Option Investor

Weekly Newsletter, Saturday, 07/09/2005

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

Dodging Dennis

Are we having fun yet? The daily gyrations of the oil sector are giving us new highs followed by sharp declines on almost a weekly basis. The number of analysts calling for a return to $40 oil are almost equal now with those thinking $70 oil is inevitable.

The game this week is called dodging Dennis. If Dennis somehow skillfully manages to miss the oil fields in the upper gulf and slam Florida instead then oil prices are ripe for a decline. The speculation factor is enormous and a miss here could cause a blow off in prices. I continue to read that as a buying opportunity like I discussed last week.

Should Dennis target the Louisiana and Mississippi coasts and make landfall as a category five hurricane then $70 oil is entirely possible. If you remember last year hurricane Ivan slammed Florida and missed most of the Gulf oil platforms but still caused a 44 million barrel loss in production. Oil prices skyrocketed and fortunes were made. The latest track I have as of Friday night is for a northwest track right towards Louisiana. This would be too coincidental to even imagine given the Fox made for TV movie "Oil Storm", which hit cable several weeks ago.

This makes this week's commentary very simple. Ride the profits or buy the dip. That is the only two options. You should also read my market wrap in the Option Investor Newsletter where I discuss the remarkable turn of events in the Saudi oceans of oil front.

XOM must have read this article last week where I said I was going to drop it for lack of movement if something did not happen soon. XOM spiked nearly $3 on Tuesday to take itself off the endangered species list.

Everybody is transfixed on the price of August crude and $60 while the more important December contract continued to set new highs at $64 on Friday.

December Crude Chart - Weekly

Chevron can't get a break. Just when the political tide was about to wash away any chances for a successful CNOOC bid the Chinese company started talking about raising the price. What little shareholder rebellion had already started began to mushroom into a serious problem for Chevron. I had expected Chevron to raise the bid just before the vote but now it appears a bidding war may develop. Chevron should eventually be the winner but the price could be steep.

The oil spike to new highs triggered two new watch list plays at the breakout trigger. That is not where we really want to join the party but waiting for a real pullback can be lonely.

I do eat my own cooking so everyone can rest assured I may have positions in any stock mentioned at any time. I am in the same boat you are. I hate it when analysts on CNBC rave about a stock but then claim no ownership. If it is such a good deal why don't they own it?

Changes in Portfolio

New Plays


Dropped Plays


New Watch List Plays Triggered
EOG $60.42 EOG Resources
ECA $43.39 Encana Corp.

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

EOG - $60.42 EOG Resources ** No stop **

EOG blasted out of the gate on Tuesday and triggered our breakout entry at $59. It continued higher with a new all time high on Friday at $61.39 before easing into the close on profit taking. I am going to suggest an insurance put but only if EOG trades at $55.50. There is strong support at $56.

Company Info

EOG is engaged in the exploration, development, production, and marketing of natural gas and crude oil, primarily in major producing basins in the U.S., as well as in Canada, Trinidad, the United Kingdom North Sea and, from time to time, select other international areas. At December 31, 2004, EOG's total estimated net proved reserves were 5,647 billion cubic feet equivalent (Bcfe), of which 5,047 billion cubic feet (Bcf) were natural gas reserves and 100 million barrels (MMBbl), or 600 Bcfe, were crude oil, condensate and natural gas liquids reserves. At such date, approximately 50% of EOG's reserves (on a natural gas equivalent basis) were located in the United States, 25% in Trinidad, 24% in Canada and 1% in the United Kingdom North Sea. EOG's operations are all natural gas and crude oil exploration and production related. (source EOG)

Joe Allman, natural gas analyst at RBC Capital Markets said EOG and companies like them generate a 30% to 50% rate of return on assets. Sometimes even 100% on certain projects. EOG grew +30% in 2004.

2007 $60.00 LEAP Call OAC-AL @ $9.50

Insurance put: AUG $55 PUT EOG-TK @ $1.15 - Enter only if
EOG trades at $55.50.

