Call Options Or Put Options On Union Pacific Corporation (UNP)?

| October 10, 2012 | 0 Comments

UNP OptionsUnion Pacific (UNP) is one of America’s leading transportation companies.  Their iconic railroad business covers 23 states across the western United States.

UNP currently trades for $121.42 per share.  The shares are up 40% from the 52-week low of $86.91 but they have fallen back 6% from the 52-week high of $129.27.

Is this an opportunity to buy call options on UNP as they profit from higher shale-oil and coal shipping revenue?  Or should you buy put options on UNP before coal and agricultural product shipments dry up?

The bulls make a convincing argument…

UNP surprised investors last quarter when they reported earnings of $2.10 per share when they were expected to make $1.97 per share.  The solid earnings beat sent the stock racing from $118 on July 18th to a 52-week high of $129.27 on September 14th

The better than expected earnings were fueled by an unlikely source… demand for oil transportation. 

You see, earlier this year President Obama prevented the Keystone XL pipeline from being built.  The pipeline would have carried about 100,000 barrels of shale oil away from the Bakken in North Dakota and Montana down to refineries in the south every day. 

But just because the pipeline wasn’t built doesn’t mean they quit pumping oil.  They just had to find another way to ship the oil.  And they found the outlet by rail.

The US Energy Information Administration said rail deliveries of oil rose nearly 40% in the first half of the year alone.  And until a pipeline is built, rail will continue to the best option to transport oil away from the Bakken.

And the best part is oil production in the Bakken is growing by leaps and bounds. 

In July, oil production in the Bakken topped 600,000 barrels per day for the first time.  It was an increase of 2% over June and a massive 69% increase in production over July of last year.

Obviously, as the amount of oil produced in the Bakken increases, so will demand for rail to transport the oil.  And that should fuel strong earnings growth at UNP.

As earnings surge, UNP should keep on rolling.

But the bears have a compelling case as well… 

Look, it was great to see increased demand for oil transportation fuel strong earnings last quarter.  But at this point, the upside from this one sector is only part of the story.

Don’t forget, UNP transports lots of other stuff besides oil.

Two of the biggest revenue generators are agricultural products, representing 19% of revenue, and coal, that makes up 22% of revenue.

Needless to say, these two areas are facing strong headwinds right now.

The drought in the Midwest is drastically reducing this year’s harvest.  That means fewer shipment of grain from the Midwest to the coasts.  In June, railroads shipped 43,000 fewer carloads of grain than they did last year.  And that’s only going to get worse as this year’s crop is harvested.

And coal shipping is even worse… 

Shipments of coal to China are falling as economic growth slows.  And they are expected to decline an additional 16% in 2013. What’s more, coal-fired power plants in the US used the lowest amount of coal in 20 years.  

With coal and agricultural product shipments on the decline, it’s going to be difficult for UNP to live up to investors lofty earnings expectations.  And that spells trouble for the stock in the weeks ahead.

If you think the bulls are right, take a look at buying the UNP January 2013 $130 calls for around $1.85.

If you think the bears are right, take a look at buying the UNP January 2013 $110 puts for around $2.05.

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.