Option Investor

Weekly Newsletter, Saturday, 12/10/2005

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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

Let's Buy Something

I think we have reached the point where there are some profitable new plays ahead. They are not necessarily in energy but close. The stars lined up for a couple of plays I have been watching and I think we can add them this week. Those are ESLR, TIE, CAM and VLO. I am going to really load the boat and add LEAP puts on OSTK and KKD.

For the current batch of energy plays the market was kind to us for two days out of five. Not much to get excited about but things are finally going our way.

The new high on natural gas on Friday was quickly sold despite cold weather blanketing the nation. Buy the forecast and sell the storm was the game plan for the week. However, the selling on Friday was not as extreme as we have seen in recent dips. They took profits but dip buyers rushed in to fill the gap. For the most part the gains stuck and we are positioned for the next cold front and gas storage report. Analysts are expecting a draw of -300 bcf from natural gas storage over the next two weeks. This is -10% of gas in storage. Once we break the five year average line it will really get interesting.

OPEC meets on Monday and everyone expects them to continue production at 100% of capacity. The OPEC president has been repeating that suggestion almost daily for two weeks. It is surprising that oil hit $61.50 on Thursday night with his repeated comments trying to restrain prices. Oil follows gas it appears and odds are good gas is going higher. Gas storage has declined for three consecutive weeks with a -59 bcf drop last Thursday. Remember, not only is storage dropping but all available production is being consumed as well. It is a historic fact that we cannot produce enough gas to meet demand during the winter and must depend on 3.2 tcf being accumulated in storage during the fall to offset the shortfall. That storage could fall below 3.0 tcf in next Thursday's inventory report. This year we are hampered by the damage in the Gulf. 2.35 bcf of gas production per day is still offline amounting to a 16.45 bcf production shortage per week. Storage levels are already -45 bcf below last years level and we almost ran out last year. We came very close to dangerous levels of low pressure in the pipelines several times. If this winter is going to be colder as most forecasters expect we could see some really high prices.

The oil companies were in the news a lot this week bragging about their new exploration budgets and stock buybacks. I believe most of this was posturing in hopes of avoiding the several levels of windfall profits taxation currently being considered. Chevron announced a $5 billion buyback, KMG $3.97B, DVN $2.89B and COP $3B.

Conoco announced its CapEx budget would rise +45% to $10 billion as it embarks on a multiyear effort to upgrade its refining capacity. That does not include investments in Russian oil producer Lukoil which Conoco owns 14.8% with an option to go to 20%. While nine refineries will begin upgrades Conoco said the majority of the budget would go toward exploration and production with the biggest chunk destined for the North Sea and west Africa.

Chevron said it was increasing its capital spending by +35% to $14.8 billion in 2006. Like Conoco, Chevron said the majority would be spent on exploration and production. Chevron is expected to earn $14 billion this year, its highest earnings ever. Let's see if you earn $14B and spend $14.8B that does not leave a lot for windfall profits. That does not take into account the announced $5B stock buyback over the next three years.

Devon announced a $4.5 billion budget for 2006 and raised its estimates for reserves by about 425 mb. 2007 production is expected to rise to 232-236 million bbls compared to 216 mb expected in 2006. Drilling to production can run 3-5 years from the first hole so lead times can be extreme.

Speaking of lead times Exxon CEO Lee Raymond had an interesting comment last week. He said, "In the energy industry, time is measured in decades." He said Exxon was involved in a $13 billion project in eastern Siberia that began 10 years ago and is expected to produce for 40 years. "All told, that is more than 50 years for one project," he said. To drive home his argument he added, "Fifty years ago, Dwight Eisenhower was president." That got my attention and drove home the point that all the exploration budgeted above by COP and CVX will not become production until sometime in 2011-2012 and any oil produced then will easily be worth double or triple today's prices. Oil produced in 2020 could sell for $500 a bbl.

