Call Options Or Put Options On Suncor Energy (SU)?

| November 28, 2012 | 0 Comments

SU OptionsSuncor Energy (SU) is an integrated energy company.  They’re focused on developing the Canada’s Athabasca oil sands. 

SU currently trades for $32.73 per share.  The shares are down 11% from the 52-week high of $36.93 and 26% higher than the 52-week low of $58.84.

Is this an opportunity to buy call options on SU as they ramp up production of Canadian oil sands?  Or should you buy put options on SU as increased US oil field production reduces demand for synthetic crude oil?

The bulls make a convincing argument…

SU’s hitting the ball out of the park with their development of the Canadian oil sands. 

Last quarter, SU pulled an average of 341,300 barrels of oil per day out of the oil sands.  It was an increase of more than 10% from the same quarter last year.  That’s strong growth in the energy industry.

But that’s just part of the story…

SU’s new CEO, Steve Williams, took control of the company in the second quarter.  And he put the company on a path to greater profitability.

You see, SU’s previous plan was too aggressive.  They were growing production but production costs were too high.  And growing at the expense of hurting the bottom line scares investors off in a hurry.

In just one quarter under Mr. Williams’ watch, he reduced the cash cost to get each barrel of oil out of the ground while maintaining strong growth.  That’s music to investors’ ears.

Put simply, SU’s new plan puts them on the fast track to profitable growth and a higher stock price. 

But the bears have a compelling case as well… 

SU’s new management may have a solid plan but they can’t control everything.  And there are a host of factors outside of SU’s control that could negatively impact earnings.

First off, SU is dependent on oil prices.  If the global economy continues to slow, it will hurt demand for oil and prices will fall.  Lower crude oil prices will pinch profits no matter what SU does.

What’s more, the region where SU produces oil lacks takeaway capacity.  There’s simply a limited amount of oil the current energy infrastructure can transport out of the region. 

And SU isn’t the only one producing oil in this area.  In fact, just across the border in the US, oil production in Bakken Shale is soaring.  That means more competition and higher transportation costs to get the oil from the fields to the refineries.

As you can see, it’s not all sunshine and roses for SU.  The reality is they face strong headwinds from factors outside of management’s control.

If you think the bulls are right, take a look at buying the SU March 2013 $35.00 calls for around $0.96.

If you think the bears are right, take a look at buying the SU March 2013 $30.00 puts for around $1.11.

Good Investing,

 Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.