Tesoro Corporation* refines and markets petroleum products, and provides transporting services. The Company operates refineries, as well as a network of retail and refueling stations in the western United States. Tesoro also markets gasoline and diesel fuel to independent marketers and commercial end users.
Valero Energy Corporation* is an independent petroleum refining and marketing company that owns and operates refineries in the United States, Canada, and Aruba. The Company produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products as well as diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates.
* Company descriptions by Bloomberg
These two companies fortunes are tied to the crack spread- basically the profit margin between their crude oil costs and the combined prices they get from the array of refined products that they produce. Crack spreads can be quite volatile as are the earnings these companies generate. Ironically, the best time to own these highly-cyclical shares is generally when profits are near their lows and investors shun them.
Earnings hit high levels in 2001 for both TSO and VLO at $1.05/sh. and $2.21/sh.
EPS peaked again at all-time highs for each company in 2006 at $5.73 and $8.30 respectively. Here are the shareholder numbers for those who sold when things looked great and bought back when times were tough:
Company...2001 Peak ....2002 Trough ....2007 Peak .... 2008 Trough ....6/26/09 Close...Current Yield
.................. Price ............ Price ............. Price ........... Price ................. Price
Tesoro ......$8.30 .............. $0.60 .......... $66.00 .......... $6.70 .............. $12.75 .......... 3.14%
Valero ......$13.10 ............. $5.80 .......... $78.70 ..........$13.90 ............. $16.48 .......... 3.64%
Both stocks hit their 2008 low on the same November 20, 2008 market day of infamy
when about 95% of all stocks got clobbered by panic selling. Each of these issues made their 52-week highs exactly one year ago on June 26, 2008 [@$20.89 and $43.30 respectively].
Zacks is looking for 2009 – 2010 EPS of $1.17 and $1.75 for Tesoro and $1.43 and $3.01 for Valero. While earnings predictability is low for this industry, it appears likely that things should be getting better over the next year or two.
Value Line sees year end 2009 book values of $24.45 and $29.65 for TSO and VLO while assigning them financial strength ratings of B+ and A. The dividend yields of 3.14% and 3.64% are the highest in more than 16 years for their shareholders (excepting buyers at last fall’s lows).
Patient investors should do very well by picking up shares in these companies and putting them away for a few years. Tesoro and Valero showed their ‘boom period’ earnings power in their numbers from 2005-2006-2007.
.................2005 EPS.......2006 EPS .........2007 EPS
Tesoro ........$4.06 ...........$5.73 ...............$4.06
Valero .........$6.75 ...........$8.30 ...............$7.72
Recovery potential seems quite substantial from today’s quotes.
Less patient investors might want to consider playing with these issues by buying shares while simultaneously selling options to lock in nice returns even if the shares ‘hang around’ for the next seven or eight months.
................................................Cash Outlay ................ Cash Inflow
Buy 1000 TSO@ $12.75 ...............$12,750
Sell 10 Feb. $12 calls @ $2.75 .........................................$2,750
Sell 10 Feb. $12 puts @ $2.20 ........................................$2,200
Net Cash Out-of-Pocket ................$7,800
If Tesoro shares remain above $12 (as they are today) on Feb. 19, 2010:
• The $12 calls will be exercised.
• You will sell your shares for $12,000.
• The $12 puts will expire worthless.
• You will likely have collected $200 in dividends.
• You will have no further option obligations.
• You will hold no shares and $12,200 cash.
That best-case scenario would result in a total net profit of:
$4,400 / $7,800 = 56.4%
That would be achieved (in just eight months) on shares that:
• Went up.
• Stayed unchanged.
• Declined by up to $0.75 or (-5.8%) from trade inception.
What’s the risk?
If TSO shares are < $12 on Feb. 19, 2010:
• The $12 calls will expire worthless.
• The $12 puts will be exercised.
• You will be forced to buy another 1000 shares.
• You’ll need to lay out an additional $12,000 cash.
• You will likely have collected $200 in dividends.
• You will have no further option obligations.
• You will hold 2000 TSO shares and $200 cash.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $12.75 purchase price less the
$2.75/share call premium = $10.00 /share.
On the ‘put’ shares it’s the $12 strike price less the
$2.20/share put premium = $9.80 /share.
