OSX - $186.37 - Oil Service Index - Stop loss OSX $160
We were triggered on the watch list OSX naked put when the index hit $185 on Jan-4th.
Raymond James analyst, Marshal Adkins, the second best stock picker in the energy sector as rated by StarMine believes oil will reach $100 and the Philadelphia Oil Service Index (OSX) will reach $275 some time in 2007 due to a combination of supply problems, extreme weather, hurricanes or other geopolitical occurrences. Long-term options on the OSX are expensive so I am electing to sell a put instead of buy a call. I am going to put a stop loss at $160 and just under the 52-week low of $170. That is a $2500 risk with the potential for a $6500 profit. The entire key will be the price of oil. As long as oil remains over $55 per bbl the demand in the oil patch for oil well servicing will remain very strong. Once past this current weakness OPEC has said they would cut production again in February if oil slipped below $60. This is our insurance on the play. Our breakeven is $185 and our maximum profit comes with the OSX over $250 at the September expiration. We are profitable with any close over $185 at expiration.
The Philadelphia Oil Service Index is an index of 15 companies that provide drilling and production services, oil field equipment, support services and geophysical/reservoir services. This index contains companies like Halliburton, Nabors, Schlumberger, etc.
Breakdown trigger $185 hit Jan-04
Chart of the OSX
ECA - $44.86 - Encana
We were triggered on the position when Encana hit our breakdown target of $45 on Jan-3rd.
Encana (ECA) needed protection last week but there was none to be found. Encana fell -4.5% on Friday after releasing production guidance that was lower than their guidance of just five weeks ago. Encana, like other energy companies operating in Canada is seeing a sharp spike in exploration and production costs due to a shortage of equipment and personnel. Several companies have either shutdown or postponed exploration in Canada until the situation moderates. Encana announced a budget of $5.9 billion for 2007 to grow natural gas and oil sands production, a -6% decrease from 2006. The company will fund the budget entirely from internal cash flow and have $1.7 billion in free cash flow remaining. Natural gas production is expected to grow by +9% but oil production is expected to decline by -5% due to accelerating depletion of existing fields. On the plus side they are scheduled to finalize an agreement on Jan-2nd with Conoco Phillips to create an integrated heavy oil business, which will generate immediate additional cash flow for Encana. Encana's average daily production from the partnership is expected to grow about +44% in 2007 to an additional +31,000 bpd. They expect additional pre tax cash flow in the range of $550-$650 million net to Encana in 2007 from the partnership. Encana had planned to repurchase 10% of outstanding shares in 2006 and they have completed 9.4% to date, 81 million shares, and expect to complete the buyback before year end. In 2007 they plan on purchasing another 3-5% or 24-40 million shares out of free cash flow. They are also planning on DOUBLING the dividend to 80 cents per share in 2007. Encana has hedged 1.5 Bcfpd of their 1.75 Bcfpd of 2007 production at $8.49 per Mcf with put options on the rest at $6 per Mcf. Personally I think Encana is doing exactly what they should do and that is increase profitability while targeting their budget dollars where it will do the most good rather than just throw money at everything all at once. What many people don't understand is that those reserves in the ground will become more valuable as each day passes. Encana can afford to wait until the economics make sense to produce them. Why pay high prices today to extract them for $8 per Mcf when they can wait a year or two and get $12 or higher for the same gas?
The sharp sell off came from a downgrade to a SELL by Citigroup citing concerns over the company's portfolio and the reduction in guidance. The selling accelerated by a triple digit loss, -156, in the Canadian markets with energy, materials, metals and financials all taking severe hits. Petro Canada (PCZ) dropped -5% or -$2.11. I am not recommending Encana as a play this weekend because we don't know how long this weakness will last. Chesapeake was hit with the same kind of selling the prior week and continued lower on the fall in natural gas prices this week. Encana, currently $50 is too expensive for the at-the-money $50 LEAP and too far away from the $60 LEAP. It has strong support in the $44-$46 range and I would rather wait to see if we can buy it cheaper.
EnCana Corporation is a natural gas producer in North America. It is a holder of natural gas and oil resource lands onshore North America. The Company is also engaged in select exploration and production activities internationally. EnCana operates under two main divisions: Upstream and Midstream & Marketing. The Upstream division manages EnCana's exploration for, and development and production of, natural gas, crude oil and natural gas liquids (NGLs) and other related activities. EnCana's Midstream & Marketing division encompasses the Corporation's market optimization activities and remaining midstream assets. EnCana is in the process of divesting the majority of its remaining midstream assets, including its natural gas storage business and the Entrega Pipeline.
Breakdown target: $45 hit Jan-3rd
Position: 2009 $50 LEAP Call ZBM-AJ @ $6.60