Summary
- Our article last Friday on an array of Oil & Gas producers picked Chesapeake Energy Corporation as the best-odds, biggest price-gain, soonest, least-risk stock of the bunch. But we overlooked PBF Energy Inc.
- Serious error? No, just now a recognition of an even better added portfolio-capital-building opportunity. Better than many stocks even outside of Oil & Gas.
- We advocate Active, rather than Passive, Investment Portfolio Management strategy, designed to build capital sooner, more likely, at less risk exposure.
- Strategy advocating decisions are based on prior actual market actions following prior price-range forecasts by the Market-Making professional community.
- Using a decades-proven strategy where one of several critical factors employed is attention to the resource of TIME. As explored below in PBF Energy Inc. vs. Chesapeake Energy.
This article’s primary focus is on PBF Energy Inc. ( PBF ).
Investment Thesis
We look to the hedging actions of Market-Makers to protect their at-risk capital endangerment required by the automation achieved by markets in serving a continuing flow of individual investor small trades while also accomplishing irregular huge-value “institutional” transactions.
The pricing and structure of such hedges reveal the coming-price expectations of both the MM protection-buyers and that of the MM industry protection-sellers.
Our comparison of Chesapeake Energy Corporation ( CHK ) with PBF Energy Inc. is prompted by their currently-attractive stock pricings coupled by large followings of Seeking Alpha readers.
Descriptions of the Subject Companies’ Activities
“ Chesapeake Energy Corporation, an independent exploration and production company, engages in the acquisition, exploration, and development of properties for the production of oil, natural gas, and natural gas liquids from underground reservoirs in the United States. The company holds interests in natural gas resource plays in the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana; and the liquids-rich resource play in the Eagle Ford Shale in South Texas. As of December 31, 2021, it owned interests in approximately 8,200 gross productive wells, including 6,500 wells with working interest and 1,700 wells with an overriding or royalty interest; and had estimated proved reserves of 661 million barrels of oil equivalent. The company was founded in 1989 and is headquartered in Oklahoma City, Oklahoma.”
“PBF Energy Inc., together with its subsidiaries, engages in refining and supplying petroleum products. The company operates in two segments, Refining and Logistics. The company sells its products in Northeast, Midwest, Gulf Coast, and West Coast of the United States, as well as in other regions of the United States, Canada, and Mexico. It also offers various rail, truck, and marine terminaling services, as well as pipeline transportation and storage services. As of December 31, 2021, the company owned and operated six oil refineries and related assets. PBF Energy Inc. was founded in 2008 and is based in Parsippany, New Jersey.”
Source: Yahoo Finance.
Yahoo Finance Yahoo Finance
These growth estimates have been made by and are collected from Wall Street analysts to suggest what conventional methodology currently produces. Here there was ample analyst coverage. The typical variations across forecast horizons of different time periods illustrate the difficulty of making value comparisons when the forecast horizon is not clearly defined.
A principal difference between Active and Passive Investment Portfolio management strategies is in how time is used in dealing with the trade-offs between Risk and Reward.
The traditional, widely used and advocated passive strategy is “Buy & Hold” where multi-year (even decades) forecast time horizons are encouraged. This worked passably-well in the 20 th century when the USA ran the competitive rules of the world following its victory in World War Two.
But has not proven so beneficial in this 21 st century as technological advances have sped up rates of change in many aspects of Global competition. Retirements built on buys of IBM, GE, PRD, EK, GM and several others won risks rather than rewards when held, not actively sold for replacement with better competitive choices. Those lost dollars were accompanied by lost years which could never be re-earned.
Risk~Reward Comparisons of Portfolio Investment Candidates
Figure 1
blockdesk.com
(Used with prior permission.)
The trade-offs here are between near-term upside price gains (green horizontal scale) seen worth protecting against by Market-makers with short positions in each of the stocks, and the prior actual price draw-downs experienced during holdings of those stocks (red vertical scale). Both scales are of percent change from zero to 25%. More favorable relationships are located down and to the right.
The intersection of those coordinates by the numbered positions is identified by the stock symbols in the blue field to the right.
The dotted diagonal line marks the points of equal upside price change forecasts derived from Market-Maker [MM] hedging actions and the actual worst-case price draw-downs from positions that could have been taken following prior MM forecasts like today's.
Our principal interests are in CHK at location [4] and PBF at [12]. A "market index" norm of reward~risk trade-offs is offered by SPDR S&P500 index ETF at [6] in unusually poor competitive market circumstances.
Those forecasts are implied by the self-protective behaviors of MMs who must usually put firm capital at temporary risk to balance buyer and seller interests in helping big-money portfolio managers make volume adjustments to multi-billion-dollar portfolios. The protective actions taken with real-money bets further define daily the extent of likely expected price changes for thousands of stocks and ETFs.
This map is a good starting point, but it can only cover some of the investment characteristics that often should influence an investor's choice of where to put his/her capital to work. The table in Figure 2 covers the above considerations and several others.