Your average cost would be $9.90 /share (ignoring dividends)
or $9.80 /share including the $200 in yield.
Tesoro shares could drop by as much as $2.95 /share or (-23%)
without causing a loss on this trade.
**************************************************************
Valero closed at $16.48 today.
Here’s a nice seven month play for those who are options savvy:
....................................................Cash Outlay .......................Cash Inflow
Buy 1000 VLO @ $16.48 ..................$16,480
Sell 10 Jan. $17.50 calls @ $1.95 ...............................................$1,950
Sell 10 Jan. $15 puts @ $1.85 ...................................................$1,850
Net Cash Out-of-Pocket ................... $12,680
If Valero shares rise to $17.50/share (up 6.2%) by Jan. 15, 2010:
• The $17.50 calls will be exercised.
• You will sell you shares for $17,500.
• The $15 puts will expire worthless.
• You will likely have collected $300 in dividends.
• You will have no further option obligations.
• You will hold no shares and $17,800 cash.
That best-case scenario would result in a total net profit of:
$5,120 / $12,680 = 40.3%
That would be achieved (in just seven months) on shares that only
needed to rise by 6.2% from the trade’s inception price.
What would the return be if the shares remained unchanged (at $16.48/share) through expiration date on January 15, 2010?
• The $17.50 calls would expire worthless.
• The $15.00 puts would expire worthless.
• You will likely have collected $300 in dividends.
• You will have no further option obligations.
• You will hold 1000 VLO shares and $300 cash.
The liquidation value of your holdings would be $16,848.
The ‘static return’ would be a net profit of:
$4,168 / $12,680 = 32.8%
That would be achieved (in just seven months) on shares that
did not go up from the trade’s inception price.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $16.48 purchase price less the
$1.95/share call premium = $14.53 /share.
On the ‘put’ shares it’s the $15 strike price less the
$1.85/share put premium = $13.15 /share.
Your average cost would be $13.84 /share (ignoring dividends)
or $13.54 /share including the $300 in yield.
Valero shares could drop by as much as $2.94 /share or (-17.8%)
without causing a loss on this trade.
Disclosure: Author is long TSO and VLO shares and short TSO and VLO options.
Valero Energy Corporation* is an independent petroleum refining and marketing company that owns and operates refineries in the United States, Canada, and Aruba. The Company produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products as well as diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates.
* Company descriptions by Bloomberg
These two companies fortunes are tied to the crack spread- basically the profit margin between their crude oil costs and the combined prices they get from the array of refined products that they produce. Crack spreads can be quite volatile as are the earnings these companies generate. Ironically, the best time to own these highly-cyclical shares is generally when profits are near their lows and investors shun them.
Earnings hit high levels in 2001 for both TSO and VLO at $1.05/sh. and $2.21/sh.
EPS peaked again at all-time highs for each company in 2006 at $5.73 and $8.30 respectively. Here are the shareholder numbers for those who sold when things looked great and bought back when times were tough:
Company...2001 Peak ....2002 Trough ....2007 Peak .... 2008 Trough ....6/26/09 Close...Current Yield
.................. Price ............ Price ............. Price ........... Price ................. Price
Tesoro ......$8.30 .............. $0.60 .......... $66.00 .......... $6.70 .............. $12.75 .......... 3.14%
Valero ......$13.10 ............. $5.80 .......... $78.70 ..........$13.90 ............. $16.48 .......... 3.64%
Both stocks hit their 2008 low on the same November 20, 2008 market day of infamy
when about 95% of all stocks got clobbered by panic selling. Each of these issues made their 52-week highs exactly one year ago on June 26, 2008 [@$20.89 and $43.30 respectively].
Zacks is looking for 2009 – 2010 EPS of $1.17 and $1.75 for Tesoro and $1.43 and $3.01 for Valero. While earnings predictability is low for this industry, it appears likely that things should be getting better over the next year or two.
Value Line sees year end 2009 book values of $24.45 and $29.65 for TSO and VLO while assigning them financial strength ratings of B+ and A. The dividend yields of 3.14% and 3.64% are the highest in more than 16 years for their shareholders (excepting buyers at last fall’s lows).
