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Weekly Newsletter, Saturday, 10/08/2005

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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

Rough Week For Energy Stocks

For the second time in two months we were stopped out of all our positions on a massive three-day drop. The good news is that we exited all of them before significant damage was done and most of our profits were protected. Hindsight is always 20:20 and I always feel the stops should have been tighter after an unplanned exit. However, as a weekly newsletter it is just as frustrating to have a good position stopped out by some temporary dip only to rocket higher for monster gains later. It is a balance I have to maintain in print but the reader is free to modify to his choosing. I am sure many of you exited earlier as the volume of email I have been receiving over the weeks just prior to the dip were from those taking profits early or asking about when to get out due to nervousness about risking large profits.

Of course there were also the few who did not put in their stops and are now suffering the pangs of regret with some stocks moving well below our stop levels. Just remember the capitulation point for the market is one tick after I finally exit those positions for a giant loss.

Here is a table of the exits for all the positions. I don't claim anybody got these exact results but had you followed the instructions exactly you would have been very close depending on your broker. The optional short-term positions are listed as well as the leaps for reference only.

Exit table for week of October 2nd.

The only positions we took a loss on were the last three entered simply because they had not yet aged sufficiently. Still the damage was minimal. The biggest damage was to profits as several positions fell several dollars in value before being stopped. The gap down open on Thursday was the most damaging since options did not open for some until well after the stock began trading. We took a big hit on those but still ended with a profit in most cases. Hopefully the majority of readers had already seen the disaster approaching and exited gracefully.

Last week VLO was on the watch list with an entry at $110 and an additional entry at $108 with a stop at $106. The velocity of the drop should have scared you off from making those entries. Had you taken the entries as planned it would have cost you $9.00 for the first entry and $7.00 for the second one for an average price of $8. Ironically the stop was hit just a few minutes later but the option price had risen to $7.60 so your loss would have only been -40 cents. This would have been scary in progress but a quick exit out the fire escape at $106 would have been cheap. I have never put a stop on a watch list item before but VLO looked very precarious just over $105 and I wanted to avoid a bloodbath. Turns out it was a lucky move on the surface but then VLO closed at $108 on Friday.

I sent out a midweek update on Wednesday with some suggestions for buying the dip. The gap down open on Thursday gave those interested a much better entry point but given the magnitude of the energy gap I would have hesitated taking the entries. All of the suggestions closed on Friday below the prices listed on Wednesday night except for COP and VLO. All the stocks closed higher Friday than their gap down prices on Thursday except for SWN. Had you taken the suggestions you would be profitable today. I appreciate the emails I received thanking me for the update and the suggestions.

Now, the next problem is what to do next? We only have one position in the portfolio, Questar (STR). I did not put a stop on it as a watch list entry and we were triggered at the beginning of the drop at $86. It hit a low of $77.90 but recovered to close at $82.99 on Friday. Despite being underwater I still like the position.

We came into the weekend with a blank slate and about six-eight weeks remaining in this demand cycle. Once we get into December traders will start looking towards spring and without some kind of energy crisis the prices will begin to soften.

Over the next six weeks I do expect natural gas and oil to rise again. The press is full of comments about falling demand but in reality it is mostly due to the hurricane fall out. Over a million people are not driving back and forth to work every day and that leaves a lot of gasoline unburned. Current estimates claim that more than 350,000 cars, trucks, etc were destroyed by the hurricanes. How much gas did that save? The high prices also impact driving habits but in most cases for only a few weeks. Once consumers get used to seeing the $3 number it will be just another hardship to bear and driving will resume again.

The refinery outages will keep oil prices soft with 14% of our total capacity offline for up to two more months. U.S. crude oil production was 3.81 mbpd in the week ended 9/30. That was the lowest recorded number since 1949. As of 10/5 there were still 3,114,700 bbls per day of refining capacity still offline. Those running only managed to operate at 70% of capacity due to lingering problems and lack of oil supply. This was the lowest level of capacity utilization since March 6th, 1987. Refineries saw inputs of crude oil of only 11.715 mbpd last week. That was the lowest volume of crude refined since March 13th 1987. Crude oil imports fell -1.574 mbpd to 8.119 mbpd due to ports or facilities still closed for Rita. This is the lowest level imported since March 7th, 2003. Gasoline will remain high but oil prices should drift until the refineries come back online.

