Option Investor

Weekly Newsletter, Saturday, 10/22/2005

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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

OK, I Give Up

This was an extremely frustrating week. The oil crash on Tuesday after the $1.4 billion block trade in XOM and the crash on Thursday when oil fell more than -$2 on futures dumping. Thursday was the last day of trading in November futures and rumor has it that Refco had billions in positions for themselves and clients. These were dumped rather than rolled forward due to their current operating condition. Whether this is true or just a rumor there was a large number of futures contracts sold with more December
Contracts sold than November.

Regardless of the reasons we were knocked out of all but one position when oil prices came crashing down. Several were stopped out by only a few cents. Most frustrating was Peabody Energy. BTU soared to $83 on Monday just ahead of earnings on Tuesday. BTU reported earnings that doubled the prior quarter but missed analysts estimates by a penny. There was no mercy and BTU fell from $83 to $72.45 and stopping us out at $73. Unbelievable!

Fortunately the losses were minimal because of the close stops. EOG and DVN were the worst at just over $2 with the rest right at $1.00. I am sure many more energy investors suffered much more than that.

UPL -1.20
CHK -1.25
EOG -2.20
DVN -2.10
TSO -1.20
NOV -1.00
BTU -0.10

Now that the slate is clean and energy earnings are next week I shudder to add anything back into the mix. We don't know what earnings are going to bring other than analysts expect something in the +70% range overall. +100% did not help BTU so I have no confidence in taking new positions ahead of the news. Hurricane damage and lost production will be on the top of the list of charges and traders have already shown no mercy for hurricane survivors.

These are some of the expected results from the top guns in the sector.

XOM, Exxon Mobil the largest oil company reports on the 27th and is expected to earn +$1.36 for only a +45% growth over last year.

CVX, Chevron Texaco, number two behind XOM is expected to report +1.92 and a +40% growth from 2004. CVX reports on the 28th. Chevron has suffered greatly from the hurricanes with two refineries knocked out and one still crippled from the blow.

COP, Conoco Phillips, reports on the 26th and is expected to report +2.56 and a +79% jump in earnings. Revenue should be over $52 billion.

AHC, Amerada Hess, also reports on the 26th and is expected to report +3.32 for a +91% growth over last year. Sales are expected to have jumped +59% over last year.

MRO, Marathon, reports on the 27th with estimates of +2.76 for more than a +200% gain. The company has already warned that production fell -20,000 bpd in Q3 due to Katrina.

APA, Apache, reports on the 27th and is expected to earn +$2.31 or +76% on a +42% jump in revenue.

APC, Anadarko, reports on the 28th and is expected to post +2.88 for only a +15% earnings growth. They must feel like the black sheep of the sector.

SLB, Schlumberger, reported on Friday with +86 cents, up form 53 cents in the comparison quarter for +67% growth. SLB said they lost 25 days of operations due to shutins in the Gulf and would have reported +6 cents higher without the hurricane impact.

ECA jumped from $46 to $55 on rumors that Shell was interested in buying the company for $65. The rumors turned out to be untrue but they did save us from being stopped on that position.

I looked long and hard this weekend and tried to find something to add for any energy pop next week. Unfortunately everything has a declining chart and/or an earnings announcement next week. Both are not conducive to an entry.

I feel like I am naked with only one position so I am going to add BTU back to the portfolio. Since they have already reported a +100% earnings gain they should be safe from further oil carnage. We were stopped out by 55 cents and that is where the drop stopped.

I mentioned in the OIN commentary this weekend that oil had fallen to strong support at $59 on Friday and rebounded to $60.63 at the close. That $59 level is a very strong support level and a perfect place for a rebound to start. The 100-day average has only been tested three times in three years and all three were in the last 12 months. The 200-day average has not been tested since Feb-2002 and is currently at $57. I believe the risk is minimal unless the entire Q4 demand cycle has imploded and oil breaks that $59 level.

Oil and gas from the Gulf was showing higher shut in rates on Friday as some companies chose not to take the weatherman's word for direction on Wilma. Evacuating 4500 workers in the event Wilma continues north instead of moving east would be very hazardous in a short time frame. Normally they have a week to exit but a failure to turn east would only give them 24-36 hours to make all the pickups and the weather is not likely to be good.

Natural gas is holding over $13 but an unexpected jump in reserves on Thursday put fear into the gas stocks. Nov-1st is the normal beginning of the winter demand cycle and the initial draw down of supplies. If the winter cycle goes as expected the price should begin to climb in November.

I reviewed the setups from last week and I would still take the entries today if the same circumstances existed. Also, some of those entries were from the watch list from two weeks ago when oil was rebounding from $61 to $64. It is unfortunate that we were stopped out two weeks in a row but sometimes it just doesn't work out the way you planned it. Next week we should have a lot more options and hopefully some better vision on the direction of demand into the winter months.

Jim Brown

Natural Gas Chart - Daily

Crude Oil futures Chart - Daily


Changes in Portfolio

New Plays
BTU $73.88 Peabody Energy

Dropped Plays

New Watch List Plays Triggered


Portfolio Listing & Top Picks

New Plays

Most Recent Plays

BTU - $73.88 Peabody Energy ** Stop loss $68.00 **

Peabody was crushed for missing estimates by a penny and fell from $83.42 to $72.45 in the three days following its earnings. They had a very bullish statement and the selling was entirely overdone. It appeared to be mostly profit taking rather than hostility about the miss. There was also a lot of behind the scenes damage in the oil sector over those same three days.