Crude oil imports rose to 10.579 mbpd last week and slightly less than last years level for the same period. Production in the gulf is still down by nearly 1 mbpd but demand due to the New Orleans disaster is also down by -750,000 bpd. Refinery utilization passed 90% for the first time since the hurricanes as those operating continue to up throughput and finish lingering minor repairs. The 437,000 bpd BP refinery is making steam to heat up the crackers and should begin production in the next week or so. There is still no estimate for restarting the Belle Chase refinery owned by Conoco. 804,000 bpd of refinery capacity or about 5% is still offline.

The drillers continue to outperform the rest of the sector simply because there are no spare rigs and day rates continue to climb. I have been waiting for a pullback in stocks like Diamond Offshore (DO) and Transocean (RIG) but after their breakout in mid November they have refused to give up ground of more than a buck or so. Very tough to get an entry point. I believe the drillers may survive the Jan-March demand decline since their profits are related to drilling rather than oil prices. There is some correlation simply because many people don't understand but they could be our port in the storm. I am in no rush ahead of the January peak in energy prices.

I believe prices will peak in January even if the country is locked in -10 below weather. From January you can see spring and demand for fill ups on heating oil will begin to decline. The strategy will be to exit any direct plays on oil and gas and spread out into some indirect plays like the drillers on any pullback.

The exception to that could be the two split plays I am setting up this weekend. Those are VLO and CAM. Both split this week after enormous runs. I am betting that buyers will jump on both and the split will give us the premium deflation we are hoping for. Normally there is a period of post split depression but recently it has been absent in energy stocks. I am going to bite my lip and take the entries. VLO at $50, sold! At least that is what I am hoping the retail traders are thinking.

II am adding the KKD and OSTK puts as a matter of timing. In the case of OSTK the retailer has gotten the Q4 holiday spike and that gives us a favorable entry for the Q1 decline. KKD saw a spike up on short covering last week to $6 despite not having filed any financials since Nov-2004. I can't believe it is still listed on the NYSE and feel it is only a matter of time before the death knell rings.

I am also adding Evergreen Solar as a timing play. Solar is not profitable because there is no volume. Without volume it is impossible to get the cost of the technology down to levels where it makes sense. In California the governator is backing a plan to subsidize one million solar rooftops. It comes up for a vote on the 15th. If it passes ESLR should get a major boost from general acceptance of the product and a sharp drop in component costs as manufacturers ramp up production in large quantities. Once California proves it is viable other states should join the party. After all less overall demand for electricity takes the load off the already overloaded electrical grid and generating plants. That means less coal train traffic, less green house gases and less energy stress all around.

The TIE entry is also a timing play. TIMET, Titanium Metals, is the worlds largest supplier of titanium. Uses for the metal are growing daily and TIE is growing with it. Sales increased +58% in the 3rd quarter while product pricing increase by +35% to +66%. Those are very substantial price increases and represents Timet's strength and position in the market place. TIE has gone nearly vertical since early October and a 2:1 split in September. On Thursday and Friday there was a monster sell off of more than $10 as funds took profits. One fund, The Royce Opportunity Fund, was up +1200% in the company since Dec-2003. Just because funds decided to take profits does not mean the business has changed. I am looking at it as a buying opportunity and hope the funds are too busy next week shuffling shares of the NDX and S&P to take more TIE off the table. I believe the selling was prompted by downgrades of several steel companies by Deutsche Bank and Merrill. They downgraded X, AKS and NUE for various reasons and I believe it prompted funds to take profits in TIE as well. Guilty be loose association.

This should be a very volatile week in the markets and it would not hurt my feelings if everyone waited until Friday's close to take these entries. That could very well be the low for the week.

Natural Gas Chart - 60 Min

Crude Oil futures Chart - 60 Min

Changes in Portfolio

New Plays

Dropped Plays
BP $67.11 BP Plc Kuqait selling 186 million shares

New Watch List Plays Triggered


Portfolio Listing & Top Picks

New Plays

Most Recent Plays

VLO - $105.53 Valero ** No Stop **

Remember we were stopped out last week on Valero at $96. It completed a +$10 run since that stop. It really ticks me off but you have to play the cards you are dealt.

Valero will split 2:1 on Dec-15th and begin trading at the new price on Friday the 16th.

