Yesterday a little after one o’clock afternoon, a multi-leg trade for Suncor (SU) Dec. 15 $34 calls took place. It wasn’t important that someone was buying or selling Suncor calls. It was the size of the trade that stood out.
According to Barchart.com data, there were 44,013 calls. That’s 440,130 Suncor shares if exercised in 121 days. Equally important, Suncor only had one call option that was unusually active on Wednesday, and you guessed it, it was the Dec. 15 $34 call.
Overall, 45,196 call contracts were traded yesterday, 142.57x the open interest, with the one single trade at 1:08 in the afternoon accounting for 97% of the action.
Somebody must believe energy prices will continue moving higher.
However, I have two questions: Is Suncor the right energy play here? And secondly, assuming Suncor is the right energy play, is the Dec. 15 $34 call the best play?
I’ll answer both of these questions.
Is Suncor the Right Energy Play?
Before I get into Suncor specifically, it makes sense to consider energy prices in general.
UBS Strategists suggested Wednesday that a barrel of West Texas Intermediate (WTI) will rise above $90 by the end of the year.
“‘We still see scope for global oil prices to rally,’ said a recent UBS note to investors. ‘We now expect Brent to hit USD 95/bbl and the US WTI benchmark to rise to USD 91/bbl by end-December, up from the current USD 90/bbl and USD 85/bbl, respectively,’” Yahoo Finance reported UBS’ comments to their clients.
Currently, prices are around $81 a barrel. However, as recently as late June, they were below $70. The price direction hinges on the Chinese economy, the UBS strategists believe. Further, they expect that demand for oil in August will hit a record high. Goldman Sachs is slightly more pessimistic. It estimates an $86 share price by December.
As the world's largest oil importer, should China’s economy get on a roll (a big if), I could see the price challenging $100 early in 2024.
That’s positive for oil producers. The last time a barrel of WTI traded above $100 was July 2022. Before that, in June 2014. So, if everything goes as planned, it would be only the third time in a decade that oil’s been over the century mark.
From that viewpoint, energy makes sense. But why not just buy an ETF that holds Suncor? You know, the old theory that a rising tide lifts all boats.
Beyond Exxon Mobil (XOM) and Chevron (CVX), you won’t get much exposure to Suncor. For example, the iShares North American Natural Resources ETF (IGE) has Suncor in its fund at a 1.80% weighting. You’d be better off going with its Canadian rival, Canadian Natural Resources (CNQ), with a 2.82% weight.
So, if individual stocks are the play here, Suncor doesn’t appear to be an obvious choice. Of the 19 analysts covering SU stock, 10 rate it a buy, while the other nine have it as a Hold.
A much better play might be EOG Resources (EOG). The Houston-based oil and gas producer operates in less expensive regions (Texas, New Mexico, Trinidad & Tobago) than Alberta's heavy oil sands.
Of the 33 analysts covering EOG, 28 rate it Overweight or an outright Buy. They’re more enthusiastic about EOG Resources.
I’m not an energy expert by any stretch of the imagination, but it does seem like a safer and smarter play.
What About the Dec. 15 $34 Call?
I'm intrigued by this call. Here's why.
The ask on the 44,013 trade was $1.23. That’s a 3.6% downpayment on its $34 strike price. You’re effectively spending $54,135 ($1.23 times 44,013) to control 440,013 shares of Suncor worth slightly less than $15 million. Its shares are currently trading around $32.68 as I write this.
So, SU must move at least 8% higher over the next 17 weeks for the buyer to consider exercising their right to buy these shares at $34 plus the $1.23 premium to obtain the right.
That doesn’t seem like a tall order. However, IGE, the ETF I mentioned in the previous section, has gained just 8% over the past 52 weeks, most of the gains coming in the last month.
So, momentum is starting to build for energy stocks in general, but it’s hard to know whether it will be enough to get Suncor back in a groove. SU stock is down 16% over the past five years, nearly 30 percentage points worse than EOG.
If you have the resources to buy $15 million worth of any stock, betting a little more than $54,000 to rent the shares for 17 weeks is not a significant expense. Especially when considering that its delta is 0.44259, providing a breakeven on your bet if the shares move higher by $1.39 to $34 and you unload your options before expiry.
I’m not enamored by Suncor stock, but the option play’s not a dud. Today, as I write this, the call’s ask price is $1.65, 34% higher than what the buyer paid yesterday. They’re ahead of the game already.
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