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Weekly Newsletter, Saturday, 08/20/2005

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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

Please Stop!

Stop the selling please! This was a very painful week. After all the analysis I did last week on historical expiration trends the law of averages produced a textbook reversal for only the third time in a year. Fortunately I had explained in vivid detail last week how we were due for a sell off and why I was raising the stops on every position to take us out if disaster struck. Dang, the master of disaster himself must have been reading my comments.

To make a long story short we were stopped out of all but ONE position. September crude fell -7% in 3.5 days and many oil stocks with huge profits dropped better than -10%. It was a textbook correction probably brought on by a combination of events.

Oil had just hit a new record high at $67 with Gasoline over $2 and Natural Gas over $10. Records were being broken daily. As we approached futures and options expiration we also were approaching the end of the driving season just three weeks away. We went from 12 refinery outages in the past week to only two in the current week. Oil was flowing and the IEA lowered their demand estimates based on higher oil prices reducing demand. In retrospect it was the perfect storm for the bulls. Hedge funds facing a contract roll over flushed their positions instead of rolling them forward. The story should end there but it doesn't. I will pick up this thought again in a minute.

We had 15 positions stopped out. 10 were profitable and 5 were not. Of the five losers the biggest loss was -1.45 on Chevron and that was related more to the Unocal drag over the last six months than a busted play. It was the only position that lost more than $1. The total loss was $4.35 for an average loss of 87 cents. Three of the losers were less than two weeks old.

The 10 profitable positions posted at combined profit of $54.03 or $5.40 average per position. The largest were APC, +11.50 and VLO +10.10. Many positions and especially Valero declined substantially before they were stopped. Had we exited last Sunday as discussed the profits would have been approximately $2.00 higher per position. Unfortunately trading is inherently risk filled. Hopefully after the extensive rationalization I offered last week those that were more cautious were able to justify an earlier exit than the official portfolio exits. I have no complaints about the profits we derived over the last nine months but I always have seller's remorse about the profits that got away for whatever the reason.

Exit Table for week of 8/19/05

Now, back to the future. The September crude contract is history after Monday and the October contract closed on Friday at $65.90, only +30 cents above September. No real bias is evident for Monday. Now, as we have seen over the last 12 months there has been a very strong reversal of direction when each contract expired and the new contract began trading. Only two months out of the past 10 has the prior trend continued.

Last week those averages bit us but until proven wrong I believe we need to continue playing the odds. That would be for a rebound in oil beginning on Monday. However, we have some new considerations this month. Those considerations are for the switch in demand from gasoline to heating oil and an increase in jet fuel and diesel. Normally many refineries experience some downtime as they make the conversions. They also use the switch over to perform needed maintenance tasks. Sometimes these do not go as planned.

Here is what I am pondering this week. Personally I am long oil from Thursday night's closing rebound with about a 50/50 position. Half invested, half in cash. The Friday rebound was kind to me so I can afford to wait and see what Monday brings before taking the next step.

If you look at a bunch of oil charts this weekend you will find quite a few that rebounded to a dead stop early in the morning and never budged a dime for the rest of the day. It looked like short covering but no follow on buying. ECA, MRO, SUN, etc. Was that just a lack of buyers on a late summer Friday or a clue that there are still sellers waiting overhead? I am hoping it is the former and everyone was just waiting for options/futures to expire before entering new positions. However, APC, TLM, COP and several others were showing an uptrend into the close.

While I would like to just give you a list to reenter on Monday I am leery of a blanket "go long" call this weekend. I am going to add a lot of the prior positions back to the watch list with triggers on both breakouts and breakdowns. Some I am only going to use breakdowns because of concerns I have about the calendar. I also added several coal stocks to the watch list. There is no "season" for coal since 50% of the electricity in America comes form coal.

We did initiate two new positions on last weeks dip. Both HP and TLM were triggered bringing the number of active positions to three!! That is a far cry from the 16 we had last week.

