Is Iraq a threat or an opportunity? And does it matter?

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Kevin Kersten 06/30/2014

Things have been getting a little warmer in Iraq recently and those tremors have been felt in world oil prices . Will violence in Iraq threaten US oil supplies? Will Barack Obama respond in an effective manner? Is this the beginning of a bigger conflict?

I suppose I should let the politicians struggle to solve the political problems focusing on some areas I know more about -like oil. When oil goes up, gas prices will rise across the country. Oil is traded on the global market, and gas quickly follows. Gas is very important to people so small disruptions in supply do result in higher oil prices. 

America is much less dependent on foreign oil that it used to be. In 2005, America imported 60% of it oil. In 2013 America imported about 32% of its oil. That is right oil imports fell from 12.5 million barrels a day down to 7.5 million barrel a day as we struck oil with a new process called fracking. Oil imports are still falling and it is likely just a matter of time before we become a major oil exporter. Before that time comes we are also much less dependent on oil from unfriendly violent foreign countries. In fact, about one third of the oil we import comes from Canada, a stable, friendly neighbor.

Oil prices will still rise and fall with what happens in the Middle East, but with vast secure domestic supplies, life in the U.S. is much more likely to continue on without disruption. Conflicts can be very bad and if we can keep relative peace it may be worth the cost, however if the whole Middle East does go up in a vast war, oil will not be cut off in America. We have mostly stable domestic supplies.

One of the companies that has been developing these supplies is EOG. It is one of the largest independent oil exploration and production companies in the world. It is a major onshore oil driller, and has been striking black gold. In 2013 the company produced over 500,000 barrels a day including about 142,000 barrels of oil daily from the Eagle Ford, 61,000 barrels a day from Bakken, and 23,000 barrels from Permian. While EOG has infrastructure in Canada, China, Trinidad, the UK and other select regions, it is only a small portion of its resources and those are all pretty stable areas.

EOG has seen its annual revenues rise from $4.7 billion in 2009 to $13.4 billion in 2013. Earnings per share over that period have risen from $1.09 to $4.02 per share. In 2014 analysts expect the company to earn of $5.42 a share. The stock has risen from the $40 to $117 a share with a big part of that swing over the last year.

EOG has struck oil repeatedly and the company has a lot of leased land which should allow the rapid development of oil properties to continue. The company is very focused on the cost effectiveness of each unit of oil it pulls out and making sure that shareholders get a high rate of return on their investments.

We all know that oil is cyclical and companies that make money when oil is priced at a $100 a barrel can lose a lot of money when oil falls to below that level. While war is possible in the Middle East, peace is also possible. Changes in technology and demand are very real. While unrest in the Middle East is likely to keep prices high going forward, a recession in China and peace in the Middle East could be a one two punch to bring prices down.


Chart courtesy of stockcharts.com

With EOG at $116.02 the August 115 call has a bid of $5.20. That gives the covered call a 3.8% return over the next 51 days with 4.5% of downside protection. If you annualize the returns (for comparison purposes only) that is a 27% return. EOG has a small dividend yield of 0.5%; the next payout is in July so we could add a little to the investment that way too.



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: EOG

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