Why Traders Are Saying 'Yes' to Hess
The rally came after the company released news that it would be selling its downstream operations, including its retail, energy marketing, and energy trading divisions, along with assets in Indonesia and Thailand. The company will shift its focus to exploration and production. Additionally, Hess announced a new $4 billion share buyback program, and a dividend increase to $1 per share.
One options trader made a bet that Hess's rally would continue, and bought 1,700 May 72.5-strike calls for $2.25 when the stock was at $69.00. This is a bullish bet that will profit if Hess at above $74.75 in 73 days.
One month ago, hedge fund Elliot Management took a 4 percent stake in the company, and accused management of "poor oversight," which they said was responsible for the company's "decade of failure." Elliot Management has been trying to seat five outsiders on its board, but Hess has rejected the nominees, saying that Elliot Management is interfering with its progress of reshaping itself.
In this context, Monday's announcement shows the company trying to demonstrate that it is capable of changing itself without outside help. Still, Elliot Management has said that the changes still fall "dramatically short of what's needed," which means that the pressure on Hess is unlikely to relent anytime soon. Elliot would like to see Hess spin off its holding in North Dakota's Bakken oil field.
Hess has started to take steps in the right direction, following in the footsteps of Marathon Oil, ConocoPhillips, and Murphy Oil, which all recently split off their refining businesses to focus on exploration and production. Going forward, the success of the stock will be tied to management's ability to implement the major changes that shareholders like Elliot Management are demanding.
This trade is a way to gain upside exposure to the stock, but with a fraction of the risk and capital outlay of buying shares outright. When activists become involved in a stock, trading can get quite volatile, which is why it is smart to hold off on owning the stock right now, as the market sees how the next couple of months play out.
Disclosures: None to report.
—Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."