The chart below is a reprint from last week showing the various futures expirations and the movement after expiration. The many reversals are my rationale for potential longs next week. Let's let the market pick our entries and for once we would be grateful for one more major drop.

September Crude Chart - Daily with all expirations

 


Changes in Portfolio

New Plays

None


Dropped Plays

New Watch List Plays Triggered
TLM $45.42 Talisman Energy
HP $54.53 Helmerich Payne

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

TLM $45.43 Talisman Energy ** Stop $43.00 **

Talisman dropped like the proverbial rock when the sector crashed but actually hit bottom sooner and rebounded stronger than many others. TLM is a very successful driller and considered to be a take over target. I am not putting any insurance on this play given the cheap option price.

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.

Jan 2006 $50 CALL TLM-AJ @ $2.10
(no leaps)

No insurance put due to cheap option

Entry (8/17) $45.00

HP - $58.00 Helmerich Payne ** Stop Loss $48.00 **

HP fell from $60 to $53 and actually led the sector in the sell off by a couple days. The jump from $40 to $60 in the prior two months was plenty of incentive to take profits. HP presented at the Enercom Conference in August and I was very impressed. From the +$20 point jump since June it is obvious others had already found this driller a compelling buy. No insurance put due to the cheap option.

Company Info:

Helmerich & Payne, Inc. is primarily engaged in contract drilling of oil and gas wells for others. It is also engaged in the ownership, development and operation of commercial real estate. The Company is organized into two separate operating entities: contract drilling and real estate. The Company's contract drilling business is composed of three business segments: United States land drilling, United States offshore platform drilling and international drilling. The Company's United States land drilling is conducted primarily in Oklahoma, Texas, Wyoming, Colorado, and Louisiana, and offshore from platforms in the Gulf of Mexico and California. The Company also operated in eight international locations during the fiscal year ended September 30, 2004: Venezuela, Ecuador, Colombia, Argentina, Bolivia, Equatorial Guinea, Chad and Hungary. In addition, the Company is providing drilling consulting services for one customer in Russia. Its real estate investments are located in Tulsa, Oklahoma.

MAR 2006 $60 CALL HP-CL @ $3.20
(no leaps)

No insurance due to cheap option

Entry (8/17) $54.00

 


Play Updates

Existing Plays

UPL - $39.45 Ultra Petroleum ** Stopped @ $37.00 **

UPL resisted the selling better than most but finally caved into the pressure. There was a fight at $38 support and it finally held but not without a spike to $37 to stop us out. I am adding UPL back to the watch list as it is more of a gas play than an oil play.

Ultra Petroleum is ultra strong. I sat in for their presentation last week in Denver and they have so much good news it was hard for them to fit it into a 30 min slot. They are concentrating their efforts on the Pinedale Anticline in the Green River Basin in Wyoming. They have over two thousand well sites plotted and they just announced on Wednesday that they got a reduced acreage approval for 10-acre spacing on a portion of this lease. They will be applying for 10-acre on the rest and this will double potential well sites. This is a very productive formation with an almost 100% completion rate. This company is minting money and ramping up to drill even faster.

Company Info:

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.

2007 $40.00 LEAP Call OZH-AH @ $8.90, exit, 8/17, $8.00, -0.90

Entry $38.75 (8/08)

NOV - $58.34 National Oilwell Varco ** Stop loss $55.00 **

NOV was the only position in the portfolio not stopped out. NOV lost -$4 during the sell off but promptly regained lost ground. Let's hope the strength continues.

This company is very strong with revenue doubling in their most recent earnings report on Aug-5th. Their guidance was very strong for 2H-2005 and beyond. The company merged with Varco back in March and the synergies are very good. After a period of post merger consolidation over the spring the trend has picked up substantially.