Entry $59.00 (7/05)

ECA $43.50 Encana Corp ** Stop Loss $38.00 **

Like EOG the Encana rocket too off on Tuesday and never looked back touching a new all time high on Friday at $44. I am not using an insurance put on ECA due to the low price on the call option.

Company Description:

ECA owns the largest independent gas storage network but that is not the primary focus of its business. ECA has been divesting itself of non-core assets in an effort to focus on its main business. It will divest itself of the gas network either through a competitive bid or IPO by early 2006. This represents a major cash generation point for ECA and they will use the cash to acquire more reserves. This is the kind of story we want in our LEAPS portfolio. Unfortunately ECA does not have leaps and we will have to use the Jan-06 calls. That should get us through the Fall demand cycle and allow us to take profits ahead of the spring dip.

Company info:

With an enterprise value of approximately US$44 billion, EnCana is one of North America's leading natural gas producers, is among the largest holders of gas and oil resource lands onshore North America and is a technical and cost leader in the in-situ recovery of oilsands bitumen. EnCana delivers predictable, reliable, profitable growth from its portfolio of long-life resource plays situated in Canada and the United States. Contained in unconventional reservoirs, resource plays are large contiguous accumulations of hydrocarbons, located in thick or areally extensive deposits, that typically have low geological and commercial development risk, low average decline rates and very long producing lives. The application of technology to unlock the huge resource potential of these plays typically results in continuous increases in production and reserves and decreases in costs over multiple decades of resource play life. (source Encana)

Encana does not have leaps so we are going to use the January-06 calls. The demand cycle runs through November giving us plenty of time to rotate out and reenter on the spring demand dip.

JAN 2006 $45 CALL ECA-AI @ $2.70

Entry $42 (7/05)


Play Updates

Existing Plays

MRO $56.12 Marathon Oil ** No Stop **

MRO made another new high on Wednesday at $57.50 and shows no signs of serious profit taking. The Thursday dip was bought and there was very little pullback at Friday's close.

Takeover speculation:

Only one company will end up with Unocal and that leaves the other hungry and looking for other targets. XOM also has nearly $30 billion in cash and needing to make an acquisition. Marathon is one of the largest remaining independents and a likely target due to its diverse operations. MRO has several large properties in Asia and within China's sphere of influence.

Company Info:

Marathon Oil Corporation (Marathon) is engaged in worldwide exploration and production of crude oil and natural gas. It operates through three segments: exploration and production (E&P), which explores for and produces crude oil and natural gas; refining, marketing and transportation (RM&T), which refines, markets and transports crude oil and petroleum products, and integrated gas (IG), which markets and transports natural gas and products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol. The Company's principal operating subsidiaries are Marathon Oil Company and Marathon Ashland Petroleum LLC (MAP). During the year ended December 31, 2004, the Company's worldwide liquid hydrocarbon production averaged 170,000 barrels per day (bpd) and sales of natural gas production, including gas acquired for injection and subsequent resale, averaged 999 million cubic feet per day (mmcfd).

On Thursday (June 30th) MRO completed acquisition of $3.7B in properties from Ashland Inc (ASH). Asland owned 38% in Marathon Ashland Petroleum (MAP) and two other businesses. ASH fell -$11.72 on the deal which represented the payment from MRO to Ashland and Ashland shareholders of stock and cash. Ashland applied $2.5B of the proceeds to payoff debt.

Current entry:

2007 $55 LEAP Call VXM-AK @ $7.90

Put insurance
Buy August $50 PUT MRO-TJ, currently 85 cents, ONLY
if MRO trades at $52.50. I do not want to buy the insurance until it is needed.

Entry $54.74 (6/27)

CHK - $25.11 Chesapeake Energy ** Stop $22.00 **

CHK broke out to another new high at $26 on Tuesday and never caved in to profit taking. The company announced it had paid off over $500 million in notes as of last Wednesday. This provided the spike to a new high. Oil profits are a wonderful thing and are allowing many companies to eliminate debt.

