Option Investor

Weekly Newsletter, Saturday, 09/10/2005

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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

Instant Replay

Last week we had monumental gains in several stocks after oil spiked to $70.85. This week oil closed at $64 but many of those same stocks are breaking out to new highs. All our positions are well into the green and almost every position is showing signs of another breakout coming. It does not get any better than this.

When I start thinking this way it is normally the day before a massive drop. Everything simply looks too bullish to be true despite the price of oil not confirming. The challenge is the damage in the gulf. As of Friday 60% of oil production was still shut in and 38% of gas supplies. The IEA said it could take 3-6 months to recover 90% of prior production. 55 million bbls of production is expected to be lost. As each day passes the extent of damage appears to increase as more platforms are explored. 20% of existing platforms and 12% of rigs are still evacuated.

Four refineries remain closed representing a 901,000 bbl per day drop in refining capacity. That is -5% of the U.S. capacity.

The 90 million bbls of oil and refined products available from the SPR and the IEA are headed for the U.S. and this is driving down the price of oil but this is only a temporary fix. The IEA is not going to keep depleting their reserves just because America is paying higher prices for gasoline.

This has setup a questionable position and outlook for me. I would like to think we are going to see oil companies continue to rise since the eventual conclusion is a permanent shortage. It is a flood of oil in the short term that bothers me. That 90 million bbls of product that will show up over the next 30 days is enough to float us for three months if we did not pump another bbl. This bothers me and makes me cautious. Traders tend to focus on the very short term and not the long-term problems. In the very short term oil could break $60 depending on the mix of products being delivered. There is also the question of where the products are going. Some of them are not coming to America and will be used to offset American exports to other countries. I know that sounds crazy but it is a matter of logistics that determines where each bbl of oil will go.

The bottom line is that we need to protect our profits while hoping for the various breakouts to occur. There were several upgrades of energy stocks last week and now that the initial hurricane hysteria is over it is possible that energy will remain the sector of choice despite the temporary loan of oil products.

Snug up those stops and don't let any money slip away.

Crude Oil Chart - Daily


Changes in Portfolio

New Plays


Dropped Plays


New Watch List Plays Triggered
SUN $79.70 Sunoco, Inc.

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

SUN - $79.70 Sunoco Inc ** Stop loss $74.00 **

The chart on Sunoco appears highly overbought but damage to the refinery system has put an entirely new spin on the outlook for the remaining refiners. Sunoco is on the verge of breaking out over the $80 level and that could cause some short covering and a decent spike.

At the time of the recommendation there were no out of the money LEAPs available for SUN so the call was used. I am using a stop loss rather than a protective put.

Company Info:

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.

Feb 2006 $80 CALL SUN-BP @ $6.30
(No out of the money LEAPS at the time)

Entry $77.50 (9/06)


Play Updates

Existing Plays

ECA - $50.55 Encana ** Stop Loss $47.00 **

Encana languished on support at $48 most of the week but rallied back over $50 on Friday and appears ready to target a new high over $51.34. ECA is widely called the number one natural gas play along with Chesapeake. With 4 bcf of gas still shut in from Katrina the gas producers should continue to do well.

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 - $74.05 Peabody Energy ** Stop Loss $68.00 **

Coal is soaring as the lack and cost of natural gas is sending power producers back to the coal bin for cheap fuel. BTU broke out to another new high on Thursday and continued that trend on Friday.

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 - $74.06 CONSOL Energy ** Stop Loss $71 **

CNX scares me. It tacked on another +6 this week and appears very overbought. I raised the stop to just under the current price to take us out on any material dip.

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)

UPL $44.55 Ultra Petroleum ** Stop loss $42.00 **

Ultra is acting more like a normal stock than CNX or BTU. The gains are slow and steady and will likely remain so until oil prices begin to climb. No complaints here as it threatens to break $45 again.

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 - $67.75 Marathon Oil ** Stop loss $64.00 **

Marathon continues to push higher and made another new high on Friday on declining oil prices. After several days of consolidation the strength appears to be returning. I raised the stop to just under the support for the week but feel free to move it higher.