Company info:

National-Oilwell Varco Inc., formerly National-Oilwell, Inc. designs, manufactures and sells systems, components and products used in oil and gas drilling and production, as well as distributes products and provides services to the exploration and production segment of the oil and gas industry. The Company's Products and Technology segment designs and manufactures complete land drilling and work over rigs, as well as drilling-related systems on offshore rigs. Non-capital revenue sources within its Products and Technology segment include drilling motors and specialized down hole tools that are sold or rented, spare parts and service on the large installed base of its equipment, expendable parts for mud pumps and other equipment and smaller down hole, progressive cavity and transfer pumps. Company's Distribution Services segment provides maintenance, repair and operating supplies and spare parts to drill site and production locations throughout North America and to offshore contractors.

FEB 2006 $60 CALL NOV-BL @ $6.00
(no leaps)

Entry $59.50 (8/10)

SUN - $62.48 Sunoco Inc. ** Stopped @ $63.00 **

SUN also resisted the selling but finally caved in to monster volume. I believe the refiners will continue to run at near 100% capacity and generate huge profits the driving season is about over. Until we know how the heating oil season starts I am hesitant to just jump back in. I will add it back to the watch list but at a lower entry. I like SUN and will continue to suggest it as a trading vehicle only until a new trend appears.

Company Info

Sunoco, Inc. operates through its subsidiaries as a petroleum refiner and marketer, and chemicals manufacturer with interests in logistics and coke making. Sunoco's petroleum refining and marketing operations include the manufacturing and marketing of a range of petroleum products, including fuels, lubricants and some petrochemicals. Sunoco's chemical operations consist of the manufacturing, distribution and marketing of commodity and intermediate petrochemicals. The Company's operations are organized into five business segments: refining and supply, retail marketing, chemicals, logistics and coke.

Jan-2006 $65 Call SUN-AM @ $5.30, exit 8/17, $4.50, -0.80

Insurance Put: None

Entry @64.18 (8/08)

SWN - $53.81 Southwestern Energy ** Stopped @ $53.50 **

SWN dropped very sharply from $58.50 to $50.50 in three days. On Thursday Boone Pickens recommended it as one of his top energy picks and the rebound began. $50 is strong support and I am adding it back to the watch list at $50.

Earnings:

SWN earnings grew +29% as reported on July-26th. Production rose +19%.

Company Info

Southwestern Energy Company is an integrated energy company primarily focused on natural gas. Through its wholly owned subsidiaries, the Company is engaged in natural gas and oil exploration and production business. It operates principally in three segments: exploration and production, natural gas distribution and marketing. The Company's exploration and production activities are concentrated in Arkansas, Texas, Louisiana, New Mexico and Oklahoma. It's wholly owned subsidiary, Arkansas Western Gas Company, referred to as Arkansas Western, operates integrated natural gas distribution systems in northern Arkansas. The Company provides marketing services in each of its core areas of operation through its gas-marketing subsidiary, Southwestern Energy Services Company.

2006 MARCH $60 CALL SWN-CL @ $6.30, exit 8/17, 5.70, -0.60
(no leaps)

Entry (8/05) $53.50

RRC - $31.55 - Range Resources ** Stopped @ $31.00 **

RRC dropped nearly -14% from its high of $34.55 to touch support at $30. The rebound was almost immediate with a +$2 jump. After its long period of consolidation in July we actually escaped from this position with a small profit. I am not adding it back in due to its recent volatility and the congestion period we struggled through in July.

Earnings:

RRC reported earnings that increased +117% on production that rose +28%. Nobody can argue with those results but the stock price remained range bound between $30-$31. Seems spectacular earnings were already priced into the stock. Funds looking for a stellar performer could be looking for RRC when new money arrives next week. RRC is expensive at a PE of 35 but only has 86 million shares outstanding. What is +100% growth worth?

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.

Dec 2005 $30 CALL RRC-LF @ $2.90, exit 8/17, 3.50, +0.60

Entry $30.50 (7/13)

APA - $68.80 - Apache ** Stopped @ $69.00 **

We escaped the Apache position with only a minor 60-cent loss. The rebound was less enthusiastic than some and after the two months of consolidation I am not adding it back to the list.