Comparing Alternative Investments
Figure 2
(Used with permission.)
Column headers for Figure 2 define elements for each row stock whose symbol appears at the left in column [A]. The elements are derived or calculated separately for each stock, based on the specifics of its situation and current-day MM price-range forecasts. Data in red numerals are negative, usually undesirable to “long” holding positions. Table cells with pink background “fills” contrast CHK attributes of significance with those of PBF immediately above. Yellow fills are of data for PBF, the stock of principal interest, and of all issues at the ranking column, [R].
Readers familiar with our analysis methods may wish to skip to the next section viewing price range forecast trends for CHK and for PBF.
Figure 2’s purpose is to attempt universally comparable answers, stock by stock, of: a) How BIG the price gain payoff may be; b) how LIKELY the payoff will be a profitable experience; c) how SOON it may happen; and d) what price draw-down RISK may be encountered during its holding period.
The price-range forecast limits of columns [B] and [C] get defined by MM hedging actions taken to protect firm capital required to be put at risk of price changes from volume trade orders placed by big-$ "institutional" clients.
[E] measures potential upside risks for MM short positions created to fill such orders, and reward potentials for the buy-side positions so created. Prior forecasts like the present provide a history of relevant price draw-down risks for buyers. The most severe ones actually encountered are in [F], during holding periods in effort to reach [E] gains. Those are where buyers are most likely to accept losses.
[H] tells what proportion of the [L] sample of prior like forecasts have earned gains by either having price reach its [B] target or be above its [D] entry cost at the end of a 3-month max-patience holding period limit. [ I ] gives the net gains-losses of those [L] experiences and [N] suggests how credible [E] may be compared to [ I ].
Further Reward~Risk trade-offs involve using the [H] odds for gains with the 100 - H loss odds as weights for N-conditioned [E] and for [F], for a combined-return score [Q]. The typical position holding period [J] on [Q] provides a figure of merit [ fom ] ranking measure [R] useful in portfolio position preferencing. Figure 2 is row-ranked on [R] among candidate securities, with PBF yellow-row identified.
The key factor of attraction in favor of PBF in comparison with CHK is column [J] which tells the average holding periods (in market days) of each stock identified in the past 5 years when prior balances between [E] and [F] were like what they are today. The difference of PBF’s 23 market days to CHK’s 47 is only half as long a capital commitment at risk and unavailable for productive investment elsewhere. (btw-- In market days a calendar month is only 21 days long.)
For whatever payoff is involved in any position, that kind of time difference effectively doubles the productive power of the capital committed. The [I] of PBF at +14% becomes like +28% earned on capital in comparison to CHK’s +20% payoff realization. The impact of this operational leverage is magnified by “compounding” as the frequency of its re-commitment is multiplied. This is suggested in Figure 2 as CAGR annual rates of reward with PBF at +324% and CHK at +160%.
That effect becomes apparent in [R] when both time and profitability odds [H] act to effect comparisons for all the stocks in Figure 2. Now PBF becomes the most-favored capital-building candidate for portfolio involvement.
Along with the candidate-specific stocks these selection considerations are provided for the averages of over 3000 stocks for which MM price-range forecasts are available today, and 20 of the best-ranked (by fom ) of those forecasts, as well as the forecast for S&P 500 Index ETF ( SPY ) as an equity market proxy.
Recent Trends in MM Price-Range Forecasts for CHK, PBF
Figure 3
(Used with permission.)
This picture is not a “technical chart” of past prices for CHK. Instead, it is the past 6 months of daily price range forecasts of market actions yet to come in the next few months. The only past information there is the closing stock price on the day of each forecast.
That data splits the price range’s opposite forecasts into upside and downside prospects. Their trends over time provide additional insights into coming potentials, and helps keep perspective on what may be coming.
The small picture at the bottom of Figure 3 is a frequency distribution of the Range Index’s appearance daily during the past 5 years of daily forecasts. The Range Index [RI] tells how much the downside of the forecast range occupies of that percentage of the entire range each day, and its frequency suggests what may seem “normal” for that stock, in the expectations of its evaluators’ eyes.
Here the present level is near its least frequent, lowest-cost presence, encouraging the acceptance that we are looking at a realistic evaluation for CHK. With nearly all past RIs above than below the present RI there is more room for an even more positive outlook.
Figure 4
(Used with permission.)
Figure 4 helps make PBF’s price volatility and wider price range (Figure 2, column [S] of 46% vs. 23%) a recognized part of the price-forecasting analysis. They are incorporated in the [R] fom measures in the effort to make realistic comparisons of what to expect between each of these investment alternatives.
Conclusion
Among these alternative investments explicitly compared, PBF Energy Inc. appears to be a logical buy preference now for investors seeking near-term capital gains.
The attractiveness of CHK remains un-sullied in comparison to all the other candidates.
For further details see:
PBF Energy: An Even Better Capital Gain Prospect Than Chesapeake