The biggest obstacle ahead is natural gas. There is no strategic reserve. Pipelines and gas processing plants are still not back online. Mexico said it had lost 220 bcf of gas imports from the U.S. due to the hurricanes. They also said they would have to import another 275 mcf per day from other U.S. sources to cover shortages until Gulf production came back online. Once those Gulf gas fields restart production there are going to be a lot of empty pipelines battling for any available production. Last Wednesday the gas inventories saw a build of 44bcf and slightly less than expected. Considering that 68% of Gulf production is still offline. I believe that pipelines and gas processing facilities still offline from the storms are hindering dispersion of gas for use and allowing it to build up in underground storage. Mexico said 220 bcf of imports from the U.S. had been lost over the last 30 days due to hurricane damage. If that gas is being produced somewhere other than the Gulf they have to be storing it until the lines to Mexico open again. They said they would have to increase imports by 275mcf per day from other U.S. sources to insure critical needs until the Gulf came back online.

The CEO of LNG was on CNBC this week and he said that gas production and imports for 2005 and the future, regardless of hurricane disruptions, would be flat to declining for the foreseeable future. In other words despite our best efforts we cannot produce or import any more gas. New LNG hubs will only act to replace declining production elsewhere.

With the winter weather hitting the middle of the country this weekend the winter demand cycle for gas consumption should get its first test. I personally believe that gas numbers for next Thursday will show a decline but I am not qualified to offer an expert opinion. Time will tell.

Given the oil and gas scenario I have laid out above I have decided to recommend only a few new positions this weekend. The oil demand picture will remain cloudy until the refineries come back online. The gas demand cycle will also remain cloudy and a hotbed of confusion until the winter demand begins to appear. until then we could see prices on both wander unless something appears to push them in a particular direction. Personally I believe that direction will be up.

The new plays I am going to recommend this weekend are cautionary at best. I am skeptical of any oil company with exposure to the Gulf. With the majority of energy earnings due out in two weeks I do not want to load the boat only to have it sunk by a rash of earnings charges due to hurricane damage. Until the refineries come back online oil will be plentiful regardless of how slow the Gulf production resumes. I believe the only rational plays ahead of earnings are gas plays. The potential for a gas squeeze this winter is huge.

Coal is another sector where prices should rise. As long as gas remains in the $12-$13 range or even higher the utility companies will burn more coal. The Senate version of the Barton bill should contain language about coal gasification and liquefaction into gasoline and diesel. Despite that being a long way from reality on any major scale it should provide another incentive to own coal.

I am going to keep the portfolio light especially since the Friday rebound was lackluster. I am also going to avoid the refiners due to the low capacity utilization for those actually running. This could impact earnings regardless of those with damage.

I am picking BTU (coal), UPL, SWN, BR and CHK (gas) and KMG as a wildcard after BP sold its chemical business. KMG is also going to spin off its chemicals business sometime in Q4 and this is a very good time to do it. I wanted to add EOG and ECA to the list but their rebound was weak. Maybe next week.

All these plays will be short-term calls, not LEAPS. I expect to be out of them well before year-end.

Turn up your thermostat and lets get that demand cycle moving!

Crude Oil Chart - Daily

Natural Gas Chart - Daily

 


Changes in Portfolio

New Plays

Dropped Plays

New Watch List Plays Triggered
STR $83.00 Questar (Natural Gas)

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

STR - $83.00 Questar ** Stop loss $77.50 **

Questar was a watch list candidate last week with a breakdown target of $86. It broke down substantially below that level and would need another +$3 gain just to get us even. Questar is in the right business for the coming months and the velocity of the rebound on Friday, +4.16, should give us a clue as to its strength.

Earnings: Oct 26th (estimate)

Company Info:

Questar Corporation (Questar) is a natural gas focused energy company with three principal lines of business gas and oil exploration and production, interstate gas transmission, and retail gas distribution. Questar conducts most of its operations through its subsidiaries Questar Market Resources (Market Resources), Questar Pipeline Company and Questar Gas Company (Questar Gas). Market Resources is a sub-holding company that owns Questar Exploration and Production Company (Questar E&P), Wexpro Company (Wexpro), Questar Gas Management Company (Gas Management) and Questar Energy Trading Company (Energy Trading). Questar Pipeline provides interstate natural gas transmission, storage and gas processing and treating services. Questar Gas conducts retail natural gas distribution.