Earnings:

APA posted earnings that rose +54% at $1.76 but missed analyst's estimates for $1.84. APA said production increased +6% to 470,000 bbls per day. Apache said aggressive drilling programs in Canada, Egypt, the North Sea and Australia point to continued production growth in the second half of 2005. After spiking to a new high at $71.22 the price fell to $67.75 on the earnings miss. A slight rebound was sold on Friday but it remained above it's lows for the week. We were initially filled on a gap open above $70 so the decline puts us into a negative position. There is no insurance put and the stop remains $65.

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.

JAN 2008 $75 LEAP CALL YWA-AO @ $13.70, exit 8/17, 13.10, -0.60
(no 2007 $75 or $80 LEAP)

Entry $70.50 (7/12)

EOG - $61.08 EOG Resources ** Stopped @ $61.00 **

EOG also failed to rally as strong as some others and has put in a lower high from the July peak. We escaped with a minor profit and I will not be adding it to the new list.

Earnings:

EOG posted earnings that rose +74% and raised its production targets for the rest of 2005 to +15.5% from +13.5% due to better than expected output for the first six months. EOG management emphasized the strong growth outlook throughout its core operating regions excluding the Barnett Shale play. Unfortunately Smith Barney and Banc America cut them to a hold because there was a lack of significantly positive news. Say what? Earnings rose +74% and production targets raised are not significant items? The stock was hammered from $66 back to $59 but has mounted a steady two-day rebound. Can you say "entry point?"

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.

EOG finished first in an investor relations survey by Greenwich last week. Rounding out the top five were Noble Corp, Carnival, Dell and UTX.

2007 $60.00 LEAP Call OAC-AL @ $9.50, exit 8/17, 10.00, +0.50

No insurance put

Entry $59.00 (7/05)

ECA $42.24 Encana Corp ** Stopped @ $43.50 **

ECA resisted the selling until noon on Wednesday and then gave up -10% by 2:PM on Thursday. The volume spike was enormous with combined total volume on those two days of nearly 10 million shares. Normal volume is a little over 2 mil per day. ECA has strong support at $40 and I am adding it back to the list at that level. We escaped with $1.10 profit on the position when our stop took us out within an hour after the start of selling.

Earnings:

Encana soared to a new three-week high at $43.20 after earnings that rose +78% to 73 cents per share but fell -6 cents short of analyst's estimates. The stock sold off slightly on profit taking after the company said higher costs due to a wet spring delay on bringing new wells online. A shortage of drilling rigs and production equipment also contributed to the delay of bringing new wells online. Encana said it had ordered 27 new rigs built to their specifications that would resolve these types of shortages. Rig costs have skyrocketed for leased rigs due to competition for available inventory and the demand for increased drilling. At $41 we are right at our entry point and a +78% grower will be in favor for the next rebound.

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 really 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, exit 8/17, 3.80, +1.10

Entry $42 (7/05)

MRO $60.20 Marathon Oil ** Stopped @ $60.50 **

Marathon never had a chance when the selling began. The very strong gains were low hanging fruit for fund managers and they picked it quickly. It appears to have support at $60 and I am adding it back to the watch list.

Earnings:

MRO posted profits that nearly doubled with $1.92 per share compared to $1.02 in the same quarter in 2004. Analysts had expected MRO to earn $1.57. Revenue rose to $12.09 billion. MRO said Q3 earnings would dip slightly due to hurricane shut-ins in the Gulf. Traders evidently did not care and MRO hit a new high at $59.12 on Friday. I raised the stop to $56.

Takeover speculation:

It appears Chevron will end up with Unocal and that leaves CNOOC 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 position:

2007 $55 LEAP Call VXM-AK @ $7.90, exit 8/17, 11.20. +3.30

No put insurance

Entry $54.74 (6/27)

CHK - $27.05 Chesapeake Energy ** Stopped @ $27.50 **

CHK fell -10% in the selling to bottom around $26. We entered this play back in May at $19 so we did pocket a nice profit. CHK has strong support at $24 and we should see buyers appear well before that. I am adding CHK back to the watch list at $26.