I am putting BTU back into the lineup as the only play possible who has already announced earnings, already been killed and should not be impacted by hurricane damage claims from other energy stocks.

I would have added an insurance put but the price of the Nov-$70 put at $2.30 was too expensive. That is about what we stand to lose with our stop.

Earnings were OCT-18th

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 @ $6.70

Entry $73.88 (10/23)

Play Updates

Existing Plays

UPL $47.81 Ultra Petroleum ** Stopped $46.00 **

Ultra rebounded on Monday to $53.55 before falling victim to the oil crash and futures selling. We were stopped out by -90 cents and I would have put them back into the mix were it not for earnings on Tuesday.

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 @ $5.10, exit $3.90, -1.20 (10/20)

Entry $50.55 (10/16)

CHK - $29.55 Chesapeake Energy ** Stopped $30.00 **

CHK collapsed on Tuesday but held its ground right at our stop the rest of the week. I considered adding CHK as a new play but the unexpected jump in gas reserves suggests caution until a new trend develops.

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 @ 4.20, exit $2.95, -1.25 (10/19)

Entry $32.60 (10/16)

ECA - $48.75 - Encana ** Stop Loss $45.00 **

Encana held above uptrend support and was the only play not stopped out. Rumors that Shell was going to make a $65 offer sent ECA to $55 on Thursday but the rumor proved to be untrue. Earnings should be strong but keep your stop tight and take no chances.

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.

APR 2006 $55 CALL ECA-DK @ $4.80

Entry $48.50 (10/13)

EOG - $61.26 - EOG Resources ** Stopped $63.25 **

EOG broke down sharply on Tuesday and Wednesday and the short term chart suggests it was one seller nibbling away at it both days. After a brief rebound on Wednesday it was knocked for a -$6 loss on Thursday. Not a good week for EOG.

Earnings schedule: 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.

APR 2006 $80 CALL EOG-DP @ $5.20, exit $3.00, -2.20 (10/19)

Entry $70.50 (10/11)

DVN - $58.07 - Devon Energy ** Stopped $58.50 **

Devon suffered the same fate as EOG and the short-term 30-min chart patterns are almost exactly identical. Somebody was exiting a big position and taking no prisoners.

Earnings Schedule: Nov-2nd

Company Info:

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.

APR 2006 $70 CALL DVN-DN @ $4.80, exit $2.70, -2.10 (10/20)

Entry $64.50 (10/11)

TSO - $55.26 - Tesoro Corp ** Stopped $53.75 **

Tesoro fell below uptrend support and did not stop until it broke the 100-day average at $54.20. TSO has no hurricane exposure and has been running at 100% capacity. The short term chart pattern is the same EOG and DVN suggesting a large fund was dumping all their energy at the same time.

Earnings Schedule: Nov-3rd

Company Info:

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.

FEB 2006 $65 CALL TSO-BM @ $4.40, exit $3.20, -1.20 (10/19)

Entry $58.50 (10/13)

NOV - $57.66 - National Oilwell Varco ** Stopped $53.50 **

NOV actually posted a gain for the week after a brief dip to $53.15 and stopping us out by 35 cents. It was an opening gap down on Wednesday and it quickly recovered but was no help to us.

Earnings Schedule: Oct-28th

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 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.

FEB 2006 $60 CALL NOV-BL @ $4.10, exit 3.10, -1.00 (10/19)

Entry $57.50 (10/13)

BTU - $73.88 Peabody Energy ** Stopped $73.00 **

Peabody really frustrated me this week. After spiking to $83.52 it fell to $72.45 after missing earnings by a penny. You would think +100% earnings growth would be good enough but profit takers were ready to pull the trigger. We were stopped out by only 55 cents. Fortunately we only lost a dime on the trade plus commissions. We missed +$4 in profit but only lost a dime.

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, exit $6.20, -0.10 (10/20)

Entry $74.65 (10/09)

Leaps Trader Watch List

After having a lot of entries massacred in the prior week I did not add any entries to the watch list last week. We escaped without having a lot of new entries on the drop. With energy earnings due out this coming week I am going to duplicate that pause and not add any this week either.

It would be very possible for some big names to disappoint this week and knock us down another notch. I would rather wait until after the carnage to pick up the bargains. I am saying that optimistically since what will probably happen is that the ones we like will explode and run for a dozen points.

This is life in the investing world. If you are not ready to take $10 losses then you have to pass on $10 gains. The gap down scenario prevents us from exiting early on bad news so it is better to wait for the news to be digested before deciding what to play.

I would like to enter the stocks below on any post earnings weakness but in a timely fashion with oil trending upward again. Until both events occur we are better off waiting on the sidelines.

These are just suggestions, not hard plays.

COP - Conoco Phillips. Earnings Oct-26th and a very strong possibility of a negative surprise. Buy the dip if you are a gunslinger. Support at $55 and $50.

AHC - Amerada Hess - good trading stock. Buy under $110 or over $122.

APA - Apache - Target $55 on any post earnings dip.

TSO - Tesoro - Target $50 on any post earnings dip.

VLO - Valero - Target $90 on any post earnings dip.

Be careful of entering new positions ahead of energy earnings beginning the week of Oct-24th.

Good luck!

Dropped Entries


New Watch List Entries


Current Watch List



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