2 Energy Stocks Ripe for Extended Rallies

Apache Corporation (NYSE:APA) and Phillips 66 (NYSE:PSX) have been rallying with crude oil, but skepticism surrounds the energy stocks

Dec 20, 2016 at 11:14 AM
facebook twitter linkedin

Energy stocks have been on fire this month, after the Organization of the Petroleum Exporting Countries (OPEC) and several of its non-cartel counterparts agreed to curb crude production. Among the oil-and-gas stocks trading higher alongside crude are Apache Corporation (NYSE:APA) and Phillips 66 (NYSE:PSX), up a respective 1.5% and 4.9% month-to-date. And although shares of both energy firms are within striking distance of notching new highs, expectations are low for APA and PSX -- making the outperforming energy stocks ripe for extended rallies.

APA, took a quick bounce off its rising 40-day moving average in late November, which helped send the shares soaring to a fresh annual high of $69 on Dec. 12. After notching this notable milestone, APA pulled back to the $66 region -- a level that corresponds to its early October highs, and now appears to be emerging as a floor for the shares. At last check, the security was trading up 0.2% at $66.86, bringing its year-to-date lead north of 50%.

Nevertheless, short sellers have been actively betting against APA, with short interest surging 14.5% in the two most recent reporting periods. With 23.3 million shares sold short, it would take nearly seven sessions to cover these bearish bets, at the stock's average pace of trading. Plus, analysts have been slow to join in on APA's uptrend. Of the 21 brokerages covering the shares of Apache Corporation, 17 maintain a "hold" or "sell" rating. Should the stock continue its march higher, a round of short-covering and/or upgrades could translate into a fresh burst of buying power.

PSX, meanwhile, has tacked on roughly 17% since bottoming near $74 in July -- a region that has served as a floor for the stock since February 2015. And the shares topped out at a near-term high of $88.87 one week ago, just a chip-shot away from their March 22 annual high of $90.87. More recently, the security was down 0.4% today to trade at $86.86.

Options traders, however, have been buying to open puts over calls at a near-annual-high clip in recent weeks, per PSX's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 18.15 -- in the elevated 97th percentile of its 12-month range. Almost all of this action has transpired at the January 2017 70-strike put, as traders brace for -- or shareholders hedge against -- a breach of $70 over the next several weeks.

Elsewhere, short interest dropped nearly 10% in the most recent reporting period, but it would still take more than four sessions to covering the remaining shorted shares, at the stock's average pace of trading. Additionally, 11 out of 13 analysts maintain a lukewarm "hold" recommendation on Phillips 66. Continued short covering and/or a round of bullish brokerage notes could help push the shares of PSX into annual-high territory.

Let us help you profit from market volatility. Target big gains in short order with a 30-day trial of Schaeffer's Weekly Volatility Trader!

Now is the time to join our thriving community of Event Traders who consistently profit from every earnings season. With this discounted subscription opportunity, you'll stay ahead of the curve and seize opportunities others miss. Do not let Q3 earnings season pass you by – subscribe now and supercharge your portfolio with expert insights that turn market reactions into profit-generating opportunities!! Don't waste another second... join us right now before the next trade targeting +200% is released!