EARNINGS:

CHK earnings more than doubled in the past quarter due to increased production and higher oil/gas prices. Production jumped by +31% from the prior quarter. They also said since the end of Q2 they had acquired 33 mcfpd of gas production and 113 bcf of proved reserves along with 181 bcf of unproven reserves.

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, exit 8/17, $9.50, +5.50

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

Entry $19.00 (05/13)

APC - $88.12 Anadarko Petroleum ** Stopped @ $87.50 **

No complaints here. We entered APC back in May at $70 and were stopped out $17.50 dollars higher. APC had been trading in a range between $85 and $90 for two months and our tight stop in the middle of the range took us out before any real damage was done. Because of that same range I am not adding APC back to the list.

Earnings:

APC reported a +25% jump in earnings but production fell as it sold off non-core assets. APC has been restructuring to devote all its efforts to its main business of exploring and producing oil and gas. Production on current assets increased +10% for the period. Sales of non-core assets allowed it to pay off $1.4 billion in debt and reduce interest expenses -24% for the period. It also used the proceeds to buy back 1.4 million shares in July. APC has another $300 million of shares remaining to complete its $2 billion share buyback. APC came close to a new high on Friday at just over $90 so it appears investors applaud the APC efforts.

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, exit 8/16, $21.60, +11.50

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

Entry $70.50 (5/04)

COP - $63.07 Conoco Phillips ** Stopped @ $63.00 **

COP has been our super star for the entire year. We owned the $100 leap when they split 2:1 and gave us (2) leaps at $50. The profit on each was $7.24 after subtracting our expired put insurance of $1.08 each. With our initial cost of $7.88 that is very close to a double and we were fortunate enough to be also doubled by the split. That is a $14.50 profit! COP is the strongest of the major oils and I will be adding it back into the list.

Earnings:

COP posted earnings of +51%, $3.14 billion, $2.21 per share and easily beat analyst estimates of $2.02. COP is the nations third largest oil company and an aggressive grower of reserves. The CEO said they were not seeing any reduction in demand. COP produces 1.7 mbpd with capacity utilization at 97% and refineries near full capacity. COP is working on a $9 billion capital improvement program over five years including $3 billion to upgrade refineries to process sour crude. He said that crude deliveries around the globe were becoming increasingly sour as sweet crude becomes scarcer. Those refiners who have to chase the dwindling supplies of sweet crude will pay constantly higher prices and see margins shrink. COP said they see stronger production for the rest of 2005 with about a 4% increase. COP has increased its share of Lukeoil to 12.6% and plans to increase it to 20% soon.

COP is one of the fastest growers on the planet despite its size. It is my number one oil pick for buy and holders. While XOM and BP are shrinking COP is growing.

Company Info

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, exit 8/17, $16.20, +8.32

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

Entry (4/18 $49.00)

OXY - $79.23 Occidental Petroleum ** Stopped @ $80.75 **

OXY dropped from $84.26 to $77.56 and got a slight head start on the sector. The rebound was also lifeless for only +36 cents on Friday. OXY gave us a great run for better than a +6 profit so no complaints here. I am not adding OXY back into the list because of the apparent rebound weakness and a top at $84 that has held it back for six weeks.

Company Info

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 announced it had been given approval to resume operations on its historical contract in Libya. It was forced to abandon operations when sanctions were imposed in 1986 due to the Pan-Am bombing. OXY expects to be producing up to 15,000 bbls per day by year end from the Libyan fields. It also won contracts on new blocks in a January auction along with COP and AHC.

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.

S&P reiterated its bullish outlook on OXY given the additions in the Permian Basin, recovery of its Lybia assets and the Oman contract award. Things seem to be going very well for OXY.