The game plan for this entry is to buy it after the split. With the stock holding at $106 it appears there is building pressure for a split run. I would rather see it heading south instead but we can't control the direction. If we do get a run it could hit $110 on any move at all. This would split to $55. I want to buy the Jan-2007 $60 LEAP. That should be far enough away from the split price to be cheap and plenty of time for another double. The last 2:1 was October-2004 at $80 ($40 split adjusted). The stock is now $105. How about a repeat of that feat?

The symbols could change on Thursday night so don't put the order in until Friday. I am expecting Friday to close down, possible the low of the week so take your time. A buck or two either way won't hurt. The longer you wait the cheaper the premium will be. Friday is quadruple options expiration and the market makers will be extremely busy. The prices might not settle until Monday. This is going to be a long-term hold so take your time and pick your entry.

I am planning on holding this over the spring demand decline since gasoline margins are a big business for Valero. I will pick an insurance put once we get an entry.

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.

2007 $60 LEAP Call - Buy on Friday or Monday after the Thursday split

Insurance Put: Will be selected after the entry

Entry $?? (12/16)

CAM $84.29 - Cooper Cameron

CAM has been trending slowly higher at the rate of about +$2 a week since the October lows. Cooper is a supplier of equipment to the oil field industry and has little correlation to the price of oil. Friday's drop in oil barely impacted CAM for a loss of only -35 cents.

CAM is splitting 2:1 on Thursday 12/15 and ex on Friday.

Like Valero we want to buy the LEAP the day after the split or Monday at the latest. With CAM at $85 and probably $90 before the split we want to buy the $50 LEAP. ($100 divided by 2)

There is no RUSH. Cam is not going to spike out of sight. You can wait until Monday or even Tuesday after the split to make the purchase. I expect Monday (12/19) to be the beginning of the year-end rally so watch it carefully.

This will be a long-term hold and will have insurance.

Company Info:

Cooper Cameron Corporation is an international manufacturer of oil and gas pressure control equipment. It also manufactures centrifugal air compressors, integral and separable gas compressors and turbochargers. The Company's operations are organized into three separate business segments: Cameron, Cooper Cameron Valves (CCV) and Cooper Compression. Cameron is a provider of systems and equipment used to control pressures and direct flows of oil and gas wells. CCV is a provider of valves and related systems primarily used to control pressures and direct the flow of oil and gas as they are moved from individual wellheads through flow lines, gathering lines and transmission systems to refineries, petrochemical plants and industrial centers for processing. Cooper Compression is a provider of reciprocating and centrifugal technology applications, and related aftermarket parts and services.

2007 $50 LEAP Call - Buy on Monday/Tuesday after the 12/16 split

Insurance Put: Will be selected after the entry

Entry $?? (12/19)

ESLR $11.71 - Evergreen Solar

Evergreen Solar is a leader in the struggling solar space with installations all over the world. The key to any solar technology is volume and the California initiative to install one million solar assisted homes could be the push that makes solar finally affordable.

The vote is expected to happen on the 15th and a successful passage could catapult ESLR higher. Either way ESLR is still a competitor with improving technology and a real business model. They are yet to be profitable but are closing in on that goal. A true volume spurt as they would get from the million home project should assure that profitability through scale. Solar is the way of the future and the million roof project could be the key. The California bill would also require home builders in CA to offer a solar component to any buyer by 2010. That would cover 150,000 homes a year.

There is no guarantee this bill will pass or even be voted on in December. I believe in solar enough that I am willing to take the risk on ESLR even without the California initiative. Options are cheap and there is a strong upside if this catches on. Unfortunately there are no leaps. We will buy the June calls and move up to a farther date later if the play progresses successfully.

The Dept of Energy also has a million roof program in progress. http://www.millionsolarroofs.org/

Company Info:

Evergreen Solar, Inc. develops, manufactures and markets solar power products enabled by its String Ribbon technology that provides reliable and environmentally clean electric power throughout the world. Its products are targeted at on grid and off-grid applications. The Company is developing technology at the wafer, cell and module stages of manufacturing, and it holds patents and other intellectual property in all three areas. In the String Ribbon technique, strings are pulled vertically through a shallow pool of molten silicon and the silicon solidifies between the strings to form a continuous ribbon of crystalline silicon. The ribbon is then cut and prepared for cell fabrication.

