Energy bulls appear to come out in force
05/11/17

DISCLAIMER: If you’re afraid of volatility, stop reading now.

After all, highly leveraged, heavily shorted oil-and-gas stocks aren’t for the faint of heart. Throw in the violent swings that have recently occurred in crude-oil futures, top it off with the power of options to beef little moves up into big moves… and that’s pretty much what traders were doing yesterday.

They went to work early Wednesday with offshore driller Ensco (NYSE: ESV), amassing over 7,000 June 9 calls for $0.20 to $0.25. Minutes later, 4,000 June 11 calls got vacuumed up for $0.30 in Nabors Industries (NYSE: NBR), which operates both at sea and on dry land.

Calls fix the price and timeframe for purchasing a security. Buyers can earn big if their contracts go in the money, or lose everything if they’re wrong. Take ESV. If the stock appreciates 13 percent to $9.20 by the middle of next month, the June 9 calls will break even. If it climbs 15 percent to $9.40, they’ll double, and an 18 percent rally to $9.60 will triple their value. They’ll become worthless if the shares remain below $9. ESV closed up 2.94 percent to $8.06.

The bullish activity comes at a potentially key moment for the energy sector as upstart U.S. producers flood the planet with cheap oil. OPEC has tried its darnedest to support prices, only to stomach a 14 percent drop between the start of the year and last Friday.

This week feels different to some traders as black gold rebounds from a nine-month low. Inventory reports from the American Petroleum Institute and U.S. Energy Department showed the crude-oil glut shrinking much quicker than expected.1 There’s also a growing buzz that OPEC will extend production cuts at its next meeting on May 25.2

If you want to understand just how the once-mighty global drillers have been humbled, look no further than a red-white-and-blue outfit like Fairmount Santrol (NYSE: FMSA). The Ohio-based company provides specially engineered sand for drillers fracking, smashing, and bashing their way to billions beneath the fruited plains. It’s a fast growing business, with tonnage up in the double digits last quarter. The shares are especially volatile, rocketing from below $2 in early 2016 to over $13 by January, and then plummeting all the way back through $5 a week ago.

Fairmount Santrol (FMSA) 1-year chart

Source: OptionsHouse by E*TRADE

Yesterday traders seemed to think FMSA is in rally mode again. They unloaded 5,000 of the June 5 calls for $0.80 and bought 10,000 of the June 6s for $0.40. Yes, they raised their breakeven price by $1, but they also increased their potential size from 500,000 shares to 1 million. In other words, they’re doubling down and putting all the chips on a breakout through $6.40. FMSA rose 6.55 percent to $5.53. 

Some traders have already hit the gusher. On Tuesday, 12-May 9.50 calls were bought in Petrobras (NYSE: PBR) for $0.08. The stock jumped the next session and those calls more than quadrupled to $0.37. Also on Wednesday morning, a slug of 3,000 September 10 calls was bought in Atwood Oceanics (NYSE: ATW) for $0.70. The small-cap offshore company shot higher in the afternoon and the calls inflated more than 25 percent in a matter of hours.

Bottom line: Some traders are hunting for value in energy, and starting with the most volatile names.

 

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1. Marketwatch: Oil gains as sources say API data show a weekly drop in U.S. crude supplies. 5/9/17. Oil prices extend gains as EIA reports larger-than-expected drop in U.S. crude supplies. 5/10/17.

2. Bloomberg: Saudi Arabia Says Oil Curbs Could Extend Beyond End of 2017. 5/7/17.