2007 $70 LEAP Call VXY-AN @ $10.00, exit 8/16, $17.80, +7.80

Insurance Put:
June $65.00 OXY-RM @ $1.40, expired worthless

Entry $68.00 (4/19)

XLE - $48.18 Energy SPDR ** Stopped @ $48.50 **

The XLE treated us very well with a +100% gain before taking the expired insurance put into account leaving us with a +77% gain or +4.35. This is an easy way to play the oil sector as a group and I will be adding it back into the list. Options are cheap too!

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.

List of XLE components: XLE List

2007 $40 LEAP Call ORJ-AN @ $5.60, exit 8/17, $11.30, +5.70

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

Entry $39.75 (4/18)

VLO - $87.89 Valero Energy ** Stopped @ $87.00 **

VLO was the poster child for the sell off and dropped from a new high at $94.44 on Monday to just under $84 on Thursday. For some reason the refiners really got whacked and VLO had a lot of profit to capture. I had purposely kept the stop lower on VLO on the assumption that the only major refiner capable of refining sour crude would continue to amass huge profits and be a favorite of investors. Unfortunately I was wrong. The hedge funds had been playing the story and with the end of driving season only three weeks away they obviously took profits early. We gave up $3 in profits on VLO with the lower stop but still netted +$10 on the LEAP. I will be adding VLO back to the list.

Earnings:

VLO posted its highest profit ever of +3.06 per share and said the rest of 2005 and 2006 would be better than ever. The CEO said demand for refined products had never been stronger and was growing. Their margins grew to $9.61 per bbl compared to $1.61 in Q2-2004 due to their ability to refine sour crude. He said the presence of very high margins in the middle of the summer proved how strong the demand was and how tight refining capacity was at full speed. He predicted a loss of 500,000 bbls of production by other refineries in 2006 when higher sulfur restrictions come into play. This will put additional pressure on refineries that can refine the heavy crude and make demand for light sweet crude even more excessive. VLO is positioned to profit from this change and will see volumes increase dramatically with its acquisition of Premcor.

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 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, exit 8/17, $24.20, +10.10

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

Entry $68.00 (4/15)

CVX - $59.92 Chevron Texaco ** Stopped @ 60.50 **

In the end it was the Unocal deal that killed this play. With a loss of -1.45 on the $60 LEAP is was the biggest loss suffered from the oil sell off. We had held Chevron since before the Unocal deal was first announced and Chevron struggled for several months with us underwater. We had just moved back into profitable territory when last weeks selling began. We exited the leap for a minor profit but after taking into account the two insurance puts we ended up in the red. Until we see a new trend develop I will avoid Chevron.

Earnings:

Chevron rallied to a new short term high at $58.41 after posting earnings of $1.76 that beat estimates of $1.69. That high did not last long after investors read that Chevron's production fell -15% in the U.S. and -2% internationally.

Company Info

Chevron will likely sell off about $3 billion in non-core assets once the Unocal 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 even at the raised price.

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.

2007 $60.00 LEAP Call VCH-AL @ $5.60, exit 8/17, $6.60, +1.00
2007 $57.50 LEAP Call VCH-AY @ $6.70, exit 8/17, $7.60, +0.90
Reference:
UCL 2007 $60 LEAP Call VCL-AL @$6.60, exit at $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.

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

New Put 6/19
Sept $55 Put CVX-UK @ 0.95, exit at 15 cents (8/10)

Entry $56.67 (04/07)

 


Leaps Trader Watch List

Both our watch list entries were triggered but the dip also wiped out 15 of our current plays. Tough to complain about a profit but it was very bloody.

I am adding back to the list several of the prior positions with new triggers. Some will trigger in either direction, some only on a further dip.

I am not going into great detail describing them since they just came off the play list.

While I would like to get one more drop to washout any remaining weakness I fear it could taint the sector for several weeks to come. I find myself wanting a move in both directions at the same time. Stranger things have happened.

I am also adding some coal stocks. I believe coal will begin to take on added importance as natural gas prices soar over the winter. There is no off-season for coal as it produces 50% of the electricity in America. In intentionally left out BTU as it appears top heavy.

Good luck!
 