Buy June $12.50 Call QLU-FV currently $2.35

No insurance

Entry $11.71 (12/12)

TIE $68.80 - Titanium Metals ** Stop Loss $62.50 **

I believe a downgrade of three steel stocks by Deutsche Bank and Merrill prompted the selling late in the week. TIE does not deal in the steel market and is not related. I believe funds simply took profits in guilty by association mode.

The drop on Friday knocked it back to the 100-day average and that has been first level support since May. TIE has broken that support only once or twice for short periods but has immediately rebounded back into the trend.

I would like to wait for a rebound to appear before making an entry but I don't have that luxury in this newsletter. Therefore I am making a hard entry for record purposes but leave it up to you to make a judgment call on Monday. $65 should be the next support level.

Company Info:

TIMET is the world's largest supplier of high quality titanium metal products. With its unique combination of strength, light weight, corrosion resistance and other metallurgical properties, titanium is used in hundreds of diverse aerospace, industrial and emerging applications where no other metal is as reliable or economical, especially on a lifecycle costing basis.

As a fully-integrated titanium manufacturer and distributor, TIMET's activities span every phase of titanium research, manufacturing and sales. We convert rutile ore into sponge; melt and refine ingot and slab; manufacture mill products; and distribute our products globally. We have the financial strength, capacity and technical solutions to meet the established demands for titanium and, as new uses for titanium accelerate, to lead the industry into the future.

Titanium Metals Corporation (TIMET) is a producer of titanium sponge, melted products and a variety of mill products for aerospace, industrial and other applications. For the commercial aerospace industry, the Company supplies titanium products to manufacturers of commercial airframes. Outside of aerospace markets, the Company manufactures a range of products for customers in the chemical process, oil and gas, consumer, sporting goods, automotive, power generation and armor/armament industries. Approximately 17% of the Company's sales revenue, during the year ended December 31, 2004, was generated by sales into industrial and emerging markets. TIMET markets and sells its products in the United States, the United Kingdom, France and Italy.


Buy March $80 Call TIE-CP Currently $6.20

No insurance this week. We will buy Jan puts once December rolls over.

Entry $68.80 (12/12)

OSTK $38.51 - Overstock.com ** Stop Loss $45 **

Probably the worst managed retail site on the Internet. The President, Patrick Byrne, blamed the poor performance of his stock on an evil "Sith Lord." (A Star Wars Character) Patrick continually ranks in the top five worst performing executives of a public company as rated by the Motley Fool. His latest claim to poor stock performance is the possible existence of "millions of counterfeit shares of OSTK trading on the Nasdaq." I am not kidding. He blames the SEC with being in collusion with the Nasdaq for refusing to disclose the number of counterfeit shares in the system. He warned "shareholders that the only prophylatic against hedge fund counterfeiting was to obtain the actual certificates from your broker and store them in a safe place." This would of course prohibit your shares from being traded. This was in response to a "Get Shorty" article in the WSJ.

Overstock has filed suit against several research firms claiming a conspiracy to drive its stock price down. Patrick claims research firm Gradient Analytics and Rocker Partners were at the center of a vast conspiracy aligned against Overstock. He warned that the criticism of Overstock.com will not go unpunished.

Patrick was forced to give up his role as Chairman in October with his father John Byrne taking back control. Patrick remains the president but that has not diminished his wild accusations.

The company has a good business model but has failed to execute on so many levels that it should be criminal. They have the worst customer service of any E-Commerce site I have every visited. I have made several purchases in the past from OSTK and all but one were botched terribly. The products come in an unlabeled box with no return address label and no invoice. You can't return them without some serious effort. Consumers will not put up with this when other companies like Amazon.com, NewEgg.com and Ecost.com are models for the industry.

SSales at OSTK have slowed and operating expenses are growing faster than revenue and marketing costs nearly doubled in Q3. Cost of acquisition for new customers rose +30% over the prior quarter. This is a signal that competition is winning the battle and prior customers are not returning. OSTK has a huge debt load and slowing sales will not help. Morningstar gives them a D+ for financial health and an F for profitability. Analysts are dropping estimates for the stock into the high $20 range and well below current prices.

