Market Overview
Last week’s “big” market-moving events (Federal Reserve and Jobs Report) brought further selling as the S&P 500 fell 3.25%, the Dow lost 2.25%, and the Nasdaq dropped 5.88%.
This week traders will turn their attention to the midterm elections (today), the latest CPI number (Thursday), as well as the third week of earnings season.
The Stock – Marathon Oil (MRO)
Why the Strength
Marathon Oil was one of the leaders of the oil bull move earlier this year, and it’s looking like it could lead again, thanks to some hard-to-beat economics and a super-aggressive buyback program.
The firm’s production is spread out among a few basins, including the Bakken, Eagle Ford (a big, just-announced buyout here should increase that basin’s importance for Marathon going forward) and Oklahoma, and all-in, the firm has a crazy-low breakeven price at less than $35 oil, so it’s been spinning off tons of free cash flow this year ($4.1 billion in the first three quarters, compared to a $20 billion market cap!). Interestingly, however, Marathon isn’t paying much out directly (quarterly dividend of 9 cents per share has been hiked a few times over the past couple of years, though it still yields just 1.1% yield), but is instead buying back shares like mad.
That’s a big reason for the recent strength: In Q3, the firm used all of its $1.1 billion free cash flow to gobble up shares, with the end result being that the share count ended the quarter down about 20% from a year ago! Plus, the board just reloaded the buyback cannon (another $2.5 billion worth), so there’s more where that came from if prices stay anywhere near this range.
Also, looking ahead, Marathon just made a good-sized buyout in the Eagle Ford ($3 billion, funded by debt) that it thinks it can boost its free cash flow by 15% next year, so like other peers (Devon, Diamondback), the top brass here isn’t resting on its laurels. There is some uncertainty about a possible minimum 15% tax (from the green energy bill) and how it affects Marathon, which is something to watch, but all in all the cash flow and buyback potential here remain big.
Technical Analysis
MRO topped in June with the group and slid 42% within a few weeks, and after a modest bounce, dipped again toward the 20 area. But the last few weeks have been on the upside, with MRO rallying all the way back to its old highs and reacting well to earnings. Stop — 26.5
The Covered Call Trade
Buy Marathon Oil (MRO) Stock at 33, Sell to Open December 33 Strike Calls (exp.12/16) for $1.75, or a Net Price of 31.25 or less
Static Return: $175 per covered call (5.6%)
Breakeven: 31.25
Covered Call Return (if assigned): $175 per covered call (5.6%)
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 31.25 or less. (In this case 33 minus 1.75 = 31.25. Or another example is you could pay 32.5 for the stock and sell the call for 1.25, which also equals 31.25)
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
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on November 15, 2022.
