Oil Stock to Short Now

Parsley Energy's short-term options should be cheap after earnings

Nov 6, 2019 at 1:28 PM
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Oil prices are lower today, set to snap a recent winning streak, due to concerns about U.S.-China trade and a bigger-than-expected increase in domestic crude inventories. Meanwhile, one oil-and-gas stock appeared on our radar as a possible short play: Parsley Energy Inc (NYSE:PE), the shares of which are waffling today after earnings.

Parsley Energy last night reported adjusted per-share earnings of 29 cents for the third quarter, falling short of expectations for 36 cents per share. Revenue just barely missed Wall Street's estimate of $511 million, coming in at $510.2 million. The company also upped its net oil production guidance for 2019.

PE shares have traded on both sides of breakeven today, and were last seen fractionally lower at $17.07 -- around half the stock's 2018 highs. Since dropping in mid-October on the firm's plans to buy Jagged Peak Energy, the stock has staged a modest rebound, but is now back within striking distance of its 180-day moving average -- a bearish signal in the past.

In fact, there have been four similar run-ups to the 180-day trendline, after which Parsley Energy shares averaged a two-week loss of 8%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. Further, PE was lower 75% of the time two weeks after the signals. One month later, the security was lower every time, averaging a loss of 8.63%. From the equity's current perch, a similar drop would put the shares around $15.60.

PE stock chart nov 6

Meanwhile, the equity's 30-day at-the-money implied volatility has dropped 13.3% to sit at 48.1% today, and the post-earnings volatility crush should make short-term options even cheaper. What's more, if Parsley Energy's Schaeffer's Volatility Index (SVI) holds steady around its two-year average of 44.9% over the next two weeks, White's modeling shows that an in-the-money PE put option could potentially return 138% on another expected retreat from the 180-day.

Should the stock once again backpedal, a flood of negative analyst attention could exacerbate PE's slide. Currently, the oil-and-gas issue boasts a whopping 24 "strong buy" recommendations, compared to one "tepid" hold and not a single "sell" rating. Likewise, the consensus 12-month price target of $24.16 represents a premium of more than 40% to Parsley Energy stock's current perch, leaving the door open for potential price-target cuts.

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