CHK is our low dollar entry into the energy market and with a new closing high it appears ready to streak higher. With natural gas prices continuing to rise it means money in the bank for CHK. Much of the electricity generated over the summer for cooling the south will be produced with CHK gas.

Company Info

Chesapeake Energy Corporation is the third largest independent producer of natural gas in the U.S. Headquartered in Oklahoma City, the company's operations are focused on exploratory and developmental drilling and producing property acquisitions in the Mid-Continent, Permian Basin, South Texas, Texas Gulf Coast and Ark-La-Tex (including the Barnett Shale) regions of the United States.

Chesapeake Energy derives 90% of its revenues from natural gas. They are very aggressive about replacing reserves and will capitalize on the continued increase in prices. Gas prices have soared in the U.S. due to the addition and conversion of electric plants to the cleaner fuel. Several times over the last winter the gas levels supplying those plants dipped to dangerous levels. The demand is increasing faster than supply and the production peak is now estimated to be 2007. Prices are going to continue higher, much higher and Chesapeake is positioned to benefit.

This summer much of northern California will get its electricity from gas due to a drought in the northwestern hydro-electric grid. Generation levels will be below normal and natural gas is the fall back fuel.

2007 $20 LEAP Call VEC-AD @ $4.00

Insurance put: July $17.50 CHK-SW @ 90 cents

Entry $19.00 (05/13)

APC - $88.44 Anadarko Petroleum ** Stop $79.00 **

APC was one of the best performers last week with a new high posted on Friday at $90 and better than a +$5 gain for the week. This was despite a downgrade by Deutsche Bank to sell on the APC debt. APC shut in production on the Marco Polo platform on Friday and evacuated 36 workers ahead of Dennis. Marco Polo produces 16,000 bpd.

Company Info

Anadarko Petroleum Corporation's mission is to deliver a competitive and sustainable rate of return to shareholders by developing, acquiring and exploring for oil and gas resources vital to the world's health and welfare. As of year-end 2004, the company had 2.37 billion barrels of oil equivalent of proved reserves, making it one of the world's largest independent exploration and production companies. Anadarko's operational focus in North America extends from the deepwater Gulf of Mexico, up through Texas, Louisiana, the Mid-Continent, western U.S. and Canadian Rockies and onto the North Slope of Alaska. Anadarko also has significant production in Algeria, Venezuela and Qatar, and exploration or production positions in several other countries.

Anadarko has just completed a restructuring program and raised estimates on May-2nd. They expect output to rise +5% in 2005 and costs to be below industry trends. S&P is estimating $8.55 for earnings in 2005 and a price target of $85.

APC signed a new pipeline deal in late June to accommodate 750 mcfpd from its Bear Head terminal currently under construction. APC announced last week it is on track to meet its annual production growth target of +5% to +9% per year through 2009. APC said it had identified 2.1 boe of additional resource potential. Half of the new resources are already on APC properties under development.

2007 $75 LEAP Call OCP-AO @ $10.10

Insurance Put
June $65 APC-RM @ $0.85, expired worthless

Entry $70.50 (5/04)

COP - $60.21 Conoco Phillips ** Stop $53.00 **

COP has been trading almost penny for penny to the price of oil. On Wednesday oil hit $62 as did COP. On Friday oil dropped to just under $60 and COP settled at $60.

Company Info

COP reported earnings of $4.10 that rose +80% over the year-ago period. Analysts had only expected $3.29. They said unplanned down time at refineries kept them from doing even better. They also said they were going to spend $3 billion between 2006-2010 to increase their ability to handle the cheaper sour crude.

COP has been aggressively purchasing assets around the globe and especially in Russia. Putin has said repeatedly that COP assets and agreements are not at risk and that COP is a partner with Russia in producing their oil.

On July 1st COP and Russia's Lukoil finalized a joint venture to develop energy fields in Artic Russia as part of a broader strategic alliance. COP has very good contacts in Russia and has been mentioned several times by Putin as a strategic partner. COP owns 12.6% of LUKOIL and has been approved to buy up to 20%.

2:1 Split on June 2nd gave us 2 of each.

