Is this an aberration? Are energy companies really yielding to environmental demands? Texas Utilities (TXU), the Texas energy giant, has scrapped plans to build 11 coal fired power plants and will give a 10% price cut to many of its residential customers.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_02_27_Coal_Plant_Builders.mp3
Despite glowing praise in the New York Times and other news outlets, it is less likely the private equity fund purchasing TXU has undergone a tree-hugging epiphany and more likely they’re freeing up capital to pay down some of the companies staggering debt.
Despite our jaundiced take, the company is sticking to the script saying in a press release, “Environmental Defense commends KKR and TPG for not only dropping TXU’s applications for eight proposed coal plants in Texas, but also for the many other commitments they have made to reduce air pollution and global warming emissions, including their support for a mandatory federal cap and trade program to regulate carbon emissions, doubling TXU’s expenditures on efficiency measures and their overall desire to rebuild TXU as a leader in the clean energy economy.”
In what is being reported as the largest leveraged buyout in history, TXU has agreed to be purchased for nearly $32 billion, plus the assumption of nearly $13 billion in debt. Kohlberg Kravis Roberts and Co. and Texas Pacific Group lead the private equity firms purchasing TXU.
The buyout placed a 15% premium on the stocks Friday closing price. Monday, the news shot the price up nearly 13%, closing in on the agreed $69.25 purchase price.
Mad Jim Cramer’s Take:
Cramer thinks the collapse of the plans to build 11 new coal plants will open up opportunities for TXU’s rivals McDermott (MDR) and Foster Wheeler (FWLT).
In this article we will take up Cramer’s recommendations and look at some potential cover calls with MDR and FWLT.
Potential Trades:
All of the following option trades have 54 days until expiration. McDermott Intl. is currently trading at $49.32 and Foster Wheeler is currently trading at $59.58. These trades were discovered using the powerful suite of option search tools found at PowerOptions.
| Covered Call – McDermott Intl. Inc. (MDR) $ 49.32 (54) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OPTION | Strike Info |
Opt Bid |
% Dnsd. Prot. |
% If Unch. |
% If Asgnd |
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| MDRDI | 07 APR $45.0 | $5.40 | 10.90% | 2.50% | 2.50% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Covered Call – Foster Wheeler Ltd. (FWLT) $ 59.58 (54) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OPTION | Strike Info |
Opt Bid |
% Dnsd. Prot. |
% If Unch. |
% If Asgnd |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| UFBDL | 07 APR $60.0 | $3.30 | 5.50% | 5.90% | 6.60% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The McDermott covered call trade, an in the money covered call, offers 10.9% downside protection and a potential profit of 2.5% if the stock remains unchanged or rises. The break-even price of this trade is $43.92. The net cost of this trade, per 100 options, is $4,392.00.
The Foster Wheeler covered call trade, an out of the money covered call, offers 5.5% downside protection and a potential profit of 5.9% if the stock remains unchanged. If the stock rises above the $60 option strike price, the potential profit becomes 6.6%. The break-even price of this trade is $56.28. The net cost of this trade, per 100 options, is $5,628.00.
Competitors:
Competitors for TXU include: American Electric Power Co. Inc. (AEP), Centerpoint Energy Inc. (CNP), Reliant Energy Inc. (RRI), and Boardwalk Pipeline Partners LP (BWP).
Competitors for MDR include: Global Industries Ltd. (GLBL), Gulf Island Fabrication Inc. (GIFI), Hyundai Heavy Industries Co., Ltd. (private), and National Oilwell Varco Inc. (NOV).
Competitors for FWLT include: Fluor Corporation (FLR), Halliburton Co. (HAL), Bechtel Group, Inc. (private), Fuel Tech NV (FTEK), and Jacobs Engineering Group Inc. (JEC).
For more information about how to identify and research great option trades, visit the PowerOptions website. There you will find the data you need to make quick, clear, and informed decisions. You can trade knowing you have found the best investment. Also, PowerOptions will allow you, with a few quick clicks, to quickly and accurately compare trades. PowerOptions‘ premium customer support is second to none in the industry. They can be easily contacted when you need them at their toll-free number to answer customer questions. Call them now toll free at 877-992-7971.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of the covered call investment strategy.
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[tags]New York Times, Kohlberg Kravis Roberts, Texas Pacific Group, Hyundai Heavy Industries Co., Ltd., Bechtel Group, Inc., AEP, American Electric Power Co. Inc., BWP, Boardwalk Pipeline Partners LP, CNP, CenterPoint Energy Inc., FLR, Fluor Corp., FTEK, Fuel Tech NV, FWLT, Foster Wheeler Ltd., GIFI, Gulf Island Fabrication Inc., GLBL, Global Industries Ltd., HAL, Halliburton Co., JEC, Jacobs Engineering Group Inc., MDR, McDermott Intl. Inc., NOV, National Oilwell Varco Inc., RRI, Reliant Resources Inc., TXU, Texas Utilities Co., covered call investment strategy, investment strategy, iron condor, poweroptions, stock option trading, stock options[/tags]