In August, Patrick Byrne held a conference call in which he basically said that everyone from hedge funds to journalists to regulators had all been scheming to destroy his company. He said the plan was being orchestrated by someone he identified only as the "Sith Lord." He really said that. Rob Plaza at Zachs Investment Research said when a CEO is putting the focus on things he can't control like short interest there could be a bigger problem he does not want you to see. He said an even bigger problem is when management blames regulators for stock manipulation you have a real problem.

The last really dumb statement, or was it, came from Patrick on Nov-10th. He said "I don't give stock advice but the average investor should probably steer clear of Overstock." That advice I will follow.

Company Info:

Overstock.com, Inc. is an online closeout retailer, offering discount, brand-name merchandise for sale primarily over the Internet. The Company's merchandise offerings include bed-and-bath goods, home decor, furniture, kitchenware, watches, jewelry, computers and electronics, sporting goods and apparel and designer accessories. It also sells books, magazines, compact discs (CDs), digital versatile discs (DVDs), videocassettes and video games (BMV). The Company also offers limited travel services. Overstock.com offers approximately 50,000 non-BMV products and approximately 500,000 BMV products in eight departments on its main Website, www.overstock.com. Overstock.com has a direct business in which it buys and takes possession of excess inventory for resale. It also has another worldstock Website, www.worldstock.com, through which artisans in the United States and around the world can sell their products.


Buy June $35 Put QKT-RG currently $5.00

No insurance.

Entry $38.51 (12/12)

KKD $ 6.01 - Krispy Kreme Doughnuts ** No Stop **Play Title

Trouble is mounting for KKD. They have not filed financials since November 2004 and they are probably going to miss the Dec-15th deadline imposed by creditors. They warned this would happen about 10 days ago. They are having to restate financials for several years due to errors in accounting for expenses, loans and franchisee info.

The CEO Scott Livengood and other top executives were ousted earlier this year on allegations of financial misdealing and securities fraud. Suits are mounting from numerous groups, debtors, employees, franchisees and vendors over all types of non payment, fraud and failure to follow through with agreements.

Stephen Cooper, a turnaround specialist, took over the reins when the officers were evicted. So far the news has only gotten worse. Stores are closing rapidly including prior showplace stores and once leading producers. Cooper has worked on prior disasters including Polaroid, TWA, Enron and Boston Chicken. That list should give you a clue what is ahead for KKD.

Cooper said the chain cannot operate 4,000 square foot stores profitably and will try to reinvent itself as a smaller, leaner company. They are closing unproductive stores in a reasonable and rational fashion according to Cooper. He wants to focus on increasing sales of coffee and other beverages.

I have written about the similarity between KKD and Boston Chicken for several years and warned numerous times at much higher levels that KKD would end badly just like Boston Chicken. Now the Boston Chicken CEO is running KKD. Amazing prediction.

Yes, Boston Chicken was turned into a profitable entity once again. However it was done at the expense of shareholders. The common stock was cancelled the ownership of the stores was turned over to the debt holders. Boston Chicken wins, investors lose.

I believe that the NYSE will eventually tire of the endless deadlines for financials and will delist them. If that happens it will be the kiss of death for funds still holding the stock and hoping for a miracle return to the $105 levels of yesteryear.

Options are cheap and the KKD story is just waiting for Cooper to write the last chapter. KKD wins, shareholders lose.

Company Info:

Krispy Kreme Doughnuts, Inc. is a specialty retailer of doughnuts. It owns and franchises Krispy Kreme doughnut stores where the Company makes and sells over 20 varieties of doughnuts, including its Hot Original Glazed variety. Each of its traditional stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Its sales channels consist of on-premises sales and off-premises sales. The Company has two complementary business units: its company and franchised stores, which Krispy Kreme refers to, collectively, as Store Operations and Krispy Kreme Manufacturing and Distribution (KKM&D). At February 1, 2004, there were 357 Krispy Kreme factory stores in operation, of which 338 are located in the United States. During the fiscal year ended February 1, 2004 (fiscal 2003), it acquired the remaining 33% interest in Golden Gate Doughnuts, LLC that it did not already own.