APR 2006 $90 CALL STR-DR @ $6.10

Entry $86 (10/04)

BTU - $74.65 Peabody Energy ** Stop Loss $70.00 **

Peabody announced this week that it was acquiring 30% of Econo-Power, a coal gasification company. With the Econo-Power process 50,000 tons of coal can be converted into one billion cubic feet of natural gas at a cost less than current gas prices. This should be a windfall for Peabody as they can now sell the gasifier and the coal to run it. This opens up a completely new market for Peabody to users that don't burn coal for energy.

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 $80 CALL BTU-CP @ $6.30

Entry $74.65 (10/09)

UPL $52.39 Ultra Petroleum ** Stop loss $48.00 **

Ultra fell as much as the rest of the crowd although not as sharply. It appeared to battle for every point as the selling progressed. UPL gained +2.84 on Friday and was stronger than all but the refiners. UPL is a very strong gas driller and has a cost of acquisition under $2 mcf. They have over 10,000 drilling sites plotted and operate a very active drilling program. UPL is working with Questar to drill the very productive Pinedale Anticline in Wyoming.

Earnings Schedule: Oct-25th

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.

March $60 Call UPL-CL @ $5.70

Entry $52.39(10/9)

CHK - $33.99 Chesapeake Energy ** Stop loss $31.00 **

CHK recently announced the acquisition of Columbia Natural Resources and over 4.2 million acres of gas leases. This puts Chesapeake as a strong number three contender in the U.S. market behind XOM and COP in that order. The additional leases and 125 mcfe of daily production will keep CHK busy drilling for the next 15 years according to their press release.

Earnings Schedule: Nov-4th (approx)

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.

APRIL $35 CALL CHK-DG @ 5.30

Entry $33.99 (10/09)

BR - $72.71 Burlington Resources ** Stop loss $68.00 **

Burlington has over 12 trillion cf of gas reserves and onshore gas in the U.S. accounts for more than 85% of their production. BR is very well positioned to profit from a continuing rise in gas prices.

Company Info:

Burlington Resources Inc. is one of the world's largest independent oil and natural gas exploration and production companies, and holds one of the industry's leading positions in North American natural gas reserves and production. Our hallmarks include long-life reserves, strong cash flow generation and high expertise in producing from complex geologic reservoirs. Our reserves base of 12 trillion cubic feet equivalent of natural gas at year-end 2004 was concentrated in North America, which supplies nearly 85 percent of current production, with a key focus being the Rocky Mountain gas fairway of the U.S. and Canada.

Burlington's producing areas include the giant San Juan Basin Field of New Mexico and Colorado, where Burlington is the leading producer; Wyoming's highly productive Madden Field; the Williston Basin of North Dakota; the Anadarko Basin in Oklahoma; the Barnett Shale and Bossier trends in Texas, and South Louisiana. Major Canadian production comes from the Deep Basin, O'Chiese, Foothills, Northern Plains, Kaybob and Southern Plains areas. We also produce natural gas in the East Irish Sea, the Dutch North Sea, Argentina and China, and oil in Algeria, offshore China and Ecuador. With headquarters in Houston, we employ more than 2,200 people.

Buy FEBRUARY $80 Call BR-BP @ $3.90

Entry $72.71 (10/09)

SWN - $72.00 Southwestern Energy ** Stop loss $68.00 **

SWN just completed a secondary offering in order to finance an aggressive drilling program on the Fayetteville Shale play in Arkansas. SWN drilled 119 wells in the first half of 2005 and only had 3 dry holes. The stock split at $72 back in June and it closed at $72 again on Friday. After gaining +18 in only four days before the crash it gave -13 back before rebounding again. Let's hope we recover that $13 very quickly. I am playing a December call because the 2006 options are way too expensive.

Earnings: Oct 28th

Company info:

Southwestern Energy Company is an integrated energy company headquartered in Houston, Texas, primarily focused on the exploration for and production of natural gas. Originally organized in 1929 as a local natural gas distribution company in Arkansas, today the Company is involved in many different activities.
Natural Gas and Crude Oil Exploration and Production - Southwestern is engaged in natural gas and oil exploration, development and production in Arkansas, Oklahoma, Texas, New Mexico, and Louisiana. At December 31, 2004, the Company's proved oil and gas reserves totaled 645.5 Bcf equivalent, of which approximately 92% were natural gas. The Company primarily conducts its exploration and production activities through its wholly-owned subsidiaries, Southwestern Energy Production Company and SEECO, Inc.
Natural Gas Distribution - The Company's utility subsidiary, Arkansas Western Gas Company, is engaged in the gathering, distribution, and transmission of natural gas to approximately 145,000 residential, commercial and industrial customers in northern Arkansas.
Natural Gas Marketing and Transportation - Southwestern provides natural gas marketing and transportation services through its wholly-owned subsidiary, Southwestern Energy Services Company. Additionally, Southwestern Energy Pipeline Company owns a 25% interest in the Ozark Gas Transmission System, a 723-mile interstate natural gas transmission system that extends from eastern Oklahoma across northern Arkansas.