Dropped Entries

None


New Watch List Entries

Current Watch List

UPL $39.38 Ultra Petroleum

** Breakout target $40.00 **
** Breakdown target $38.00 **

Company info:

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 Jan 2007 $45 LEAP CALL OZH-AI
Alternate short term entry: March $40 Call UPL-CH

Breakout Target:
BUY Jan 2007 $45 LEAP CALL OZH-AI
Alternate short-term entry: March $45 Call UPL-CI

*************************

MRO - $60.17 Marathon Oil

** Breakdown Target $58.00 **
** Breakout Target $61.00 **

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).

Breakdown Target
BUY JAN 2007 $60 LEAP CALL VXM-AL
Alternate short-term entry: Jan-06 $60 Call MRO-AL

Breakout Target
BUY JAN-2008 $65 LEAP Call WXM-AN (no 2007 $65 strike)
Alternate short-term entry: Jan-06 $65 Call MRO-AM

*************************

COP - $63.12 Conoco Phillips

** Breakdown Target $61.00 **
** Breakout Target $63.50 **

ConocoPhillips is an integrated energy company. The Company's business is organized into six operating segments. The Exploration and Production segment primarily explores for, produces and markets crude oil, natural gas, and natural gas liquids on a worldwide basis. The Midstream segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids. The Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of the Company's equity investment in LUKOIL, an international, integrated oil and gas company. The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Emerging Businesses segment encompasses the development of new businesses, including new technologies related to natural gas conversion into clean fuels and related products, technology solutions, power generation and emerging technologies.

Breakdown Target
BUY JAN 2007 $65 LEAP CALL OJP-AM
Alternate short-term entry: Jan-06 $60 Call COP-AL

Breakout Target
BUY JAN-2007 $65 LEAP CALL OJP-AM
Alternate short-term entry: Jan-06 $65 Call COP-AM

*************************

CHK - $27.05 Chesapeake Energy

** Breakdown Target - none **
** Breakout Target $63.50 **

Chesapeake Energy Corporation is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs and the marketing of natural gas and oil for other working interest owners in properties that it operates. The Company's properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota and New Mexico. The proved oil and natural gas reserves as of December 31, 2004 were approximately 4.9 trillion cubic feet of gas equivalent (tcfe). At December 31, 2004, approximately 89% of the Company's proved reserves (by volume) were natural gas, and approximately 70% of its proved oil and natural gas reserves were located in the primary operating area, the Mid-Continent region of the United States, which includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle.

Breakdown Target
BUY JAN 2007 $25 LEAP CALL VEC-AE
Alternate short-term entry: Jan-06 $25 Call CHK-AE

Breakout Target - none

*************************

VLO - $87.90 Valero Energy

** Breakdown Target $80.50 **
** Breakout Target $89.00 **

Valero Energy Corporation (Valero) owns and operates 15 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 2.5 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasolines, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.

Breakdown Target
BUY JAN 2007 $85 LEAP CALL VHB-AQ
Alternate short-term entry: Jan-06 $85 Call VLO-AQ

Breakout Target
BUY JAN 2007 $100 LEAP CALL VHB-AT
Alternate short-term entry: Mar-06 $100 Call VLO-CT

*************************

SWN - $53.81 Southwestern Energy

** Breakdown Target $51.00 **
** Breakout Target $55.00 **

Southwestern Energy Company is an integrated energy company primarily focused on natural gas. Through its wholly owned subsidiaries, the Company is engaged in natural gas and oil exploration and production business. It operates principally in three segments: exploration and production, natural gas distribution and marketing. The Company's exploration and production activities are concentrated in Arkansas, Texas, Louisiana, New Mexico and Oklahoma. It's wholly owned subsidiary, Arkansas Western Gas Company, referred to as Arkansas Western, operates integrated natural gas distribution systems in northern Arkansas. The Company provides marketing services in each of its core areas of operation through its gas-marketing subsidiary, Southwestern Energy Services Company.