Buy 2007 $5.00 LEAP Put OKK-MA currently $1.35

No insurance

Entry $6.01 (12/12)


Play Updates

Existing Plays

HW - $35.27 - Headwaters ** No Stop **Play Title

HW is still holding over support at $35 and waiting for the market to resume its upward trend. The drop in oil prices failed to dent HW materially but we do need a positive spurt to revive a declining trend.

Headwaters (HW) has a compound annual growth rate of more than +120% mainly because it deals with the ash left over from burned coal. Coal generates a lot of ash and it is a problem the electric generating plants have to deal with when these cold fronts really suck up their coal supplies. Headwaters has three separate businesses from that ash. They have a business that buys and sells it for various purposes. Second they have produced a bonding agent to that makes it easy to transport without blowing out of the rail cars. They sell this to others for profit. Third they have a patented process for converting this ash into a synthetic fuel, which is licensed to plants that actually do the conversion.

They also make building materials and a cement substitute that uses this ash to make concrete more durable. Considering the thousands of tons of ash generated each week this appears to be a gold mine for Headwaters. When electric plants fight the tons of daily ash Headwaters is there to help and converts that ash back to dollars. This sounds too good to be true and I think that was the real problem with the decline from $46 in August to the $30 level in October. The ramp from IPO in April from $30 to $46 and decline back to $30 is complete. Those that got in on the good IPO story took their profits as energy prices declined. Now may be the time to jump back on the coal train with Headwaters rather than Peabody.

Company Info:

Headwaters Incorporated is a diversified company providing products, technologies and services to the energy, construction and home improvement industries. Headwaters conduct its business primarily through four business units, including Headwaters Resources, Headwaters Technology Innovation Group (HTI), Headwaters Construction Materials and Headwaters Technology Innovation Group. In September 2004, the Company acquired Tapco Holdings Inc., a manufacturer of building products and professional tools used in residential remodeling and construction. In June 2004, the Company acquired Eldorado Stone, LLC, a manufacturer of architectural manufactured stone based in San Marcos, California. Eldorado Stone is being purchased from Graham Partners, a middle-market private equity firm. Eldorado Stone will be integrated into Headwaters' coal-based construction materials operations.

2007 $40 LEAP Call ZPP-AH @ $4.30

Insurance Put:
Enter Feb $30 Put HW-NF if HW trades below $34

Entry $35.50 (11/22)

BP - $67.11 - BP Plc. ** Closed **

BP held above support at $67 on Friday's sell off after setting a new two month high over $69 on Tuesday. This was surprising due to a sudden sale note from Kuwait. The Kuwait Investment Office in London, a Kuwait government agency, signed a consortium of banks to sell 185 million shares of BP. This represents 0.9% of the outstanding shares. Kuwait will still own 2.56% of the company after the sale. Kuwait said the sale was part of a portfolio rebalance program of its international investments. Since BP only averages about 3.5 million shares per day this could be a huge problem ahead. While the shares are not expected to be sold into the open market they will be tough to unload without weighing on the price.

I elected to close the position for a -0.30 cent loss rather than speculate on the impact of the future sale.

Company Info:

BP p.l.c. is an oil company trying to remake itself into an energy company. The operating business segments were Exploration and Production; Refining and Marketing; Petrochemicals, and Gas, Power and Renewables. Exploration and Production's activities include oil and natural gas exploration and field development and production, together with pipeline transportation and natural gas processing. The activities of Refining and Marketing include oil supply and trading, as well as refining and marketing. The Petrochemicals segment ceased to operate separately as of January 1, 2005. Gas, Power and Renewables activities include marketing and trading of natural gas, natural gas liquids , new market development and liquefied natural gas (LNG), and solar and renewables. The Company formed the TNK-BP joint venture between the Company and the Alfa Group and Access-Renova (ARR). In addition, it plans to incorporate AAR's 50% interest in OAO Slavneft, a Russian oil company, into TNK-BP.

