PWE vs. XOM: Followup

A few days ago I wrote Jake Schmidt about what I saw was the problem with the large integrated oil companies like Exxon (XOM), Conoco (COP) and Chevron (CVX). Namely, the integrated oils are saddled with both diminishing reserves in more politically dangerous and expensive locations, and alternately, generate much of their income from refining and retail operations which have been squeezed by tight crude supplies and decreasing crack spreads.

This week's earning news has backed up that assertion as XOM on Thursday and CVX today, have disappointed the Street and have been sold off as a result. I had suggested that instead, we should just buy more Pennwest (PWE) or other favorite Canroys. They continue to be a great bargain as shown by the yield and cash flow multiples. Or, if a little more leverage and return is desired, sell the puts short.

Today (August 1), the PWE September $30 put (PWEUF) has a premium of $1.65. This generates a return of over 5% on the premium, but with the leverage of a margined short put (20% margin), the actual return is over 25%. When the 42 days to expiration is annualized, that simple return is around 250%. High return, high risk, so what is the risk? Getting PWE assigned at $30 a share if the price drops further before expiration on September 20. That PWE stock price is based on the cash flow generated by an average crude oil price of $80 a barrel, with the PWE hedge program that is in place. What is the risk of oil going below $80 in the next 12 or 24 months? I think pretty low. And if the stock is "put" to you the option seller, it is returning 12% on dividend yield right now, while retaining almost 50% of its cash flow for reinvestment and acquisition.

I continue to think the Canroys are the way to play the energy market. If not PWE, take a look at Daylight (DAYYF), Harvest Energy (HTE), Provident (PVX), Baytex (BTE), or Pengrowth (PGH).