The Energy Trade No One is Looking At
The following post is a Guest Blog by CNBC Contributor Brian Stutland.
Phillips 66 gained 2.7 percent Friday on news that the company would be raising its dividend by 25%, and do another $1 billion in share buybacks for the second quarter in a row
In all, Phillips 66 has appreciated by 60 percent since its IPO in May 2012, when it spun off from ConocoPhillips.
It was also showing heavy call option activity on Friday—the stock's call-put ratio was 9.2:1.
The biggest trade of the day was the purchase of 11,886 May 65-strike calls for $1.05, which was done with the stock at $52.22. This is a bullish bet that PSX will be above $66.05, or 18.8 percent higher, 158 days from now.
So why is now the time to get bullish?
Phillips 66 currently yields 2.3 percent, and has shown a strong commitment to returning shareholder value ever since its IPO. But this has not come at the cost of growth. (Read More: Bulls Step on the Gas with Phillips 66.)
In June, CEO Greg Garland announced that he would like to increase delivery of shale crudes to Phillip's refineries by 100,000 to 150,000 barrels per day within 2 years. Garland plans to accomplish this by using rail cars, and the company has since purchased several thousand of them. Bakken crude is one of the most efficient crudes for refiners to use, because it leaves very little residual waste products during the refining process.
Phillips has also recently entered agreements with Kinder Morgan to deliver Ford Eagle crude to its Texas refineries. Garland believes that the exploration and production side of the energy business will continue to expand at a faster pace than the crude oil transportation infrastructure will. If this scenario plays out, PSX will be able to keep its supply costs low and widen profit margins further in the future.
I would buy the stock on a dip, or buy call options on the stock to profit from a continued rally.
However, I would not chase this stock higher. PSX has rallied nearly $10 in the past three weeks, so traders should expect to see some profit-taking, and use it as an opportunity to buy in.
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
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Disclosure: Brian Stutland is short puts on Phillips 66.