Oil Stock Poised for a Breakout?

04/03/2008 12:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocelynn Drake, technical analyst for Schaeffer's Investment Research, says Hess Oil is in good shape technically and unloved by Wall Street.

The shares of Hess Oil (NYSE: HES) received a nice boost Tuesday when the security was upgraded from Market Perform to Outperform at Friedman Billings Ramsey. The brokerage firm lifted its outlook based on higher oil prices and production. (Hess is an oil company involved in refining and exploration and production-Editor.)

Based on net asset values, rising production costs, and other factors, analyst Eitan Bernstein lifted his price target for Hess Oil to $107 from $97. The average target price for HES stands at $94.70, according to Thomson Financial. (The stock closed above $93 Wednesday-Editor.)

There is still room for more upgrades from Wall Street, as HES isn't exactly a favorite among the various brokerage firms. According to Zacks Investment Research, the stock has earned four Buy ratings, seven Holds, and one Sell. Any additional upgrades could help to give the shares a solid boost.

Since reaching a peak of $105.85 in December 2007, the security has trended sideways, consolidating its gains. As a result, this channel has carried the equity into key support at its ascending 20-week moving average. HES has not logged a weekly close below this trend line since August 2007.

In fact, the stock has suffered only four weekly closes below this moving average since December 2006. The security could now use this support level as a springboard to launch it on the next leg of its up trend.

Wall Street isn't the only one with doubts about the company. Short-term options speculators have loaded up on the pessimistic positions, betting on a pullback in the shares. Schaeffer's put/call open interest ratio for HES rests at 1.14, as put open interest outnumbers call open interest among April and May options.

What's more, this reading is higher than 95% of all those taken during the past week. In other words, options players have been more pessimistically aligned toward the stock just 5% of the time during the past 12 months.

Digging into the stock's open interest configuration, we find that peak April put open interest stands at the out-of-the-money 80 strike with nearly 3,000 contracts, while the call with the heaviest open interest is the 95 strike with fewer than 1,100 contracts. This lack of call open interest compared to put open interest in the April series underscores the low expectations investors have for the security.

Traders should keep a close watch on support at the stock's 20-week moving average. If the stock can bounce off this moving average and break out of its current trading range, there is ample pessimistic sentiment on the shares that could quickly turn into buying pressure as the bears jump on the equity's bandwagon.

Subscribe to the Option Advisor here.
  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS