This week we are adding leading energy player Devon Energy (DVN). Please note, we will VERY likely collect the $1.55 quarterly dividend in the coming weeks, though I won’t include that in the profit and loss equations as it’s not a certainty.

Cabot Profit Booster Issue: August 30, 2022

Market Overview
Before we get into this week’s idea, I do want to note that next week’s issue will be published on Wednesday, due to the Labor Day holiday.

Also, we are going to exit our Dollar Tree (DLTR) covered call position as the stock fell below our stop on earnings last week. To do so we need to:
Sell DLTR Stock
Buy to Close the September 165 Call

Moving on …

The market narratives again swung wildly last week as the S&P 500 fell precipitously on Monday, went super quiet on Tuesday and Wednesday, soared higher on Thursday, and then fell apart again on Friday. Big picture, it was a super sloppy week as the S&P 500 fell 4%, the Dow lost 4.22%, and the Nasdaq pulled back 4.45%.

This week we are adding leading energy player Devon Energy (DVN). Please note, we will VERY likely collect the $1.55 quarterly dividend in the coming weeks, though I won’t include that in the profit and loss equations as it’s not a certainty.

The Stock – Devon Energy (DVN)
Why the Strength
We view Devon Energy as being one of (if not the) institutional leaders of the oil patch during the past year; it was one of the first to shift to the new playbook (less CapEx, flat-ish production, harvesting free cash flow) and a variable dividend (paying out 50% of free cash flow above its base dividend).

Interestingly, while the firm continues to do great with elevated energy prices (about half of output is oil, but a quarter is gas and another quarter is liquids, so it does benefit a good amount from the current sky-high gas prices), with a $1.55 quarterly dividend set for September (ex-dividend date is September 9), we think the reason Devon has come back stronger than many peers is that it’s not just sitting on its hands but is actually playing offense: In July, it completed an $865 million bolt-on buyout of a player in the Williston Basin that brought 38,000 acres and more than 100 top-notch drilling locations, and then earlier this month, it announced a $1.8 billion (all cash) bolt-on buyout of a firm in the Eagle Ford, with 42,000 acres and 350 excellent drilling locations and another 150 re-frac candidates.

Most important, though, is that Devon isn’t chasing deals–both acquisitions were accretive to cash flow (in fact, both were acquired at prices resulting in free cash flow yields north of 25% at strip pricing!), with the first leading to a 13% base dividend hike and the second (not yet completed) anticipated to boost Devon’s free cash flow profile by 10% and lead to bigger variable dividends and potentially accelerated share buybacks, too.

Clearly, energy prices are key, but Devon continues to improve its story and anything in the $80 to $90 oil range should lead to a bevy of payouts and share buybacks in the quarters ahead.

Technical Analysis
DVN topped around 78 with the energy group in early June, correcting very sharply to just under 50 a month later. But after that break, the stock began to repair itself—shares held the 40-week line on that initial dip, and after bouncing into the low 60s, held that key long-term trend line again earlier this month. And now it looks like the sellers have left the building, with a very impressive, persistent move into the mid-70s. Stop — 62

The Covered Call Trade
Buy Devon Energy (DVN) Stock at 72, Sell to Open October 70 Strike Calls (exp. 10/21) for $5.50, or a Net Price of 66.5 or less

Static Return: $350 per covered call (5.26%)

Breakeven: 66.5

Covered Call Return (if assigned): $350 per covered call (5.26%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 66.5 or less. (In this case 72 minus 5.50 = 66.5. Or another example is you could pay 71 for the stock and sell the call for 4.50, which also equals 66.5)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on September 7, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.