2007 $70 LEAP Call VAO-AN @ $5.20, exit $4.90, -0.30

Put Insurance: April $60 Put BP-PL (Cancelled - No Entry)
Buy the insurance only if BP trades at $64.

Entry $66.43 (11/20)

CHK - $31.14 Chesapeake Energy ** No Stop **

CHK is holding just below its current resistance at $32 and lost only -31 cents on the Friday selling. If gas continues higher the next resistance level is $35. CHK dipped to just under $30 on Thursday when it announced it was going to sell 20 million shares and use the proceeds to retire debt. That dip was promptly bought and the stock ended higher on the day at $31.45.

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.

2007 $35 LEAP VEC-AG @ $4.00

Insurance Put:
April $25 CHK-PE when CHK traded at $28 on 11/07 @ $2.30

Entry $29 (11/04)

UPL - $57.96 Ultra Petroleum ** Stop loss $54 **

UPL moved higher for the week and was one of the best performers in the gas sector. It is still stuck at resistance at $59 with the all time high at $60. One more good gas spike and we could be off to the races. They increased their CapEx budget +47% to $425 million for 2006. 93% or $395 million will be spend developing the very prolific Pinedale Anticline. Approx 165 new wells will be drilled at that location in 2006.

I raised the stop to $54.

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 @ $5.20

Insurance Put: Dec $45 Put UPL-XI (cancelled not triggered)

Entry $55 (11/02)

COP - $63.17 Conoco Phillips ** Stop Loss $57 **

Conoco is struggling to break the $65 resistance and the reason is probably the continued failure of the Belle Chase refinery on the Gulf. There is no start date and rumors are quoting something in the late first or early second quarter. This is going to be a very expensive problem for Conoco. I am sticking with it until the 200-day average breaks at $60 or January appears first.

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.

2007 $70 LEAP Call OJP-AN @ $6.40

Insurance Put: Cancelled - no entry

Entry $63.25 (10/31)

UNH - $63.71 Unitedhealth Group ** Stop Loss $61 **

Another new high for UNH and the streak continues. This is prime time for health care stocks and we should get one more push into year end with something over $65-$66 or maybe even $70 if the market really catches fire after the 19th. I will keep raising the stop just in case.

Play Reasoning:

UnitedHealth is the leader in the managed heathcare sector. Earnings are soaring, +31% in Q3 to $2.43 billion and the outlook is only up. With health care costs rising more and more companies will turn to UNH to lessen their benefit expenses. We are also expecting a seasonal bounce now that October is behind us. There were two strong sell cycles in October as funds took profits from a long period of gains. Historically health care companies have done very well over the next three months as funds look for safe havens for year-end cash. UNH gained +37% from the October lows for the same period in 2004. Buyers appear on every dip to the 100-day average currently at $55.

Company Info:

UnitedHealth Group Incorporated is a diversified health and well-being company, serving approximately 55 million Americans. The Company provides individuals with access to healthcare services and resources through more than 460,000 physicians and other care providers, and 4,200 hospitals across the United States. It manages approximately $60 billion in aggregate annual healthcare spending on behalf of more than 250,000 employer-customers and the consumers it serves. The Company conducts its business primarily through four operating divisions: Uniprise, Health Care Services, Specialized Care Services and Ingenix. On July 29, 2004, the Health Care Services business segment acquired Oxford Health Plans, Inc. (Oxford). Oxford provides healthcare and benefit services for individuals and employers, principally in New York City, northern New Jersey and southern Connecticut.

2007 $60 LEAP Call VUH-AL @ $6.40

March $50 Put UHB-OJ

Entry $56.75 (10/31)

Leaps Trader Watch List

With the addition of a bunch of new plays this week I am not going to change the watch list other than modify the targets slightly.

Both of these companies are good performers but we are getting closer to the end of the line for oil plays in 2004. The entries below, if triggered, would only be 2-3 week plays.

Dropped Entries


New Watch List Entries
PBR $71.12

Current Watch List

BTU - $81.23 - Peabody Energy

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.

Breakdown target: $80.00
Buy March $85 Call BTU-CQ


PBR - $71.12 - Petrobras

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.

Breakdown target: $70.00
Buy April $75 Call PBR-DO


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