Option Investor

Weekly Newsletter, Saturday, 09/17/2005

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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

Volatility Returns

Considering how volatile oil was for the week I am surprised we did not lose more positions then we did. VLO, SUN and NOV hit their stops and were closed. Meanwhile MEE, BTU and CNX continued to thrive with new highs all around. While oil stocks were weak the coal and gas plays continued to be strong with coal taking honors for the biggest gains.

The price of oil retreated on Friday to close at $63 and right at strong support. Many of the oil issues were seen rising into the close as though preparing to get an early start on Monday. It could have been due to the S&P rebalancing and not just a bid under oil. We will not know until Monday.

One thing everyone needs to keep in focus is that oil stocks don't have to go up just because oil goes up or down. Oil stocks are captive to the broader market and should the historical September weakness appear next week there is nothing to keep oil stocks from falling as well. Crude could be climbing but if the markets are crashing oil stocks will follow. However, without any material bias any gain in crude should translate to a gain in energy stocks and a corresponding gain in the markets. You can't have 350 energy stocks moving higher on crude without seeing the broader indexes reflect that move. Remember, I said in a market without any "bias" and next week is not likely to be that market.

With the Fed meeting on Tuesday there is likely to be lots of bias once that meeting is over. Current consensus is for another hike of +25 points but the door is open to anything from a pass to a +50 point hike in light of recent inflation information.

The IEA said it was not going to extend the amount of oil released to the U.S. or the extend the timeframe so the worry is going to quickly come back to U.S. production and everything we can import from commercial sources. With gulf oil production still 56% offline and gas -34% offline every day brings us closer to that choke point where demand will exceed supply and refineries will have to start paying up again for light sweet crude.

Encana dumped an albatross last week and sold its Ecuador property to China for a fat price. The deal was officially to Andes Petroleum but that is a front for China. Seems they feel they can get more done by using the appearance of locally owned companies. Occidental also has property in Ecuador and could be the next to announce a deal. The problem with Ecuador is the current political unrest. Production has been sharply curtailed by protestors and attacks on oil assets. Encana was smart to take the quick exit and a fat check. You don't suppose China had anything to do with the recent increase in attacks? Maybe I have watched too many movies where the potential buyer makes things tough for the current owner to induce them to sell.

We are getting close to the period where the energy stocks will start announcing guidance upgrades and it could be very healthy for stock prices. I would rather they wait for a bottom to announce rather than just before the drop.

With the markets likely to be volatile with a downside bias this is a week to snug up stops and try to exit with a profit if oil decides to retest the 100-day average at $60. While this would be a good buying opportunity I don't want to give up current profits on the way down.

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
FDG $41.85 Fording Canadian Coal

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

FDG - $41.85 Fording Canadian Coal Trust ** Stop $39.25 **

Oops! I posted the entry point on FDG for a dip to $125 last week and neglected to take into account the 3:1 split due on the 13th. The $125 entry price would have equated to $41.66 and that was hit at the open on the 14th. Since the entry and the option was listed mistakenly and I am going to list the entry as $41.66 and the option as the March-$45. (March-135 recommended divided by 3) Several readers emailed me that they were dividing by 3 and taking the entry so I am going to eat the busted entry. I am going to show it with an average cost of $2.50 with the high at $2.80 and low of $2.05 on the opening spike.

Fortunately, after a day of consolidating just under $40 the coal fired rocket took off again on Friday and sent the stock back to close at $41.85. As long as the natural gas spigot is turned down to low the coal burners will be hot and hungry. With the potential for a gas shortage this winter it appears many utilities are storing up as much coal as they can handle in advance of the first cold snap.

Company Info:

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.

MARCH 2006 $45 CALL FDG-CI @ $2.50

Entry $41.66 (9/14)


Play Updates

Existing Plays

SUN - $73.45 Sunoco Inc ** Stopped at $74.00 **

Ouch! Where did that truck come from? From a new high last Friday at $80 to the close this Friday at $73.45 was a long slow bout of selling that never let up. There was no news specific to SUN but refiners in general sold off on news that the IEA was sending gasoline as part of their disaster help. Also the end of the driving season contributed to a decline in demand. I don't believe the story is over for the refiners with heating oil season just ahead but we are out of SUN for the time being. Personally I am looking for a bottom to buy the dip. Who knows where that will form and it will likely come in the form of a news event than some support line.

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, exit $4.50, -1.80
(No out of the money LEAPS at the time)

Entry $77.50 (9/06)

ECA - $50.96 Encana ** Stop Loss $47.00 **

Ecana struggled all week to break resistance at $51.40 and appears ready to try again next week. Encana is a pure gas play and is less impacted by oil prices than most others. A break over $50.50 could cause some short covering and put us into a new range.

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 - $79.48 Peabody Energy ** Stop Loss $74.50 **

Simply amazing. BTU rocketed for a +3.95 gain on Friday alone and forced me to raise the stop this week +6.50 points higher. Can't complain about that! Coal is becoming the fuel of choice with gas likely to go to $20 this winter.

