHK Apr 35 Call.
Diamond Offshore Drilling
Diamond Offshore Drilling Logo
If you want a true leader in the oil drilling space, then you want Diamond Offshore Drilling (NYSE: DO). The company is one of the biggest names in the space, and like the other drilling companies on our list, Diamond also will benefit from increased demand for oil and rising energy prices. One positive for Diamond is that it gets a lot of its business internationally. About half of its gross income comes from Latin America and South America, while only about 10% comes from the Gulf of Mexico. That means its business isn’t contingent on any favorable U.S. government permit decisions. Traders with a penchant for this gem should check out the DO Jun 73.50 call.
SPDR S&P Oil & Gas Exploration
SPDR S&P Oil & Gas Exploration Logo
If you are bullish on the drilling sector at large, and you want to get some exposure to the space without having to pick a specific company winner, then try the SPDR S&P Oil & Gas Exploration & Production (NYSE: XOP). This Exchange-traded fund is a great way to cover all of your drilling bases, as it contains the biggest companies in the oil and natural gas drilling business. Top five holdings in XOP as of March 15 were Frontier Oil (NYSE: FTO), Chesapeake Energy (NYSE: CHK), Holly Corp. (NYSE: HOC), Tesoro Corp. (NYSE: TSO) and Cabot Oil & Gas Corp. (NYSE: CBT). Drilling bulls should take a look at the slightly out-of-the-money XOP Apr 59 Call.
At the time of publication, Jim Woods held no positions in any of the stocks, funds or options mentioned in this article.
