Southwestern Energy Options (SWN): Unusual Trading Activity
Options in natural resource exploration company Southwestern Energy (SWN) showed a large amount of unusual trading activity late Friday afternoon.
As you know, oil and natural gas haven’t seen the best of days lately. In fact, they’ve been taken out to the woodshed and showed no mercy.
And these two commodities constitute the bulk of Southwestern Energy’s business.
But, are prices getting a little out of hand?
At least one option trader thinks so. After SWN hit a yearly high of $49 a share last July, it’s been pretty much downhill from there.
The stock’s now sitting down almost 31% at $29 a share.
However, experienced option traders take a stock like SWN sitting at this multi-year low and weigh whether it’s time to jump in or abandon ship.
One trader Friday afternoon decided it was time to jump in… and jump in big!
According to our tracking system, the trader came in and sold 3,000 SWN January $23 strike put options at a price of $3.20 per share. The total premium collected was a cool $960,000.
That works out to a 14% premium return on his $23 strike price for just eight months work.
Not too bad!
Remember, put selling is a bullish strategy.
So, this option trader needs SWN to stay at or above the $23 strike price by January expiration.
And with Southwestern Energy starting to show signs of leveling off, he’s clearly betting the stock has finished falling. If that happens, the trader will probably be going out to more than a few nice steak dinners!
What’s more, I like the attractive premium that was collected, and I’m convinced this trade’s got a lock in.
I’ll explain why in a moment… but first, a few words about the company.
Southwestern Energy is an independent exploration and production company focused on unconventional natural gas in two US shale plays (the Fayetteville and Marcellus).
The company also has oil and gas development projects on formations in Louisiana, Texas, Colorado, and Canada.
In addition, Southwestern Energy owns various oil field services and gathering assets. At year-end 2011, SWN’s proved reserves were some of the highest in the country with net production of 1,370 MMcfe per day. And natural gas effectively represented 100% of production and reserves.
So, what else is making this company so attractive?
Between the Fayetteville and Marcellus shale operations, SWN can lay claim to being one of the lower-cost dry gas producers in the US.
The firm’s Fayetteville acreage provides more than a decade of low-risk drilling opportunities, with breakeven points somewhere between $3-$4 per Mcf. And its Marcellus position offers a profitable outlet to recycle excess cash flows in the event natural gas prices remain depressed.
But that’s not all…
Southwestern Energy’s push to diversify its gassy production mix could be a game-changer. The company has some additional prospects on the horizon, Brown Dense, D-J Basin, and New Brunswick to name a few.
And these assets have not been figured into the company’s assessment of fair value.
These are huge positives for SWN, and could easily drive the stock a lot higher from here.
I hope SWN pulls an about face and turns to the upside for this option trader.
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Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