(2) 2007 $50 LEAP Call OJP-AJ @ $7.88

Insurance put:
(2) June $50 COP-RJ @ $1.08, expired worthless

Entry (4/18 $49.00)

OXY - $81.00 Occidental Petroleum ** Stop $73.00 **

OXY made a new high at $82.50 on Wednesday and dipped on Thursday with the terrorist attack. Friday saw it return to $82 with very little weakness into the close.

Earnings are scheduled for July-22nd

Company Info

OXY declared a quarterly dividend of 31 cents in early May and appointed former U.S. Secretary of Energy, Spencer Abraham, to their board. Earnings in 2004 were a record $2.6B and as the CEO pointed out on Friday it was more than a billion more than they earned in 2000. Not a bad growth record. Q1 earnings were up +74% over Q1-2004.

OXY reported earnings on April 26th of $2.16 per share compared to estimates of $1.99. OXY said it had higher than expected production, strong pricing and record chemical sales. Still it failed to produce the blowout earnings of COP due to hedging.

OXY reported an agreement with Oman to invest $2B in the Mukhaizna oil field and upgrade production from 10,000 bbls per day to 150,000 per day. I would happily invest $2B once to get $3B return per year. Good job!

OXY is the 239th largest company in the world and an oil giant.
Occidental's principal activities are to explore for, develop, produce and market crude oil and natural gas. The operations are carried out through two segments: Oil and Gas and Chemical. The Oil and Gas segment develops, explores for, produces and markets crude oil and natural gas. The Chemical segment manufactures and markets basic chemicals. The company operates primarily in the United States, Qatar, Yemen, Colombia, Oman, Pakistan, Canada, Russia, Ecuador and the United Arab Emirates.

2007 $70 LEAP Call VXY-AN @ $10.00

Insurance Put:
June $65.00 OXY-RM @ $1.40

Entry $68.00 (4/19)

XOM - $59.42 Exxon Mobil ** No Stop **

XOM finally got a life with a +$3 bounce to $60.73. Unfortunately it slipped back to nearly $58 before record high oil prices took hold. At least the short-term trend is finally up and with earnings ahead XOM should report record results and possibly a home for its $30 billion in cash. XOM announced that part of that cash would be spent for two double-hulled tankers currently in use by BP. BP and COP are building $2 billion worth of new tankers and are retiring their older vessels. XOM still has four single hulled tankers working the route between Valdez and the west coast refineries. They must be retired by law by 2015 or sooner depending on the type.

Company Info

XOM reported a +44% jump in earnings in Q1 but missed analyst estimates. After items XOM earned $1.15 and analysts were expecting $1.20. XOM hedged to capture high oil prices and prices continued to move higher. They also saw a drop in production as mature fields continued to decline. XOM said it will spend $15-$16 billion in capex in 2005 in an effort to discover/produce more oil. They also said they were going to buy back $3.5 billion in stock in the current quarter. Their record profits of $7.86 billion for the quarter give them plenty of cash for anything they desire. Maybe a couple acquisitions would help that sagging production.

XOM has larger reserves and more cash than any other oil company. They have to find something to do with their $30 billion and it will either be returned to the shareholders or used to buy more reserves.

XOM is the largest oil company in the world and while it has the largest reserves it also has the highest overhead cost.

2007 $60 LEAP Call ODU-AL @ $6.70

Insurance Put:
July $55 Put XOM-SK @ $1.20

Entry $58.00 (4/19)

XLE - $46.23 Energy SPDR ** Stop $42.50 **

The XLE finally broke out to a new high on the strength of the spike in XOM, its biggest component. The $47.30 high failed on the terror dip but the XLE did maintain an upward trend.

Company Info

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.

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.

2007 $40 LEAP Call ORJ-AN @ $5.60

Insurance put:
Buy June $39 Put XLE-RM @ $1.35, expired worthless

Entry $39.75 (4/18)

VLO - $84.44 Valero Energy ** Stop $75.00 **

Outstanding is the only word to describe the gains in VLO. This refiner just won't die and continues to make new highs. VLO is the strongest performer on the S&P-500 year to date.

