There is an upcoming quarterly ex-dividend of $.275 (annual dividend yield of 2.5%) on February 10th, 2023, so two potential return-on-investment results for this position, as detailed below, include the possibility of early assignment because the ex-dividend is prior to the February 17th, 2023 options expiration date. Given my current Overall Market Meter indicator of Slightly Bearish, an in-the-money Covered Calls position was established with a Delta of 77.9 which approximates the probability that the Call options will be in-the-money and therefore assigned on the options expiration date.
With a market capitalization of $6.9 billion, Murphy Oil is a relatively small company as oil and gas exploration and production companies go. It has a worldwide presence, but its primary operations are on both land and sea in the U.S. and Canada. Murphy Oil appeared in my Energy Sector stock screener which puts it in the top 7% of Energy Sector companies. Its primary valuation metrics are very attractive: (1) TTM (for FY2022) P/E Ratio of 7.7 and an estimated FY2023 P/E Ratio of 6.7; (2) EV/EBITDA of 4.2; (3) FCF Yield of 14%; and (4) P/TBV of 1.38 which is only one-half of the Energy Sector average. Their most recent quarterly earnings (Q4 of 2022) reported last week showed a 42% revenue increase and a 175% profit increase compared with the same quarter last year.
As detailed below, two potential return-on-investment results are:
- +1.2% absolute return (equivalent to +41.4% annualized return for the next 11 days) if the stock is assigned early (on the last business day prior to the February 10th, 2023 ex-dividend date); OR
- +1.9% absolute return (equivalent to +37.4% annualized return over the next 19 days) if the stock is assigned on the February 17th options expiration date.
Murphy Oil Corp. (MUR) -- New Covered Calls Position
01/30/2023 Bought 400 Murphy Oil Corp. shares @ $43.24
01/30/2023 Sold 4 MUR 2/17/2023 $40.00 Call options @ $3.74 per share
Note: the Implied Volatility of the Call options was 41.5 when this buy/write transaction was executed.
2/10/2023 Upcoming quarterly ex-dividend of $.275 per share
Two possible overall performance results (including commissions) for this Covered Calls position are as follows:
Murphy Oil Covered Calls Net Investment: $15,802.68
= ($43.24 - $3.74) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,493.32
= ($3.74 * 400 shares) - $2.68 commission
(b) Dividend Income (If option exercised early on Feb. 9th, the last business day prior to the February 10th ex-div date): +$0.00; or
(b) Dividend Income (If Murphy Oil stock assigned at the Feb. 17th, 2023 expiration): $110.00
= ($.275 dividend per share x 400 shares)
(c) Capital Appreciation (If Murphy Oil Call options assigned early on Feb. 9th): -$1,296.00
+($40.00 strike price - $43.24 stock price) * 400 shares; or
(c) Capital Appreciation (If shares assigned at $40.00 strike price at the Feb. 17th options expiration): -$1,296.00
+($40.00 - $43.24) * 400 shares
Either outcome would provide an attractive return-on-investment result for this Murphy Oil Corp. investment. These returns will be achieved as long as the stock is above the $40.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $39.225 ($43.24 -$3.74 -$.275) provides 9.3% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this Murphy Oil position, all nine criteria were met.
