XLE - $39.75 Energy SPDR ** No Stop **
The XLE SPDR is composed of 27 energy stocks and represents about 8% of the SPX. This is the 8% that helped push the SPX to the current levels with the rise in oil over the last year. In fact the XLE has far exceeded the SPX in performance over the past year.
The XLE functions like an energy index and should rebound or bottom before oil stocks in general. Once traders start nibbling at the individual stocks in the index we will get our first glimpse of a rebound in the making.
The target was for a dip to $38 but after the weeks activity I decided to jump in early. The XLE has strike prices at every point compared to every $5 for individual stocks. This makes the cost of entry cheaper as well as the cost of insurance.
I chose a leap close to the money because there was no material price difference for the Leaps $2-3 away. Insurance is cheap and I expect this to be a very long term play.
BUY 2007 $40 LEAP Call ORJ-AN currently $5.60
Entry $39.75 (4/18)
VLO - $67.61 Valero Energy
Valero is the largest independent refiner in the U.S. and one that has made the switch to the higher profit margins of sour crude. Oil prices are generally quoted using the West Texas Light Sweet price, which closed on Friday just over $50. The sour crude sells for significantly less and will become the dominant variety as oil supplies dwindle. Sour crude has been running about $10 a bbl under sweet crude. Valero is seeing even bigger discounts from less desirable grades from Mexico and Alaska. It costs more to process the sour crude and fewer refineries can handle it. This forces the price of that sour crude lower. Finished gasoline is priced basically on the price of a barrel of sweet crude. This means the same gas Valero produces from cheaper sour crude sells for the same price as the gas produced from sweet crude. This enables Valero to capture a significant profit margin. They had a record year in 2004 due in part to their ability to process the cheaper grade of oil. The company has already said 2005 profits will be higher in 2005 even if margins narrow for others.
Company website: http://www.valero.com/About+Valero/
Valero will report earnings on April 21st and they are expected to be very strong. However, we still want to buy the insurance put just in case disaster strikes.
2007 $75 LEAP Call VHB-AO @ $14.10
Entry $68.00 (4/15)
PCO - $54.34 Premcor ** No Stop **
Premcor is a high margin refiner with upside potential from diversification. Premcor processes 800,000 barrels of oil per day with four refineries. They produce gasoline, diesel and jet fuel. The company can process 450,000 bbls per day of high sulphur heavy crude similar to the Valero story.
Premcor is highly diversified with geographic locations, different products and some markets that are not saturated from close proximity of other refiners.
Premcor is seen to have more upside than the more fully valued refiners in that it is seen to be under owned and not fully understood. They will announce earnings on April 28th.
On Friday PCO dropped -3.20 on news that they had a refinery outage of 150,000 bbls due to an equipment failure. This pushed it below support at $56 and gave us our entry.
2007 $60 LEAP Call VJE-AL @ $9.60
Insurance put: June $50.00 PCO-RJ currently $1.95