VLO remains in the best position to profit given their ability to refine the heavy sour crude currently available in the market. As prices rise on distillates VLO will continue to gain margin against other refiners.

Company Info

VLO has been weak since the announcement it was buying Premcor. This should be a very good deal for them and the combined companies will control a large portion of the refinery business. Think of it as a buying opportunity.

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. 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 reported earnings on April 21st of $1.92 that more than doubled the prior year of $.91 cents. VLO fell slightly in trading because analysts had estimates of $1.97. Shucks, they missed estimates by a nickel but more than doubled last year. Let's sell them. Duh! They rebounded as eager traders rushed into the gap and they closed at $74.86 on Friday, more than $5 above the earnings dip at $69.55.

Valero announced on June-30th it was going to retire the Diamond Shamrock brand and put up Valero signs at its 2,900 Shamrock stations. This will give the Valero brand and image a huge boost since few if any consumers know Valero owned the chain. Valero has gone from a single refinery with 170,000 bbls of output to 14 refineries and 2.5 mbpd of output and 4,700 retail stores over just a few short years. It will become the largest refiner in the nation when it completes its acquisition of Premcor later this year.

2007 $75 LEAP Call VHB-AO @ $14.10

Insurance put:
June $60.00 VLO-RL @ $2.05, expired worthless

Entry $68.00 (4/15)

CVX - $57.36 Chevron Texaco ** No stop **

Chevron continues to languish while we wait for the August 10th vote and any potential new bids. No excitement here but a Unocal victory should give them a significant boost.


CVX rebounded slightly on July 1st after the House voted 333 to 92 to prohibit the sale of Unocal to CNOOC. This is not a binding vote as it only accomplished adding an amendment to a spending bill but it does hurt the chances of CNOOC for getting the deal done. Traders are afraid Chevron will be forced to bid higher and that is causing weakness in the stock.

Chevron could easily bid higher given the paltry $11 per bbl of proven reserves. It is only good business to wait until it feels prudent to do so. I am betting Chevron will sweeten its offer just before the Unocal vote on August 10th. This will hinder CNOOC from raising its bid quickly enough to matter.

Company Info

Chevron spiked to $54.50 on May 6th on news of an oil find in Utah by Wolverine where Chevron has extensive leases. It was also announced that Chevron had won a portion of the 15 blocs up for bid in Libya.

Chevron posted earnings that disappointed the street due to several unplanned outages at various refineries. CVX saw refining profits fall -36% but the condition is expected to be temporary. The stock is also weak due to uncertainties about the Unocal acquisition.

Chevron announced in early April that it was purchasing Unocal for $18 billion in cash and stock and both CVX and UCL dropped sharply. This was not a surprise for Chevron to make the purchase but the timing caught everyone off guard.

In theory everyone was waiting for oil to drop in Q2 and allow the next round of acquisitions to be made at a more reasonable value. Instead Chevron did a take under on Unocal by offering less than the current share price. It is a good deal if you can pull it off.

Chevron beat out several other firms including China's CNOOC who had been a hot pursuer but had to drop out at the last minute after it could not complete the final terms in time. CNOOC has since offered $67 a share for Unocal but the deal is expected to fail due to a lack of approvals.

Chevron will likely sell off about $3 billion in non-core assets once the deal is consummated. The main asset Chevron wanted was the 1.7 billion barrels of proven reserves and tens of thousands of acres of additional leases still to be explored. Chevrons current average cost of produced crude is $27. After selling the non-core assets they will end up with the Unocal proven reserves at about $9 a bbl plus billions in other assets like gas fields, power plants and joint ventures around the world. This was a very sweet deal for Chevron.

It may take some time for the cloud to lift from the stock price but the next jump in oil prices should do wonders. Chevron dropped back to its 100-day average at $55.50 on the news and this should be very strong support. There is not expected to be any hurdles to getting the deal approved as most of the assets are either out of the country or will be divested as part of the deal.