Buy DEC-$80 Call SWN-LP @ $5.10
(2006 calls are too expensive)

Entry $72.00 (10/9)

KMG $87.59 Kerr McGee ** Stop loss $84.00 **

On Thursday Kerr McGee announced it was going to spin off its chemical business sometime in Q4. Kerr McGee's chemical business it the worlds third largest producer and marketer of titanium dioxide pigment with a 13% global market share. After the spin off KMG will be solely dedicated to exploration and production of oil and gas. KMG recently agreed to spend $4 billion to repurchase its shares in a successful defense to keep Carl Icahn from acquiring a seat on the board. Plenty of reasons for upside potential here without any boost from oil prices.

Company Info:

Kerr-McGee Corporation (Kerr-McGee) is an energy and inorganic chemical holding company whose consolidated subsidiaries, joint ventures and other affiliates (together, affiliates) have operations throughout the world. The Company's core businesses include exploration and production, and chemicals. Kerr-McGee's oil and gas exploration and production areas are onshore in the United States, in the Gulf of Mexico, the United Kingdom sector of the North Sea and China. In addition, the Company has exploration programs in Alaska, Brazil, Morocco, Bahamas and Benin. Kerr-McGee affiliates engaged in chemical businesses produce and market inorganic industrial chemicals, lithium-metal-polymer batteries and heavy minerals. On June 25, 2004, the Company completed a merger with Westport Resources Corporation. On Oct 7th, 2005, the Company announced its decision to proceed with the proposal to spin off its chemical business in Q4-2005.

Buy APRIL $90 Call KMG-DR currently $7.40

Entry $87.59 (10/9)


Play Updates

Existing Plays

EOG $69.07 EOG Resources ** Stopped $70.00 **

EOG lost -12 points in the sell off and only recovered +3 from its lows. I elected to pass on adding it back into the lineup until some strength returned.

Earnings Scheduled: Nov-2nd

Company Info:

EOG Resources, Inc. (EOG) explores for, develops, produces and markets natural gas and crude oil primarily in major producing basins in the United States, Canada, offshore 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.

April 2006 $80 Call EOG-DP @ $6.60, 10/6 exit 4.70, -1.90

Entry $74.90 (10/02)

TSO - $61.36 Tesoro ** Stopped $62.00 **

Tesoro retreated back to uptrend support at $58 before finding buyers. The +2.92 rebound on Friday was encouraging but without oil to refine there could be some earnings weakness. I still like it but don't want to carry refiners until the picture clears.

Earnings Schedule: Nov-4th (approx)

Company Info:

Tesoro Corporation (Tesoro), formerly Tesoro Petroleum Corporation, is an independent refiner and marketer of petroleum products with two major operating segments, Refining and Retail. Through its refining segment, the Company manufactures products, primarily gasoline and gasoline blendstocks, jet fuel, diesel fuel and heavy fuel oils for sale to a variety of commercial customers principally in the mid-continental and western United States. It operates six refineries in the United States with a combined rated crude oil capacity of 558,000 barrels per day. During the year ended December 31, 2004, approximately 50% of the Company's total refining throughput was heavy crude oil. Its retail segment distributes motor fuels through a network of branded gas stations, primarily trading under the Tesoro and Mirastar brands. The Company markets its products to wholesale and retail customers, as well as commercial end users. On November 8, 2004, the Company changed its name to Tesoro Corporation.

Feb 2006 $70 CALL TSO-BN @ $6.10, 10/5 exit 5.10, -1.00
(LEAPs too expensive)

Entry $65.00 (9/26)

PBR - $63.90 Petroleo Brasileiro ** Stopped $66.00 **

PBR has no hurricane exposure but still retreated -12 with the rest of the group. The +2.50 rebound on Friday was encouraging but I would like to see a trend develop again before going back into this position.

