Option Investor

Weekly Newsletter, Sunday, 09/04/2005

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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

Are We Having Fun Yet?

If a $20 run in Valero does not make you jump for joy then have somebody check you for a pulse. It was an outstanding week in the energy sector and for the LEAPS portfolio. Every stock was up substantially and they gave back very little on Friday.

Oil settled at $67.57 and right on light support after promises from Bush and the IEA promised a total of 90 million bbls of crude and refined products. You would have thought it was manna from heaven from the positive comments in the press. In reality it is just a finger in the dike ahead of the Q4 demand cycle.

I believe that once we get the inventory numbers on Wednesday we could see another new rally begin. However, the summer driving season is over on Tuesday and gasoline demand will slow. Demand for diesel, jet fuel and heating oil will begin to increase as the cyclical Q4 demand begins to ramp up.

The refining capacity is still short more than a million bbls per day with four refineries likely out for at least a month. This should put us well behind the demand curve.

In short, the recommendation is to buy the dip and hold on until December. Originally I had expected to exit our earlier positions during September once the driving season had ended. We got knocked out a little early and bought the dip as oversold in hopes of catching the next wave. Surf's up! The wave was much stronger than expected due to the Katrina damage and with the refinery problem and the rig problems in the Gulf there is every indication that it will continue for several months. The game plan now would be to look for an exit in the December time frame and then buy the dip in March. That of course assumes the demand calendar plays out as expected.

Now the question most asked this week. I was ***** and missed the entries when should I enter now? I believe the Friday selling was just profit taking before an early Nymex close and ahead of a three-day weekend. The October crude contract returned to its 100/130 ema on the 30-min chart and what appears to be an initial buying opportunity before stronger support at $66. As I type this on Friday night it looks like a buyable dip. I can't imagine any scenario where oil demand/production works out favorably over the next two months so I remain bullish.

We are just entering the two worst months of the year for hurricanes, Sept/Oct and the weather service is still expecting 8-10 more hurricanes. Given the increased activity so fat this year that may be a very good guess. Also, they are predicting a colder than normal winter in the northeast. The same weather patterns that produce the strong hurricane season also produces a below average winter. Better stock up on heating oil now because another Gulf storm could put the energy sector down for the year.

Lehman is sponsoring an Energy Conference next week with many of our companies presenting. It could give another pop to the stocks as well as the Wednesday inventories.

All of our watch list plays were triggered so we have a full portfolio once again.

Crude Oil Chart - Daily


Changes in Portfolio

New Plays


Dropped Plays


New Watch List Plays Triggered
ECA $49.61 Encana
BTU $70.23 Peabody Energy
CNX $68.10 CONSOL Energy

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

ECA - $49.61 Encana ** Stop Loss $44.00 **

Encana blasted off early in the week and triggered our entry at $46 first thing Monday morning. After an early morning hiccup it rocketed to more than $51 before pulling back to close just over $49 on Friday. If you missed the entry I believe the pullback on Friday is a buying opportunity.

Company Info:

EnCana Corporation is an independent crude oil and natural gas exploration and production company. Its key landholdings are in western Canada, the United States Rocky Mountains, Ecuador, the United Kingdom central North Sea, offshore Canada's East Coast and the Gulf of Mexico. EnCana explores for, produces and markets natural gas, crude oil and natural gas liquids (NGLs) in Canada and the United States. EnCana is also engaged in exploration and production activities internationally including production from Ecuador and the United Kingdom central North Sea. EnCana has interests in midstream operations and assets, including natural gas storage, NGLs gathering and processing facilities, power plants and pipelines.

JAN 2007 $50 CALL ZBM-AJ @ $7.10

Alternate short-term entry:
Jan-06 $50 Call ECA-AJ @ $2.50

Entry @ $46 (8/29)

BTU - $70.23 Peabody Energy ** Stop Loss $63.00 **

As natural gas becomes more scarce and supply disruptions in the Gulf scare electric companies the coal sellers will ship even more coal than they do now. Growth in the coal business is spiking as the cheap alternative now that gas is over $10. BTU is the largest coal company with 50 years of proven reserves.

BTU suffered a sharp drop at the open on Friday as traders took profits from the +$10 jump in a little more than a week. Looks like a buying opportunity to me.

