(By Philip Guziec) We use Morningstar's proprietary industry-level data to find sectors and industries that are attractive for option-based investment strategies.
The charts below show how much the average implied volatility for each sector differs from its trailing-three-month and trailing-one-year averages for U.S.-listed equity options (vertical bars, indexed on the right-hand scale), the change in implied volatility from week to week (dark blue line, indexed on the left-hand scale), the implied correlations of small- and large-cap stocks, and the relationship of implied volatility across size and value stocks.
Implied volatility of options on energy companies remains well below trailing-quarter and trailing-year levels. We think this poses an opportunity to buy longer-term undervalued call options to express a bullish position.
Source: Morningstar Option Research
Canadian Natural Resources (CNQ)
Canadian Natural Resources is an independent oil and gas company with properties in western Canada, the North Sea, and offshore West and South Africa. Production is roughly 600,000 barrels of oil equivalent per day (65% oil-weighted), of which 10% is from assets in the North Sea and Africa. Proven plus probable reserves exceed 7.5 billion boe, 86% oil, and 67% attributable to oil sands assets. We have updated our oil and natural gas price deck with the latest forward curves. While this lowers our near-term outlook, there is no change to our CAD 51 per share fair value estimate. Canadian Natural Resources will likely continue to face near-term headwinds from depressed heavy oil pricing in Canada and operational concerns with its Horizon oil sands mine. Our outlook, which remains positive, is somewhat tempered over the near term. Horizon is, in our opinion, Canadian Natural Resources's most significant asset in terms of long-term oil potential, and with the third ore preparation plant now on line, production should average 100 mbpd for the rest of 2012. Canadian Natural Resources also has thermal production in Cold Lake (98 mbpd), and the potential to bring on line incremental heavy and thermal production of 40-60 mbpd every two years. Financing for these projects should come from a combination of debt and cash flow generated from Horizon, North Sea, and Africa.
Nabors Industries(NBR)
Nabors Industries is one of the world's largest land rig drilling contractors. The company has more than 450 land rigs, more than 700 land workover rigs, and numerous offshore rigs that drill for oil and natural gas globally. The company derives about 75% of its revenue from North America. In addition, Nabors provides well servicing, engineering, transportation, and other services for oil and gas producers. New CEO Anthony Petrello has unveiled a much-needed plan to revitalize Nabors after several years of disappointments and capital allocation errors. The firm plans to dispose of its oil and gas properties, which include acreage in Columbia, the Eagle Ford, Alaska, and the Horn River play. Nabors also plans to eventually sell Canadian workover assets, as well as international and Gulf of Mexico-based jackup rigs, among other items. In total, we think Nabors could realize $1.5 billion to $2 billion over the next few years from these sales, and it plans to apply the proceeds toward debt reduction with a goal of getting debt/capital below 25% by the end of 2013 from 42% today. The streamlined Nabors plans to focus on niches that require specialized technology or assets, such as deep-water platform rigs in the Gulf of Mexico, where it can earn compelling returns.
Whiting Petroleum(WLL)
Founded in 1980 and based in Denver, Whiting Petroleum is an independent oil and natural gas company with operations primarily in the Bakken/Three Forks system of North Dakota and Montana and enhanced oil recovery projects in Texas and Oklahoma. At year-end 2011, proved reserves were 345 million barrels of oil equivalent (boe), with net production of 68,000 boe per day. Oil represented more than 80% of reserves and production. With its Sanish Field acreage probably out of runway by 2014, we're glad to see Whiting fast-track its North Ward Estes program and aggressively go after other Bakken/Three Forks prospects. In the Williston Basin, especially, Whiting should be able to take advantage of its geoscientific familiarity, network of land brokers and title attorneys, contracted rigs and frac crews, and existing infrastructure to help drive efficiencies as it moves forward with exploration and development of new fields. Intermittent periods of midstream tightness remain possible in this region in the short term, although longer term we expect this to become less of an issue. As the company proves out acreage and the industry releases additional data points on emerging plays like the Wolfcamp, Bone Springs, and Niobrara, we expect to gain more insight into their longer-term potential.
Implied volatility increased materially only for consumer defensive, health-care, and utilities companies.
Our sector standout chart below shows how much the average implied volatility for each sector differs from its average during the last year and last quarter. Vertical bars (indexed on right-hand scale) show present sector volatilities with respect to historical averages. The dark blue line (indexed on the left-hand scale) shows change relative to the previous week.
Source: Morningstar Option Research
PhilipGuziec is co-author of the Morningstar Investor Training course on Option Investing. For more about Morningstar's fundamental approach to investing in options, please click on this link to download our free guide to option investing.