Patient investors should do very well by picking up shares in these companies and putting them away for a few years. Tesoro and Valero showed their ‘boom period’ earnings power in their numbers from 2005-2006-2007.
.................2005 EPS.......2006 EPS .........2007 EPS
Tesoro ........$4.06 ...........$5.73 ...............$4.06
Valero .........$6.75 ...........$8.30 ...............$7.72
Recovery potential seems quite substantial from today’s quotes.
Less patient investors might want to consider playing with these issues by buying shares while simultaneously selling options to lock in nice returns even if the shares ‘hang around’ for the next seven or eight months.
................................................Cash Outlay ................ Cash Inflow
Buy 1000 TSO@ $12.75 ...............$12,750
Sell 10 Feb. $12 calls @ $2.75 .........................................$2,750
Sell 10 Feb. $12 puts @ $2.20 ........................................$2,200
Net Cash Out-of-Pocket ................$7,800
If Tesoro shares remain above $12 (as they are today) on Feb. 19, 2010:
• The $12 calls will be exercised.
• You will sell your shares for $12,000.
• The $12 puts will expire worthless.
• You will likely have collected $200 in dividends.
• You will have no further option obligations.
• You will hold no shares and $12,200 cash.
That best-case scenario would result in a total net profit of:
$4,400 / $7,800 = 56.4%
That would be achieved (in just eight months) on shares that:
• Went up.
• Stayed unchanged.
• Declined by up to $0.75 or (-5.8%) from trade inception.
What’s the risk?
If TSO shares are < $12 on Feb. 19, 2010:
• The $12 calls will expire worthless.
• The $12 puts will be exercised.
• You will be forced to buy another 1000 shares.
• You’ll need to lay out an additional $12,000 cash.
• You will likely have collected $200 in dividends.
• You will have no further option obligations.
• You will hold 2000 TSO shares and $200 cash.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $12.75 purchase price less the
$2.75/share call premium = $10.00 /share.
On the ‘put’ shares it’s the $12 strike price less the
$2.20/share put premium = $9.80 /share.
Your average cost would be $9.90 /share (ignoring dividends)
or $9.80 /share including the $200 in yield.
Tesoro shares could drop by as much as $2.95 /share or (-23%)
without causing a loss on this trade.
**************************************************************
Valero closed at $16.48 today.
Here’s a nice seven month play for those who are options savvy:
....................................................Cash Outlay .......................Cash Inflow
Buy 1000 VLO @ $16.48 ..................$16,480
Sell 10 Jan. $17.50 calls @ $1.95 ...............................................$1,950
Sell 10 Jan. $15 puts @ $1.85 ...................................................$1,850
Net Cash Out-of-Pocket ................... $12,680
If Valero shares rise to $17.50/share (up 6.2%) by Jan. 15, 2010:
• The $17.50 calls will be exercised.
• You will sell you shares for $17,500.
• The $15 puts will expire worthless.
• You will likely have collected $300 in dividends.
• You will have no further option obligations.
• You will hold no shares and $17,800 cash.
That best-case scenario would result in a total net profit of:
$5,120 / $12,680 = 40.3%
That would be achieved (in just seven months) on shares that only
needed to rise by 6.2% from the trade’s inception price.
What would the return be if the shares remained unchanged (at $16.48/share) through expiration date on January 15, 2010?
• The $17.50 calls would expire worthless.
• The $15.00 puts would expire worthless.
• You will likely have collected $300 in dividends.
• You will have no further option obligations.
• You will hold 1000 VLO shares and $300 cash.
The liquidation value of your holdings would be $16,848.
The ‘static return’ would be a net profit of:
$4,168 / $12,680 = 32.8%
That would be achieved (in just seven months) on shares that
did not go up from the trade’s inception price.
What’s the break-even on the whole trade?
On the first 1000 shares it’s their $16.48 purchase price less the
$1.95/share call premium = $14.53 /share.
On the ‘put’ shares it’s the $15 strike price less the
$1.85/share put premium = $13.15 /share.
Your average cost would be $13.84 /share (ignoring dividends)
or $13.54 /share including the $300 in yield.
Valero shares could drop by as much as $2.94 /share or (-17.8%)
without causing a loss on this trade.
Disclosure: Author is long TSO and VLO shares and short TSO and VLO options.