Earnings Schedule: Nov-11th

Company Info:

Petroleo Brasileiro engages in the exploration for oil and gas and in the production, refining, purchasing and transportation of oil and gas products. For the last quarter reported, net revenues increased 35% to $10.73B. Net income increased 53% to $2.05B.

Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a wholly owned government enterprise responsible for all hydrocarbon activities in Brazil. The Company also has oil and gas operations in international locations, with the significant international operations being in Latin American countries. Petrobras is engaged in a range of oil and gas activities, which include segments like exploration and production; refining, transportation and marketing; distribution; natural gas and power; international, and corporate. During the year ended December 31, 2004, the Company had estimated proved developed and undeveloped crude oil and natural gas reserves of approximately 11.82 billion barrels of oil equivalent in Brazil and other countries.

JAN 2007 $75 LEAP CALL VDW-AO @ 8.10, exit 10/5 $7.30, -0.80

Entry $68.50 (9/26)

ECA - $50.54 Encana ** Stopped $54.75 **

The strong gains in ECA over the past month probably held it back on Friday. There may be some sellers left just waiting for a bounce to unload more. I watched it on a five min chart all day along with several others and ECA was the least impressive. If a trend returns we will play it then.

Earnings Schedule: Oct-26th

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, exit 10/5 $13.80 +6.70

Alternate short-term entry:
Jan-06 $50 Call ECA-AJ @ $2.50, exit $8.20, +5.70

Entry @ $46 (8/29)

BTU - $74.65 Peabody Energy ** Stopped $78.00 **

BTU took a serious hit and it is not even an oil stock. It just proves that the selling was pure profit taking and not stock specific. Those with large accumulations of profit were hit the hardest. BTU had been very kind to us and we escaped with a nice profit despite giving back $6 before being stopped out. Yes, $6 of profit. The call traded at $19.30 at the open on the 4th and we exited for $13.80 on the 5th. Dang, I hate that! I reinstated BTU as an active play.

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, exit 10/5 $13.80, +7.30
(no leaps)

Entry $67.25 (8/29)

UPL $52.39 Ultra Petroleum ** Stopped $51.00 **

Ultra gave up the required -$10 along with the other stocks in the sector and then followed up with a nice +2.84 gain on Friday. I reinstated UPL as an active play.

Earnings Schedule: Oct-25th

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, exit 10/6 $15.10, +6.70

Alternate short-term entry:
March $45 Call UPL-CI @ $4.40, exit $10.60, +6.20

Entry $40.00(8/22)

MRO - $62.34 Marathon Oil ** Stopped $67.50 **

Marathon also lost -$10 in three days and had a nice +2.40 rebound. However, Marathon did have some refinery problems and some hurricane issues. I am avoiding this play again until the fog clears.

Earnings Schedule: Oct-27th

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, exit 10/4 12.00, +5.50

Alternate short-term entry:
Jan-06 $65 Call MRO-AM @ $2.90, exit 10/4 $5.80, +2.90

Entry $61 (8/22)

COP - $63.60 Conoco Phillips ** Stopped $67.50 **

Conoco rebounded +1.58 on Friday and started declining before the rest of the sector. I fear refinery outages could produce a nasty earnings surprise. I am putting COP on hold until after earnings.

Earnings Schedule: Oct-26th

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, exit 10/4 $10.80, +3.30

Alternate short-term entry:
Jan-06 $65 Call COP-AM @ $4.40, exit $6.80 +2.40

Entry $63.50 (8/22)

CHK - $34.04 Chesapeake Energy ** Stopped $34.50 **

CHK held up very well even after the announcement of their Columbia Resources Acquisition but eventually it buckled under the pressure. However, it appears poised to breakout over $34 and current resistance as long as a new crisis does not develop. I added CHK back as a new position.

Earnings Schedule: Nov-4th (approx)

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, exit 10/6 8.70, +3.80

Alternate short-term entry:
Jan-06 $30 Call CHK-AE @ $2.25, exit $8.70, +6.55

Entry $28.11 (8/28)

XLE - $49.53 Energy SPDR ** Stopped $52.25 **

The XLE lost an amazing -$7 and shows how broad based the selling really was. I am not adding XLE back as a play because of the potential for a major component to miss estimates due to hurricane damage. Better to be safe than sorry.

The XLE is a slave to oil prices given the makeup of the 27 component stocks. The biggest is XOM and it is a pure oil price play. The index has exposure to damage in the Gulf but also to companies that would repair the damage. That is the problem with indexes, you get the good, bad and ugly all rolled into one.