The Unocal leap was actually triggered when the price hit $59 on the announcement. With UCL trading at $58.74 at Friday's close there would not have been any material movement. Because any Unocal leap will eventually end up being a Chevron leap I am electing to use the previously recommended Chevron leap as the actual position. I am using Friday's close for the entry price.

2007 $60.00 LEAP Call VCH-AL @ $5.60
2007 $57.50 LEAP Call VCH-AY @ $6.70
UCL 2007 $60 LEAP Call VCL-AL @$6.60

We held both CVX and UCL leaps when the buyout was announced. I dropped the UCL listing as a duplicate to focus on the eventual merged company. Anybody holding the UCL leaps at the time should still be in them and ready to benefit from a higher UCL bid by CNOOC.

Insurance Put:
June $55 Put CVX-RK @ $1.65, expired worthless

New Put 6/19
Sept $55 Put CVX-UK @ 0.95

Entry $56.67 (04/07)


Leaps Trader Watch List

If Dennis misses the oil belt in the Gulf there is a good chance we could see a sizeable dip in oil prices and oil stocks. That means I need to add some new candidates since two of our three watch list stocks were triggered last week, EOG and ECA.

I am leaving BP on the list but raising the breakdown entry point. BP spiked +$4 last week on news they were selling two older tankers to XOM. If Dennis misses us we might get an entry on the back draft. Remember that we missed the BP entry by -25 cents the prior week at $62.25. Today it is $66.30. Dang it!

I was hoping for a pullback in AHC after last Friday's spike but instead it soared another $5. Still going to pass because option prices are out of sight. I know, you get what you pay for but I want to be cheap this close to Q4. The same goes for SUN, which has failed to slow down its advance.

I keep mentioning Talisman as they surge higher but they have no leaps. I am going to bite the bullet this week and add them as a candidate on the hopes of a dip and a cheap entry with the Jan-06 options. I plan on being out of all our oil positions before December so a cheap call may be worth it.

When I added EOG last week I mentioned that UPL was the slower mover of the two. UPL jumped +10% this week. UPL is definitely a candidate for a dip this week.

Stocks I think everyone needs to keep on their personal watch list including those listed above.

DO - Diamond Offshore
RIG - Transocean
DVN - Devon Energy
SWN - Southwestern Energy
XTO - XTO Energy
APA - Apache
COG - Cabot
KWK - Quicksilver
RRC - Range Resource Corp
SUN - Sunoco
AHC - Amerada Hess

Dropped Entries


New Watch List Entries
Ultra Petroleum
KWK $45.00 Quicksilver
RRC $29.00 Range Resources
TLM $41.00 Talisman Energy
APA $69.00 Apache

Current Watch List

UPL - $33.80 Ultra Petroleum

** Breakdown Target $31.00 **
** Breakout Target - none **

Ultra Petroleum Corp. is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. During the year ended December 31, 2004, it owns interests in approximately 166,974 gross (92,997 net) acres in Wyoming covering approximately 260 square miles. The Company owns working interests in approximately 241 gross productive wells in this area and is operator of 41.5% of the 241 gross wells. Through Pendaries Petroleum Ltd., it is active in oil and gas exploration and development in Bohai Bay, China. The Company also owns interests in 15,518 gross (14,652 net) acres in Pennsylvania, as well as interest in approximately 720 gross (320 net) acres and interests in three productive wells in Texas.

Breakdown Target
BUY DEC $32.50 Call UPL-LZ currently $4.30


BP - $66.30 BP, PLC

** Breakdown Target $63.50 **

BP p.l.c. produces & markets crude oil & petroleum products worldwide. It is involved in exploration and field development throughout the world and is engaged in the manufacture and sale of petroleum-based chemical products. For the 3 months ended 3/31/05, revenues rose 15% to $81.01B. Net income rose 34% to $6.60B. Results reflect increased sales from all the business segments, higher marketing & refining margins and inventory gains

Breakdown Target
BUY 2007 $65 LEAP CALL WAO-AM currently $8.80


TLM $41.50 Talisman Energy

** Breakout target - None **
** Breakdown target $38.50 **

Company info:

Talisman Energy Inc. (Talisman) is an independent international upstream oil and gas company whose main business activities include exploration, development, production, transporting and marketing of crude oil, natural gas and natural gas liquids. The Company's operations, during the year ended December 31, 2004, were conducted principally in four geographic segments: North America, the North Sea, Southeast Asia and Algeria. The Trinidad Angostura project began production in January 2005. Exploration is being advanced in other areas outside the principal geographic segments, including Alaska, Colombia, Qatar and Peru. During 2004, total production averaged 438 million barrels of oil equivalent per day (mboe/d) and the Company exited the year producing 452 mboe/d in December. In 2004, the Company drilled 641 successful wells.

Breakdown Target
BUY Jan 2006 $40 CALL TLM-AH currently $5.30


KWK $44.89 Quicksilver

** Breakout target $46.75 **
** Breakdown target $42.50 **

Company info:

Quicksilver Resources Inc. (Quicksilver) is an independent oil and gas company engaged in the exploration, acquisition, development, production and sale of natural gas, crude oil and natural gas liquids (NGLs) primarily from unconventional reservoirs, such as fractured shales, coal beds and tight sands. Quicksilver's operations are concentrated in Michigan, Indiana/Kentucky, Texas, the Rocky Mountains, and the Canadian province of Alberta. At December 31, 2004, Quicksilver had estimated proved reserves of 968 billions of cubic feet of natural gas equivalent (Bcfe). Approximately 92% of its reserves were natural gas, 77% were classified as proved developed. Approximately 62% of the estimated proved reserves are located in Michigan.

Breakdown Target
BUY Dec 2005 $45 CALL KWK-LI currently $5.10

Breakout Target
BUY Dec 2005 $47.50 CALL KWK-LW currently $3.90


RRC - $29.42 - Range Resources

** Breakout target $30.50 **
** Breakdown target $27.50 **

Company info:

Range Resources Corporation (RRC) is an independent natural gas and oil company engaged in the exploration, development and acquisition of oil and gas properties, primarily in the Southwestern, Appalachian and Gulf Coast regions of the United States. As of December 31, 2004, RRC has proved reserves of 1.18 trillion cubic feet (Tcfe) of natural gas equivalent, of which 81% natural gas; 64% is proved developed reserves, and 77% operated with a reserve life of 14.9 years. The Company owns 2,428,000 gross (1,890,000 net) acres of leasehold plus over 400,000 royalty acres. RRC has a multi-year inventory of drilling projects that includes over 5,000 identified drilling locations. On June 23, 2004, RRC purchased the 50% of the remaining Great Lakes that it did not own. In December 2004, RRC also purchased additional Appalachian properties through the purchase of PMOG Holdings, Inc, a private company, or Pine Mountain.

Breakdown Target
BUY Dec 2005 $30 CALL RRC-LF currently $2.75

Breakout Target (same)
BUY Dec 2005 $30 CALL RRC-LF currently $2.75


APA - $69.40 - Apache

** Breakout target $70.50 **
** Breakdown target $66.00 **

Company info:

Apache Corporation is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. In North America, the exploration and production interests are focused in the Gulf of Mexico, the Gulf Coast, the Permian Basin, the Anadarko Basin and the Western Sedimentary Basin of Canada. The Company has interests in seven countries, such as the United States, Canada, Egypt, Australia, the United Kingdom, China and Argentina. Its segments are the United States, Canada, Egypt, Australia, North Sea and Other International. On August 20, 2004, Apache signed a definitive agreement to acquire all of Anadarko's Gulf of Mexico-Outer Continental Shelf properties (excluding certain deepwater properties). During the year ended December 31, 2004, the Company participated in drilling 1,913 gross wells, with 1,735 (90.7%) completed as producers.

Breakdown Target
BUY JAN 2007 $70 LEAP CALL OWF-AN currently $11.60

Breakout Target
BUY JAN 2008 $75 LEAP CALL YWA-AO currently $13.20
(no 2007 $75 or $80 LEAP)


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PO Box 630350
Littleton, CO 80163

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