In a bid to be the first oil company to destroy Santa’s home Royal Dutch (NYSE:RDS.A) announced it will begin test drilling north of Alaska in July. A venture that Royal thinks will be a hydrocarbon bonanza comes with plenty of risk both for the company and for cute little Coca-Cola polar bear cubs. This is mostly uncharted territory for drillers of course as it is NORTH of Alaska. Have a look at this map: (Source: Google)
In fairness to Royal here are their safety plans for the Arctic.
What to do
While we are not thrilled about Arctic drilling we actually have an ulterior motive for our “stance” on Royal here: put options. If we have a belief that a stock will go down we can profit from that and limit our downside by buying put options. Repeat: I don’t actually advocate this trade (here are trades I like), I wish instead to demonstrate how to take a bearish position on a stock using put options.
So here is our “thesis”: Royal Dutch’s stock price will decrease significantly in the near/mid term for the following reasons:
- The Arctic will require a lot of capital expenditure
- Cheap shale energy will make Arctic drilling uncompetitive
- A lot of bad press (like this)