Company Info:

Peabody Energy Corporation (Peabody) is a private-sector coal company in the world. During the year ended December 31, 2004, the Company sold 227.2 million tons of coal. It sells coal to over 300 electricity generating and industrial plants in 16 countries. The Company owns, through its subsidiaries, majority interests in 32 coal operations located throughout all the United States coal producing regions and in Australia. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. In the West, it owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the East, it owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. The Company owns four mines in Queensland, Australia. Most of the Australian production is low-sulfur, metallurgical coal. In addition to the mining operations, the Company markets, brokers and trades coal.

MAR 2006 $70 CALL BTU-CN @ $6.50
(no leaps)

Entry $67.25 (8/29)

CNX - $68.10 CONSOL Energy ** Stop Loss $63 **

Another super star in the coal and gas business found instant favor in the post Katrina world. A +7 bounce saw a -3 retracement on Friday. Wait for confirmation of a rebound before entering new positions.

Company Info:

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.

JAN 2007 $70 LEAP CALL VTL-AN @ $9.40

Alternate short-term entry:
Jan-06 $70 Call CNX-AN @ $4.40

Entry $66 (8/29)

Play Updates

Existing Plays

UPL $43.65 Ultra Petroleum ** Stop loss $40.00 **

Ultra set a new high at $45.60 on Thursday and retreated to close at $43.65 on no news. Simple profit taking in my opinion since all energy stocks had exactly the same pattern. UPL retreated to the 100/130 ema on the 30 min chart which is a buy signal for me. Strong support in the $42 range provides a safety zone.

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.

Jan 2007 $45 LEAP CALL OZH-AI @ $8.40

Alternate short-term entry:
March $45 Call UPL-CI @ $4.40

Entry $40.00(8.22)

MRO - $65.06 Marathon Oil ** Stop loss $61.00 **

Marathon rebounded from $59 to $67 for a killer week and like the other stocks retreated only slightly on Friday. Marathon was seen to be at risk in the wake of Katrina but recent reports indicate there was little damage. If I was going to look for a new entry I would want it to be closer to $63.50 but any move over $66 could be the train leaving the station again.

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).

JAN-2008 $65 LEAP Call WXM-AN @ $6.50

Alternate short-term entry:
Jan-06 $65 Call MRO-AM @ $2.90

Entry $61 (8/22)

COP - $66.77 Conoco Phillips ** Stop loss $63.50 **

A midweek upgrade gave Conoco a +$3 boost on Thursday but profit taking snatched -$2 back on Friday. COP ended up +4.77 for the week and we definitely can't complain. Support is just over $65 and I would look to enter new positions in that range. Conoco's 247,000 bbl Alliance refinery is still without power and could take an additional two weeks to restart. No date can be set until power can be restored.

Company Info:

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.

JAN-2007 $65 LEAP CALL OJP-AM @ $7.50

Alternate short-term entry:
Jan-06 $65 Call COP-AM @ $4.40

Entry $63.50 (8/22)

CHK - $31.78 Chesapeake Energy ** Stop loss $29.00 **

Chesapeake rallied of the Katrina news as a gas producer completely isolated from the storm. The dramatically higher price of natural gas is a plus for CHK and their very low cost structure. Initial support in the $30 range would make a nice entry on a pullback. Stronger secondary support is very strong in the $28 range. S&P raised earnings targets on CHK because of their increased earnings potential as gas moves higher.

Company Info

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.

JAN 2007 $30 LEAP CALL VEC-AF @ 4.90

Alternate short-term entry:
Jan-06 $30 Call CHK-AE @ $2.25

Entry $28.11 (8/28)

VLO - $108.43 Valero Energy ** Stop Loss $102.50 **

Unbelievable! When refiners started dropping like flies in Louisiana Valero literally took off like a rocket. The stock gained +25 points for the week with only a minor decline on Friday. For those looking for an entry point ANY decline should be targeted. Valero will be reaping huge profit margins from the lack of competition and ability to process sour crude. The lack of ANY material pullback after a +25 point sprint should be an indication of its relative strength.

