An Energy Bargain With a Covered-Call Twist
As inflation creeps back, here’s my next energy play.
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Cracks continue to develop in the market. Alphabet (GOOGL) and Tesla (TSLA) sold off this past week following quarterly results. Both companies delivered negative free cash flow for the quarter and boosted capex guidance.
Meanwhile, yield on the 30-Year Treasury has moved decisively above the 5% threshold in a move reminiscent of 2007. A rate hike is becoming increasingly likely at the September FOMC meeting.
Oil and other energy prices have spiked as the MoU with Iran is all but in tatters and daily strikes have gone on for two weeks now. U.S. strategic petroleum reserves are at their lowest levels since 1983. Gasoline is back to $4 a gallon and diesel fuel is now over $5 a gallon.
In short, things are starting to get ugly again on the inflation front.
In my column Wednesday, I highlighted two energy concerns where I have taken new positions. One of these, SLB N.V. (SLB), formerly known as Schlumberger, moved up sharply during Friday’s trading session after the company, delivered better-than-expected quarterly results before the bell.
Today’s trade idea is around one of SLB’s long-time rivals and a name that has been in my portfolio throughout 2026. That would be Halliburton (HAL), a stock I have been adding incrementally to via covered call orders.
Like Schlumberger, Halliburton should benefit from the long-term effects of the latest conflict in the Middle East. This will force many countries in the words of its brethren to “accelerate efforts to diversify supply, strengthen domestic resource development, and rebuild strategic and commercial inventories.”
A few years from now, the globe will be much less reliant on supplies transiting the Strait of Hormuz. If Saudia Arabia did not have a 1,200-mile network of pipelines and infrastructure to send seven million barrels per day of oil and refined products around this key chokepoint, the global economic picture would be even more dire.
Obviously, the war in the Middle East is negatively impacting business while the missiles are still firing across the region. Sales to the area were down 11% year-over-year in Halliburton’s latest reported quarter. That pent-up demand should be a nice tailwind when hostilities finally come to an end.
Halliburton did just win a significant multiyear contract from Saudi Aramco (ARMCO) to deliver integrated stimulation and completion services on a multibillion-dollar unconventional gas project in Saudi Arabia. Earnings and revenues will be flattish this year but should rebound nicely in 2027.
Halliburton stock moved significantly higher on the outbreak of hostilities, but has fallen back some 25% from its highs in mid-May, providing another solid entry point to act upon. And given the valuation levels of the overall market, HAL trading at just over 14x forward earnings estimates with a current dividend yield of 2.04%, is a relative bargain. I can make my potential entry point even more attractive utilizing the following covered call trade.
Option Strategy
Here is how one can initiate a position in HAL utilizing a covered call strategy. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the March $33 call strikes, fashion a covered call order with a net debit in the $29.00 to $29.40 a share range (net stock price – option premium). Liquidity is solid with the options against this equity.
This strategy provides downside protection of 13% over the trade’s duration, which includes two quarterly dividend payouts of $0.17 a share. The strategy also provides return potential of 14%, including dividends, even if the stock trades flat over its option duration.
At the time of publication, Jensen was long HAL and SLB.
