Monday, November 24, 2008

Establish Anadarko Petroleum Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Anadarko Petroleum Corp (APC).

Anadarko is one of the largest worldwide exploration and production companies primarily involved with natural gas. This advisor believes that natural gas has a strong claim as being an essential long-term energy resource for America since it has two key characteristics: (1) it's abundant in the U.S.; and (2) it's a clean-burning energy alternative to oil. These two advantages make it an attractive option as our country seeks ways towards energy independence in conjunction with environmental responsibility; and thus nat gas could be a good long-term investment opportunity. Anadarko has proven reserves and annual production rates very similar to that of Devon Energy and Apache Corporation. However, Anadarko's market cap is only $17 billion whereas Devon and Apache are $31 billion and $25 billion respectively. Anadarko has substantial long-term debt but management is committed to reducing it to 25-35% of market capitalization and is making good progress in that direction; and their free cash flow (at 15% of market cap) is tops among its peers. It's current year P/E ratio is less than 7 and its return-on-equity is adequate at approximately 20%. Importantly, CEO Jim Hackett and his top management team seem excellent, and their goals for APC include 5-9% growth per year with 120% production reserve replacement annually. Finally, their low production costs enables them to achieve greater than 10% return-on-investment even if the Nat Gas spot price were to decline to as low as $5.09.

Established Anadarko Petroleum Corp (APC) Covered Calls for Dec08:
11/24/08 Bought 500 APC @ $35.62
11/24/08 Sold 5 APC Dec08 $35.00 Calls @ $3.60

Annualized Return If Exercised (ARIE): +117.3%
Downside Breakeven Protection: 10.1%

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