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 - $75.74 CONSOL Energy ** Stop Loss $73 **

After nearly stopping us out at $71 on Wednesday CNX caught the coal fire and rocketed to another new high on Friday. I am moving the stop to $73 to keep from giving up our gains. That may be too close but I am being careful now that we are up over $10 from our entry.

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 $44.95 Ultra Petroleum ** Stop loss $42.75 **

Ultra spent the week wandering under $45 as oil wandered under $65. UPL is tied to oil prices despite its heavy gas drilling and production but it appears to be consolidating for a break over that $45 level on any good news. Last week it announced that proven reserves on the Pinedale Anticline had risen to over 40 trillion CF of gas due to new results from continued drilling.

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 - $68.01 Marathon Oil ** Stop loss $65.50 **

Marathon also appears to be ready for a breakout to a new high over $68 and is just marking time until oil prices return to an up trend. I am still very positive on MRO but I did raise the stop just in case.

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 - $69.15 Conoco Phillips ** Stop loss $66.50 **

Conoco closed in on new high territory once again after lagging most of the week. The lack of a trend in oil prices kept COP from breaking out but the strength is still there. Conoco was selected as one of the companies to develop the $20 billion Shhtokman LNG project in Russia. XOM and Shell were excluded from the project. This has been on the burner for more than 10 years and Gazprom finally made the awards this week. Deutsche Bank upgraded its targets on COP to $80 saying that the damage to its Alliance refinery in LA is more than offset by massive U.S. refining margins that DB expects to continue through 2006 and beyond.

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 - $33.86 Chesapeake Energy ** Stop loss $32.00 **

CHK is slowly climbing the new high road with only a minor pullback from Thursday's new high at $34.25. Chesapeake has a high beta to gas prices and should continue to do well as winter approaches.

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 - $108.00 Valero Energy ** Stopped $108.50 **

All good things must come to an end and this run had to brake for profits sooner or later. VLO had run +$26 from our entry and that is well past being a hog on profits. We got an even +100% gain on the VLO LEAP and I doubt anybody reading this is complaining. We will look for a bottom and try to reenter for the heating oil season.

VLO announced approval of a 2:1 split this week but the measure still must be approved by shareholders. There is no date and it could be months before it is effective.

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, exit $24.20, +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 - $52.27 Energy SPDR ** Stop Loss $51.00 **

The XLE followed the price of oil sideways as the week progressed but closed near the high for the week. There is nothing spectacular about this index in a week lacking of energy high points. The XLE does not have any coal stocks and was left out of the Friday coal rally. Be patient, our time will come.

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 - $54.87 Massey Energy ** Stop Loss $53.00 **

Massey rewarded us with our patience over the last two weeks with a blowout high on Friday and a +3.37 gain. When you consider Massey warned back on the 7th that fuel costs would impact profits this is amazing. On Friday the Jana Partners hedge fund filed a letter with regulators saying it had requested Massey to buy back $1.5 billion in shares and unlock value for shareholders. We got our value on Friday regardless of whether Jana gets their wish. Jana said Massey should make a tender offer for a 10% premium to buy back shares. This would be instantly accretive to 2007 earnings by over 20% according to Jana.

I jacked up the stop loss just in case this rocket runs out of fuel.

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 $47.75 Talisman Energy ** Closed **

Talisman is the weakest oil play we have and was still declining into Friday's close when all the other majors were inching towards new highs. I elected to close TLM rather than wait for our stop to be hit at $47. This should guarantee a sharp spike next week.

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, exit 3.30, +1.20
(no leaps)

No insurance put due to cheap option

Entry (8/17) $45.00

HP - $59.92 Helmerich Payne ** Stop Loss $57.50 **

NOV had a sharp dip on Thursday that stopped us out only to see the price return to its prior range. NOV was not behaving well and I am not disappointed to see it go since we did exit with a profit. I would like to reenter once a new trend is established.

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, exit $7.60, +1.60
(no leaps)

Entry $59.50 (8/10)

Leaps Trader Watch List

I believe we already have the best of the best and any attempt to add more plays just dilutes the potential of the ones we already have.

However, I would suggest looking at EOG and PDS if you need some new meat in your diet. PDS is a slow mover but it is very methodical. There is very little volatility and the trend is definitely up.

EOG is a past play and it appears to be building a wedge at $71 for a potential breakout. We have seen over a week of consolidation and it closed very near a new high on Friday.

I am cautiously optimistic about oil for next week but we have the danger of the Fed meeting and the potential for the markets to head into the September abyss at a high rate of speed. While I am optimistic I do not feel suicidal this week. I want to wait and see what the market brings us. Who knows, we may get a new entry on VLO under $100.

No new plays this week.

Good luck!

Dropped Entries


New Watch List Entries


Current Watch List



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