REXX - Covered Call

Fundamentals:



.Longer term I am bullish on oil. US$ has to go down and oil has to go up.

IEA senior claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply published on Nov 9th – which is used by the British and many other governments to help guide their wider energy and climate change policies.

· This is a semi speculative trade. It is speculative because it is a small company. I am bullish on oil over the next few months although I expect short term there will be some correction from current level of $79 per barrel to around $70. It is my intent to load up on oil companies once the oil price reaches close to this level
· But I cannot resist doing a covered call for this company when I saw the high premium it offers on the SC.
· REXX us $240m market cap company based in Illinois Basin ( 72% oil, 27% Natural gas and 1% natural gas liquid)
· It has $24m in cash and $17 m long term debt which is healthy for a small size company
· REXX belongs to the group of oil companies where the initial potentials of easy production is over. There is still 60-70% of oil trapped in the ground in these “depleted” oil field. Sophisticated enhanced oil recovery techniques can be used to recover another 25% of the original oil in place.
· With oil above $70, it is now viable to recover this oil again. Cost of recovery is around $25 per barrel. It is still cheaper than the cost of tar sand oil in Canada.
· So far the market has not recognized the value of the potential of recovery using newer techniques. The potentials are placed under “reserved”. The oil is definitely in existence. It has been there for years. It is a matter of time that the reserves will be “proven”. Once proven, price of stock can double.
· REXX released its results yesterday after being delayed for 1 day. It was a lower loss and better than analysts’ expectation.
· The company is resuming its oil recovery activities as oil prices resume its upside trend. As long as oil price hold above $50 per barrel, company can deliver good potentials for the coming months.

Trade – covered call

BTO 1000 shares at 8.98
STO 2010 March 10 SC at 1.25
Cost Basis: 7.73
Maximum Return: 2.1 or 27.2 % ( 81% annualised )

PE: Let the SC expired or assigned. If expired, continue to short call against stock. The stock has a potential to double in the coming months

SE: Add a protective put if it is below 7.5 to turn it into collar.