Get your frack on with Pioneer Natural Resources

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Julian Close 06/30/2014

Not for the first time this year, I find myself expressing the financial benefits of a policy I oppose. I'm happy to do so, however, since my opposition-to the U.S.'s exportation of crude oil, in this case-is based on the problems presented by the policy, not the view that the policy won't make money for the companies that pushed it through. In fact, I find it quite instructive to look at the profits companies can generate for themselves with simple, and often quite reasonable sounding policy changes. From a profit/loss standpoint, spending on political pressure often looks like a much better option than, say, spending on R&D, or spending on employee training. It is not at all hard to understand why corporations succumb to the temptation to re-legislate, rather than innovate.

But though self-legislation is easy to understand, I find it just as easy to condemn. Corporations will self-legislate for their own interests every time, regardless of whether doing so is net beneficial to society. Through the magic of hierarchical diffusion of responsibility, they can even do this (usually) without the need for illegal or immoral actions. Of course, it is rarely profitable or even possible for companies to pressure legislators on behalf of net benefit , and so, without a champion, net benefit falls increasingly by the wayside. The consequences to society are many, but the greatest and most destructive of these is the ever increasing disparity of wealth and power.

But enough of the depressing stuff, let's focus on the company that's holding the dry end of the dipstick. Pioneer Natural Resources ( PXD ) is a big fracking company. They drill in the Spraberry field in West Texas and the Eagle Ford Shale in South Texas. As it happens, when you start fracking around with the shale in areas like this, you bring up natural gas in abundance, as well as oil in only slightly less abundance, and finally, quite a lot of a very light form of crude called condensate. So while Pioneer Natural Resources has been making money from natural gas, it finds it has more of the others, particularly condensate, than it needs.

So, it sounds almost perfect, doesn't it? We can keep the natural gas boom going and pay Pioneer Natural Resources a small amount for their condensate which we can then save for a rainy day, and everyone will be happy. Except that Pioneer Natural Resources doesn't want a small amount of money-they want a large one. Hence, they turned the screws on the politicians (screws which turned surprisingly easily in this case) and had the United States's 40 year old ban on the exportation of crude oil lifted.

Now, Pioneer Natural Resources can sell their condensate abroad and make more money. Sadly, the U.S. refining industry was hammered by the news, since all the crude oil exported represents, at the end of the day, the deliberate enrichment of the refining industry in some other country at the expense of our own. Also, Dow Chemical ( DOW ) and DuPont ( DD ), companies which were making chemicals at lower costs from the low cost crude and passing the savings to countless industries, are both losing value. All those low cost chemicals, in combination with low fuel costs, have been credited with spurring a U.S. manufacturing renaissance, so that's presumably over now too.

But remember the important thing: Pioneer Natural Resources will be making more money . So obviously the chance of any significant near-term drop in the price of PXD stock appears remote.


Chart courtesy of stockcharts.com

I seek to capitalize on this strength with a bull-put credit spread. Look at the September 180/190 bull-put credit spread for at least a $0.70 credit. You will need to use limit orders to place this trade, and the bid-ask spreads are fairly wide, so you may need to play with the order a bit to get filled. This trade has a target return of 7.5% over 82 days, which is an annualized return of 33.5%, (for comparison purposes only). PXD stock has to fall 16% to cause a problem. Be aware that this is an aggressive trade, best undertaken by investors with diverse portfolios and high tolerance for risk.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: PXD , DOW , DD

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