Breakdown Target
BUY MAR 2006 $55 CALL SWN-CK (no leaps)
Alternate short-term entry: Dec-05 $55 Call SWN-LK

Breakout Target
BUY MAR 2006 $60 CALL SWN-CL (no leaps)
Alternate short-term entry: Dec-05 $60 Call SWN-LL

*************************

XLE - $48.18 Energy SPDR

** Breakdown Target $46.00 **
** Breakout Target $49.00 **

The XLE SPDR is composed of 27 energy stocks and represents about 9% of the SPX. This is the 9% 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.

List of XLE components: XLE List

Breakdown Target
BUY JAN 2007 $50 LEAP CALL OJW-AX
Alternate short-term entry: Dec-05 $48 Call XBT-LV

Breakout Target
BUY JAN 2007 $55 LEAP CALL OJW-AC
Alternate short-term entry: Jan-06 $50 Call XBT-AX

*************************

CNX - $64.29 CONSOL Energy

** Breakdown Target $60.00 **
** Breakout Target $66.00 **

CONSOL Energy Inc. is a multi-fuel energy producer and energy services provider that primarily serves the electric power generation industry in the United States. The Company has two principal business units, Coal and Gas. The principal activities of the Coal unit are mining, preparation and marketing of steam coal, sold primarily to power generators, and metallurgical coal, sold to steel and coke producers. As of December 31, 2004, CONSOL Energy produced high-British thermal unit (Btu) bituminous coal from 17 mining complexes in the United States and Australia. The principal activity of the Gas unit is to produce pipeline quality methane gas for sale primarily to gas wholesalers. The Company provides energy services, including terminal services, industrial supply services and coal waste disposal services. It is developing its land assets that it previously used primarily to support its coal operations.

Breakdown Target
BUY JAN 2007 $65 LEAP CALL VTL-AM
Alternate short-term entry: Jan-06 $65 Call CNX-AM

Breakout Target
BUY JAN 2007 $70 LEAP CALL VTL-AN
Alternate short-term entry: Jan-06 $70 Call CNX-AN

*************************

MEE - $48.07 Massey Energy

** Breakdown Target $46.00 **
** Breakout Target $49.00 **

Massey Energy Company (Massey) produces, processes and sells bituminous coal of steam and metallurgical grades of a low-sulfur content through its 22 processing and shipping centers, called resource groups, many of which receive coal from multiple coal mines. Massey operates 34 underground mines (four of which employ both room and pillar and longwall mining) and 15 surface mines (with seven highwall miners in operation) in West Virginia, Kentucky, and Virginia. Its steam coal is purchased by utilities and industrial clients as fuel for power plants. Its metallurgical coal is used to make coke for use in the manufacture of steel.

Breakdown Target
BUY JAN 2007 $50 LEAP CALL VHK-AJ
Alternate short-term entry: Jan-06 $50 Call MEE-AJ

Breakout Target
BUY JAN 2007 $50 LEAP CALL VHK-AJ
Alternate short-term entry: Jan-06 $55 Call MEE-AK

*************************

ACI - $60.01 Arch Coal

** Breakdown Target $58.00 **
** Breakout Target $63.00 **

Arch Coal, Inc. (Arch Coal) operates in the coal mining industry. The Company's primary business is mining and processing of compliance and low-sulfur coal from surface and deep mines throughout the United States for sale to utility, industrial and export markets. Its mines are primarily located in the Powder River Basin, Central Appalachia and Western Bituminous regions of the United States. During the year ended December 31, 2004, Arch Coal operated or controlled 27 mines and controlled approximately 3.7 billion tons of proven and probable coal recoverable reserves. In fiscal year 2004, the Company sold 128.4 million tons of coal.


Breakdown Target
BUY JAN 2007 $60 LEAP CALL OSE-AL
Alternate short-term entry: Jan-06 $60 Call ACI-AL

Breakout Target
BUY JAN 2008 $70 LEAP CALL YEP-AN (no $65/$70 strike in 2007)
Alternate short-term entry: Jan-06 $65 Call ACI-AM
 


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