Cabot Profit Booster 178

With June expiration coming next Friday, June 18, the Cabot Profit Booster portfolio is in great shape as all four of our existing positions are either at the strike price that we sold (RRC) or well above it (FNKO, IGT, PGNY).

This week my attention turns to selling a July call against an emerging oil and natural gas star that just broke out to new highs last week.

Cabot Profit Booster 178

With June expiration coming next Friday, June 18, the Cabot Profit Booster portfolio is in great shape as all four of our existing positions are either at the strike price that we sold (RRC) or well above it (FNKO, IGT, PGNY).

This week my attention turns to selling a July call against an emerging oil and natural gas star that just broke out to new highs last week.

The Stock – Marathon Oil (MRO)
Why the Strength
Marathon Oil is yet another energy explorer that’s starting to throw off mountains of cash, and with oil prices perking up, the prospects for crazy-huge cash flow is looking like a real possibility.

The firm operates in four of the better basins in the U.S. (Delaware, Eagle Ford, Bakken and the Stack/Scoop in Oklahoma) as well as in Guinea, and like nearly all of its peers, it’s content to keep CapEx in check (one of the lowest CapEx rates per barrel of production in the industry) and cut costs elsewhere (G&A costs down 23% last year) while production remains relatively flat. And that’s leading to some of the best cash flow outlooks in the entire energy sector—even at $50 oil and $3 natural gas, Marathon believes it will crank out $1.1 billion of annual free cash flow (about 10% of the current market cap), with that figure lifting to $1.6 billion (about 15% of the market cap) at $60 oil! (It sees its breakeven price at less than $35 oil.)

Indeed, in Q1, the company cranked out more than $440 million (about 56 cents per share) of free cash flow, which it used to pay off more than $500 million of debt; the top brass is targeting another $500 million of debt reduction by year end, but it’s also intent to reward shareholders directly—Marathon recently hiked its modest dividend (annual yield now 1.2%) and intends to return more than 30% of its cash flow to investors over time. (There’s a big share buyback authorization, though it’s not being used too much yet, with the share count down only 0.6% year-on-year.)

And now it’s looking like even the $60 oil cash flow prediction ($1.6 billion of cash flow) could prove conservative, which is likely to accelerate dividend hikes and share buybacks going ahead. We like it.

Technical Analysis
MRO rallied from an oversold low of 4 last November to 13 in early March before beginning its consolidation. The correction was sharp (27% from high to low) but more than reasonable given the prior advance, and volume really dried up nicely (usually a sign the sellers have been worn out) near the end of May. Last week brought a good-looking breakout (up 14% on Tuesday) and it held those gains for the rest of the week. Stop — 11.5

The Covered Call Trade
Buy Marathon Oil (MRO) Stock at 13.75, Sell to Open July 14 Strike Calls (exp. 7/16) for $0.55, or a Net Price of 13.20 or less

Static Return: $55 per covered call (4.16%)

Breakeven: 13.20

Covered Call Return (if assigned): $80 per covered call (6.06%)

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 13.20 or less. (In this case 13.75 minus 0.55 = 13.20. Or another example is you could pay 13.50 for the stock and sell the call for $0.30, which also equals 13.2)

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 June 15, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
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