The Major Oil Refiner Paying Out 51% a Year to Select Traders
U.S. refiners are in a solid bull market right now. The shale natural gas and oil boom is the primary driving force for these companies, as fracking continues to boost oil and gas production in North America.
This production increase has led to a pricing differential between WTI crude (the North American benchmark) and European Brent crude. Since U.S. refiners are able to buy cheaper WTI crude compared to their counterparts elsewhere in the world who are buying crude at the higher Brent cost, there is a natural pricing advantage for domestic refiners.
Valero Energy (NYSE: VLO) has been a direct beneficiary of lower WTI pricing. VLO is the largest U.S. refiner, owning 16 refineries with a cumulative capacity of 2.9 million barrels per day (bpd) of crude.
During the past three months, Wall Street analysts have steadily increased their earnings estimates for 2014 and 2015. Currently, they expect the company to earn $6.02 per share this year and $6.06 next year.
So even though the stock is up roughly 60% since the beginning of October, VLO is still trading at a single-digit price-to-earnings (P/E) ratio. The stock should continue to move higher based on the strong profit metrics and management’s commitment to returning profits to shareholders.
Last year, VLO used its excess cash flow to fund $500 million in dividend payments. And in January, management announced it was increasing the quarterly payment from $0.225 per share to $0.25. VLO currently yields 1.9%.
The company is also actively buying back shares to reduce the float, which helps boost earnings per shares (EPS). Last year, VLO spent $900 million on share buybacks and should continue to purchase shares this year given the company’s ample cash flow.
With North American oil production slated to grow from roughly 13 million bpd in 2013 to more than 16 million bpd in 2020, the company’s potential for higher earnings (and more dividend increases) is strong.
VLO is trading near its 52-week high, and the trend is solidly bullish.
Today, I want to set up a put selling trade that could generate up to 51% a year in income. To do this, we are going to sell the VLO May 55 Puts, which expire on May 16, and are currently trading near $2.85.
By selling these put option contracts, we will be paid $2.85 per share ($285 per contract) for assuming the obligation to purchase 100 shares of VLO per contract at the $55 strike price.
Since we are receiving $2.85 per share in premium for selling the puts, our net cost will actually be $52.15 per share should we be obligated to buy VLO. Considering the strong environment for U.S. refiners, VLO’s ample dividend payment, and the robust share buyback program, I would be happy to purchase shares at this level.
When we sell these put contracts, we will need to set aside $52.15 per share ($5,215 per contract) in case VLO remains below $55 through the May expiration and we are assigned the shares.
My expectation is that VLO will move back above $55 and the put options will expire worthless. If this is the case, our income of $285 per share will represent a 5.5% profit over the $5,215 in capital that we are setting aside.
Since this income will become “free and clear” 39 days after we initiate the trade, our per-year rate of return nets out to just over 51%.
Considering the low level of interest rates, a 51% per-year income level is a very attractive yield. And even if VLO trades lower and we are obligated to buy the stock, I am confident that we will be able to realize a profit on the trade given the bullish environment for U.S. oil refiners and VLO in particular.
Note: My colleague Amber Hestla has been able to “steal” thousands of dollars at a time from Wall Street using this same strategy. By performing these “heists,” as we call them, she’s delivering annual gains of 78.8%… 125.6%… and even 212.2%.
You can read about this opportunity in a research report describing exactly how these “heists” work. In it, she’ll show you how you could generate thousands as early as the next trading session. To access this must-see piece of research, follow this link now.