Valero completed its acquisition of Premcor on Monday giving it an even stronger position in the market. Premcor shareholders who elected to receive stock received a combination of cas and stock worth $90.13 on Thursday in exchange for their PCO stock at $81.77. The VLO stock hit $113 on Thursday. Pretty good deal for those shareholders!

Company info:

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.

JAN 2007 $100 LEAP CALL VHB-AT @ $12.10

Alternate short-term entry:
Mar-06 $100 Call VLO-CT @ $6.40

Insurance put: October $80 Put VLO-VP @ $1.50

Entry $89 (8/22)

XLE - $50.95 Energy SPDR ** Stop Loss $49.00 **

The XLE broke out to a new high after the sharpest jump in over a year. Support is in the $50 range for those looking for a new entry. The combination of drillers, service companies and integrated oils overcame the XOM cloud.

SPDR Description:

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

JAN 2007 $55 LEAP CALL OJW-AC @ $3.50

Alternate short-term entry:
Jan-06 $50 Call XBT-AX @ $2.45

Entry $49 (8/22)

MEE - $49.75 Massey Energy ** Stop Loss $46.50 **

Massey tried very hard to break $51 after the Monday ramp but could not muster the energy. The drop on Friday back to the 100 ema (30min) appears to be another buying opportunity but confirm upward movement before taking the bait.

Massey is a favorite of Boone Pickens and one of the stocks he recommends. They have a high demand low sulphur coal with reserves of 3.2 billion tons.

Company info:

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.

JAN 2007 $50 LEAP CALL VHK-AJ @ $9.00

Alternate short-term entry:
Jan-06 $55 Call MEE-AK @ $2.95

Entry $49 (8/22)

TLM $49.13 Talisman Energy ** Stop $45.50 **

Talisman rallied with the rest of the sector but failed to give back as much closing only about a buck under Thursday's levels. I would look to enter new positions in the $48 range. TLM is not involved in the Katrina disaster. The breakout over $48 puts TLM into a new range and the next break over $50 could run to $55 before slowing.

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 - $58.30 Helmerich Payne ** Stop Loss $55.00 **

HP suffered severe damage to one of its eight rigs operating in the Gulf. The damage probably kept HP from breaking out over $60 on the week long run. HP weakened sooner than the other stocks as news of this damage surfaced. I would look to enter new positions on any dip to support just above $57. That makes its present level at $58 still inviting. Nearly all companies working in the Gulf have suffered some damage so HP should not suffer more than others.

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

NOV - $58.30 National Oilwell Varco ** Stop loss $57.00 **

NOV benefited from several comments from analysts that the damage in the Gulf would provide additional profit opportunities for NOV. NOV makes rig components and equipment. Could be a real gold mine for NOV. Look for new entries in the $60 range with support at $58.

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)


Leaps Trader Watch List

With all our watch list entries being triggered last week I am running out of viable targets. I view any new entries with a 60-day life and I only want ones with a great chart. That limits the field.

Secondly I want to either buy huge reserves or a refiner with plenty of upside. We already have COP and VLO and I would not buy XOM with your money. The only real plays that might fill the bill are SU, SUN and AHC. Since we already have a full portfolio I am only adding one and that is SUN.

Sunoco is a refiner and enjoyed a monster +$16 bounce last week. After giving back $5 it is trying to find support at $75. Ideally one more drop to $72 would be perfect.

Good luck!

Dropped Entries


New Watch List Entries
Sunoco, Inc.

Current Watch List

SUN - $75.31 Sunoco Inc

** Breakdown Target $72.00 **
** Breakout Target $77.50 **

Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 900,000 barrels per day of refining capacity, approximately 4,800 retail sites selling gasoline and convenience items, over 4,300 miles of crude oil and refined product owned and operated pipelines and 38 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States. Sunoco is a significant manufacturer of petrochemicals with annual sales of approximately five billion pounds, largely chemical intermediates used in the fibers, resins and specialties markets. Utilizing a unique, patented technology, Sunoco also currently has the capacity to manufacture over 2.5 million tons annually of high-quality metallurgical-grade coke for use in the steel industry.

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.

Breakdown Target
BUY Feb 2006 $80 CALL SUN-BP
(Leaps are all $15 in the money)

Breakout Target
BUY Feb 2006 $80 CALL SUN-BP (same as breakdown)
(Leaps are all $15 in the money)


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