The Pile On Oil Trade (SU)

Feel Like 3900%…?

We never liked those schoolyard stooges who relished the opportunity to jump on us while we lay on the ground after a stumble.

But when real life hands you a bowl-him-over opportunity like this one, you don’t balk.

Wither Oil…?

Today’s trade is based on the integrated O&G machers at Canada’s Suncor Energy (NYSE:SU).

Oil, as you know, has been weak over the last three months, and Suncor has been even weaker.

Analysts, too, have revised their earnings estimates for the company LOWER of late – not a promising sign.

Moreover, S&P recently lowered the company’s credit rating to BBB and offered a NEGATIVE outlook on SU debt – its second such cut in the last three years.

That said, fundamentals are reasonable, even if they’re not as good as the rest of the peer group.

Take a look –

• P/E is 5.46 and Forward P/E is 3.37.
• Dividend Yield is a robust 5.36%, but in light of the company’s need to pay down debt and an increasingly difficult Oil Sands regulatory regimen, the full payout may not be safe.
• Price to Book is 1.27.
• But next year’s Earnings are expected to CONTRACT by 16.37%.

All told, we see challenging times for the bulls.

Now look at the chart –

Technically…

1. RSI and MACD are both sub-waterline, indicating the bears are in control and momentum favors the sellers (in green).
2. This, after a brief bullish move in August gave hope to shareholders that a turn higher was at hand.
3. Weekly RSI is also sub-waterline and weekly MACD is about to confirm (not seen here).  When that occurs, we should see additional, pile-on selling.
4. Price-wise, a seven month Head and Shoulders topping pattern is now on the threshold of completion (in red).
5. When price breaks definitively below the neckline (in blue), technicians will be given an additional reason to sell.
6. Downside count for the pattern predicts a decline to roughly $16!
7. But the bulls are giving one final insurgent push to avoid the inevitable (in purple).

Will they succeed?

We don’t believe so.

But price may play in the 27-30 range until a decisive selling event ensues.

And then THIS will make you a boatload –

A Jew and His Gold recommend you consider selling the SU December 16^th 29/32 CALL spread* for a credit of $1.05 (2.45/1.40) and buying the SU December 16^th 29/27 PUT spread** for $1.10 (3.10/2.00).  Total debit on the trade is $0.05.

[*Sell the 29 CALL and buy the 32 CALL.   **Buy the 29 PUT and sell the 27 PUT.]

Rationale: we’re looking at a maximum take of $1.95 on a nickel expended.  That’s 3900%.

Max loss is $3.05 (difference between the CALL strikes plus the initial debit).

Breakeven on the affair is $28.95, and price opens today at $28.46, meaning we’re already $0.49 in-the-money.  And that’s a pleasure (thanks to very tight spreads).

The full 3900% purse is ours on a decline of just 5.1%.

And we have 80 days to get there.

Repent, good Jews and Noahides.  The world is in the docket.  And judgment looms.

This is not the time to let up.

Praise be the Al-mighty living G-d of Abraham, Isaac and Jacob!

Many happy returns!

Matt McAbby

Follow @HughLOHaynew