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, 10/4 exit $5.60, +2.10

Alternate short-term entry:
Jan-06 $50 Call XBT-AX @ $2.45, exit $4.57, +2.12

Entry $49 (8/22)

 


Leaps Trader Watch List

After a week of really nasty selling you would think there would be a dozen attractive targets for new positions. Unfortunately most of the potential candidates have hurricane damage of some sort. With earnings only two weeks away the risk is too great to add a company with exposure to the Gulf. This knocks out the refiners and the major oils as well as a bunch of little guys.

The only plays I feel comfortable owning now are the gas plays and maybe Tesoro as a refiner. Valero had two refineries out and that makes it too risky. PBR would probably be a great add but its success is tied to the price of oil. Those other oil stocks who are slaves to oil prices are also on the do not disturb list until a new trend in oil develops.

That leaves us with the remaining gas plays I did not put on as regular plays this weekend. I am cautious about them until we see a new trend develop as well and the price of gas begin to firm.

Be cautious and limit your position sizes on any watch list entry.

Good luck!
 

Dropped Entries

None


New Watch List Entries

Current Watch List

ECA - $50.54 - Encana

** Breakdown Target - $48.50 **
** Breakout Target - $52.50 **

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.

Breakdown Target @ $48.50
BUY APR 2006 $55 CALL ECA-DK

Breakout Target @ $52.50
BUY APR 2006 $60 CALL ECA-DL

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

EOG - $69.05 - EOG Resources

** Breakdown Target $66.50 **
** Breakout Target $70.50 **

EOG Resources, Inc. (EOG) explores for, develops, produces and markets natural gas and crude oil primarily in major producing basins in the United States, Canada, offshore 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.

Breakdown Target @ $66.50
BUY APR 2006 $75 CALL EOG-DO

Breakout Target @ $70.50
BUY APR 2006 $80 CALL EOG-DP

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

DVN - $63.44 - Devon Energy

** Breakdown Target $60.50 **
** Breakout Target $64.50 **

Devon Energy Corporation (Devon) is an independent energy company engaged primarily in oil and gas exploration, development and production, the acquisition of producing properties, the transportation of oil, gas and natural gas liquids (NGLs) and the processing of natural gas. Devon operates oil and gas properties in the United States, Canada and various regions located outside North America. Devon's North American properties are concentrated within five geographic areas. Operations in the United States are focused in the Permian Basin, the Mid-Continent, the Rocky Mountains and onshore and offshore Gulf Coast. Canadian properties are focused in the Western Canadian Sedimentary Basin in Alberta and British Columbia. Properties outside North America are located primarily in Azerbaijan, China, Egypt, and areas in West Africa, including Equatorial Guinea, Gabon and Cote d'Ivoire.

Breakdown Target @ $60.50
BUY APR 2006 $65 CALL DVN-DM

Breakout Target @ $64.50
BUY APR 2006 $70 CALL DVN-DN

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

TSO - $61.36 - Tesoro Corp

** Breakdown Target $58.50 **
** Breakout Target $63.50 **

Tesoro Corporation, is an independent refiner and marketer of petroleum products with two major operating segments, Refining and Retail. Through its refining segment, the Company manufactures products, primarily gasoline and gasoline blendstocks, jet fuel, diesel fuel and heavy fuel oils for sale to a variety of commercial customers principally in the mid-continental and western United States. It operates six refineries in the United States with a combined rated crude oil capacity of 558,000 barrels per day. During the year ended December 31, 2004, approximately 50% of the Company's total refining throughput was heavy crude oil. Its retail segment distributes motor fuels through a network of branded gas stations, primarily trading under the Tesoro and Mirastar brands. The Company markets its products to wholesale and retail customers, as well as commercial end users. On November 8, 2004, the Company changed its name to Tesoro Corporation.

Breakdown Target @ $58.50
BUY FEB 2006 $65 CALL TSO-BM

Breakout Target @ $63.50
BUY APR 2006 $70 CALL TSO-BN

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

NOV - $59.29 - National Oilwell Varco

** Breakdown Target $57.50 **
** Breakout Target $62.50 **

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 workover 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 downhole 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 downhole, 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.

Breakdown Target @ $57.50
BUY FEB 2006 $60 CALL NOV-BL

Breakout Target @ $62.50
BUY APR 2006 $65 CALL NOV-BM
 


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