Cabot Profit Booster Issue: March 19, 2024

Before we get into this week’s covered call idea, we have two positions we need to address coming out of expiration Friday.

Because the market has somewhat lost its momentum recently, we are going to exit our WDC and WSC stock positions, as the March calls we sold expired worthless on Friday.

To execute these trade you need to:

Sell your WDC stock

And

Sell your WSC stock.

Moving on …

It was another slippery week for the market as the sector rotation and trader narratives seemed to swing violently day-to-day. By week’s end the S&P 500 and Dow were marginally lower, while the Nasdaq fell 0.76%.

The Stock – Permian Resources (PR)

As this week’s Top Ten list shows, commodity stocks that were setting up in recent months have started to come to life, with oil names—bolstered by resilient prices in the $80 area and M&A activity in the group—helping to lead the charge. Permian Resources definitely looks like one of the leaders (Diamondback Energy, written about earlier this month, is also a top dog) and it has a great story to tell:

Following its big acquisition of Earthstone in Q4, the company is the second largest pure play in the Permian basin (and largest pure play in the Delaware) with over 400,000 acres (as well as 70,000 royalty acres), and it’s one of the most efficient operators as well, with the lowest “controllable cash costs” (a company metric) per barrel of output among its peers. In fact, a good part of the story does come down to continued improvement on the cost side—Earthstone had higher drilling costs than the company in general, and Permian Resources is wringing out synergies faster than expected and expects drilling costs per foot to fall 10% this year.

Even with lower oil prices year-over-year, results here have been resilient, with Q4 free cash flow coming in at 47 cents per share, and like the rest of the industry, Permian is passing along a lot of that to shareholders, via base (1.5% yield) and variable dividends (the two combined totaled 15 cents per share in Q4) and share buybacks (nine cents per share equivalent in Q4; it just bought back another two million shares this month)—plus, with free cash flow expected to rise this year, those figures should grow nicely if oil prices remain resilient.

The last angle is M&A, where, ironically, the firm’s purchase of Eathstone has made it a better target for some major oil firms that have been looking to bolster their Permian basin exposure. As far as oil plays go, we like it.

Technical Analysis

PR was resilient during the bear market, even outperforming the broad oil group, hitting higher highs in late 2022 (most of the sector topped mid-year) and then gliding up to the 15 level last summer. That last move led to a retreat in November when investors started to chase after growth names, but the action that followed was solid, with a lot of tightness in the 13 area and support in February at the 40-week line. Now PR is running again, with a big-volume, persistent move to new price highs. Stop — 14.2

The Covered Call Trade

Buy Permian Resources (PR) Stock at 16.75, Sell to Open May 17 Strike Calls (exp. 5/17) for $0.75, or a Net Price of 16 or less

Static Return: $75 per covered call (4.68%)

Breakeven: 16

Covered Call Return (if assigned): $100 per covered call (6.25%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 16 or less. (In this case, 16.75 minus 0.75 = 16. Or another example is you could pay 16.85 for the stock and sell the call for 0.85, which also equals 16.)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions

The next Cabot Profit Booster issue will be published on March 26, 2024.

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