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 - $69.02 Conoco Phillips ** Stop loss $65.50 **

Conoco closed in on new high territory despite being one of the four oils with a refinery out for months in Louisiana. After a mid week dip COP took flight and ended +3 off the lows. Careful on this one. COP is my favorite integrated oil but the refinery problem bothers me. Keep your stops close.

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 - $33.35 Chesapeake Energy ** Stop loss $31.00 **

It was a great week for CHK but it is moving very close to long term resistance at $34. We are up +$3 in the LEAP so keep those stops tight and don't let them take back our profits. I would be thrilled to see CHK break over that $34 resistance but after a long run it may be getting tired.

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 - $114.97 Valero Energy ** Stop Loss $108.50 **

Unbelievable! There appears to be nothing holding Valero back as the largest independent refiner and the only major left that has a large capacity for the cheaper Saudi crude. Margins are going to be huge and profits will be massive. VLO broke out of some midweek consolidation after a +15 point move in the prior week to add on another +9 this week. Tighten those stops and take profits here soon. Rockets eventually run out of fuel.

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 - $52.80 Energy SPDR ** Stop Loss $51.00 **

The XLE literally broke free of the group on Friday and soared to a new high over resistance at $52 that had held it back for two weeks. We are getting very overbought here so tighten up your stops.

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 - $51.15 Massey Energy ** Stop Loss $48.50 **

Massey warned this week that shipments would not meet expectations and dipped to $48 at Wednesday's open. Traders quickly forgave them and MEE hit another new high on Friday at $51.59. I was going to close Massey after the warning but I am not going to argue with a new high. I raised the stop to protect us. If we are stopped I will switch us into Fording Coal (FDG). If you are considering a new position I would recommend FDG on any pullback.

Massey is a favorite of Boone Pickens and one of the stocks he recommends. They have a high demand low sulfur 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 $49.22 Talisman Energy ** Stop $47.00 **

Talisman is moving up slowly despite oil prices decreasing. Once that decrease is reversed I expect TLM to breakout once again. The gas plays are finding more buyers but oil stocks are not dead, just resting.

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 - $59.41 Helmerich Payne ** Stop Loss $57.50 **

HP is struggling after the news of rig damage made the press. HP suffered severe damage to one of its eight rigs operating in the Gulf. HP has failed to recover from this weakness but I hesitate to drop it as the next move higher could be explosive once $60 breaks. Almost everyone in the Gulf suffered damage so I am going to give them one more week before the boot.

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 - $65.25 National Oilwell Varco ** Stop loss $63.00 **

NOV continues to move higher as damage to rigs in the Gulf provides a business opportunity to NOV. The old high is $66 and we are very close to a new breakout after a week of consolidation. I like this stock even at this level.

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

Just kidding but the opportunities in the oil patch may be weak until we disperse that 90 million bbls of oil from the various strategic reserves. Until then we need to concentrate on something other than oil stocks.

Fortunately coal stocks are finding plenty of favor and are selling for obscene PE ratios relative to their coal reserves.

We are already playing BTU and MEE, which leaves Fording Coal as the next target. With the price of natural gas rising power companies will have to burn more coal to save money and keep rates down.

I am not adding a bunch of stocks to the watch list until we exit some of our existing plays.

Good luck!

Dropped Entries


New Watch List Entries
Fording Canadian Coal Trust

Current Watch List

FDG - $131.90 Fording Canadian Coal Trust

** Breakdown Target $125.00 **
** Breakout Target - none **

Fording Canadian Coal Trust (the Trust) is an open-ended mutual fund trust. The Trust does not carry on any active business. Distributions to Unitholders are facilitated by the Trust's investment in Fording Inc. The Trust holds all of the issued and outstanding Fording Common Shares, Fording Preferred Shares and Fording Subordinated Notes and does not own any other material assets. Through Fording Inc., the Trust holds a 62%-interest, declining to 61%, effective April 1, 2005, and to 60%, effective April 1, 2006, in the Elk Valley Coal Partnership and a 100%-interest in NYCO. The Trust uses the cash it receives from its investment in Fording Inc. to make quarterly cash distributions to its Unitholders. During the year ended December 31, 2004, the Elk Valley Coal Partnership accounted for 96% of the Trust's revenues and NYCO accounted for the balance.

Breakdown Target
(No leaps)


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