Monday, January 7, 2013

APC: An oil exploration breakout

Anadarko Petroleum Corp. (APC) on Friday closed above its high price of the last 20 days, $77.35, and is still trading above that level today, confirming the bull signal under the Turtle Trading rules.

The upswing broke past a sideways range that has been in effect since July, with a ceiling a bit above $77 and a floor just below $66. That pause is part of a broader swing to the upside that began in early June from $56.42.

The prior upswing peaked at $88.70 in February, and that level arguably constitutes major resistance for APC.

In the past four years, about seven out of every 10 breakouts by APC have been profitable, with the average return being 8.7%. Half of bullish breakouts have earned money, with an average return of 10%.

In sorting breakouts for a possible trade, I combine the trade success rate and the average profit into a combined score. In the case of APC, the overall score is 5.7, and the upside breakout score is 5.0.

To put it in perspective, the 15 breakouts on Friday by highly liquid stocks had overall scores ranging from 5.2 down to 1.6. Anything above 5 is at the higher end of the range.

APC has a trend score of 60. It is calculated by taking the percentage of higher lows in the five trading days proceeding the breakout, and then adjusting that by the distance traveled in those days. It is a way of estimating the strength of the push beyond the price channel.

APC's trend score is not particularly high. The scores for Friday's 15 breakouts ranged from 210 down to 40.

However, APC has been profitable 7 times out of 10 with a low trend score (below 1), for an average return of 8.8%.

One challenge facing traders these days (aside from the budgetary Hunger Games in Washington) is the beginning of the 4th quarter earnings announcements. Alcoa Inc. (AA) kicks off the season after the close on Tuesday.

Under my rules, I don't open a new position in a stock within 30 days of an upcoming announcement. Since APC announces on Feb. 4, it will take a slight bending of the rules (mea culpa!) to allow a trade.

Analysts are certainly bullish about APC's prospects, with a collective 68% enthusiasm index.

Anadarko Pete, based in a Houston, Texas suburb, The Woodlands, is an international fossil fuels exploration and production company with more than 2.5 billion barrels of oil equivalent in its proven reserves.

The company's return on equity is an unspectacular 8%, and long-term debt is reasonable, although a bit higher than I like, at 61% of equity.

Earnings, although positive the past 11 quarters, have shown a large degree of volatility, as is to be expected with an oil and gas company. The results have steadied somewhat in 2012.

Of the past 11 quarters, nine have surprised to the upside and two to the downside.

Institutions own 81% of shares and have bid up the price so that it takes $2.83 in shares to control a dollar in sales.

On average, APC trades 3.1 million shares a day, providing sufficient liquidity to support a wide range of option strike prices, with open interest on my strikes in the four- and five-figure range. The bid/ask spread on front-month at-the-money calls is 2.9%.

Implied volatility stands at 32%, near the low end of the six-month range. It has been falling since Dec. 31.

Options are pricing in confidence that nearly two-thirds of trades will fall between $71.43 and $85.73 over the next month, for a maximum potential gain or loss of 9%. The implied range over the next week is $75.15 to $82.01.

Trading in options is a running 28% above the five-day average volume for calls, and 7% above average for puts.

The fair-price zone on today's 30-minute chart runs from $77.75 to $78.71, encompassing about two-thirds of transactions surrounding the most-traded price, $78.39. Five hours before the close, APC is trading slightly above the most-traded price but within the zone.

Anadarko next publishes earnings on Feb. 4. The stock goes ex-dividend in March for a quarterly payout yielding 0.46% at today's prices.

Decision for my account: I've opened a bull position in APC, bending the trading rules slightly to accommodate the earnings date. I structured the initial position as a bull put spread, long the $75 February puts, and short the $71.50 Februaries. This gives me a profitable trade down to $74.41, with a potential top yield of 19.1%.


My trading rules can be read here. (They don't talk about the trend score because I'm still developing it.) A discussion of recent modifications, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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