Table of Contents
Leaps Trader Commentary
Oil prices rose to nearly $64 on Friday ahead of Monday's problem. The problem is of course Iran. Iran is expected to be referred to the UN Security Council on Monday to answer for two year of stonewalling questions from the IAEA and for resuming their attempts to process uranium. According to the IAEA report Iran is rushing forward in its attempts to produce weapons grade uranium and build nuclear weapons.
The report will be heard by the 35-nation board meeting of the International Atomic Energy Agency will play a significant role in determining the next step for the UN as it tries to force Tehran to stop its weapons program. The board already reported Iran to the Security Council but the council is waiting for the outcome of the IAEA board meeting before taking any action. The Security Council has the power to impose political and economic sanctions on Iran.
The Council was forced to wait for the IAEA meeting by Russia and China, which have vetoes on the Security Council and strong ties to Iran. The secret "Green Salt Project", Iran's attempt to convert uranium into the precursor for weapons grade enrichment was linked to tests of high explosives and designs of a missile re-entry vehicle. Documents obtained from Iranian sources included instructions on how to cast fissile uranium into a spherical core of a warhead. All of these steps are clearly designed to produce a weapon rather than generate electric power.
I think it is obvious to anyone with an open mind that Iran is not looking to generate electric power. Otherwise why would they have turned down a lifetime supply of processed uranium fuel offered by Russia for a paltry $35 million? Why would they risk the world's wrath to attempt private processing at a much higher cost if Russia was willing to give it to them basically for free?
I think it is obvious that Monday's meeting is not going to have a positive outcome. Of course as long as Russia and China are buying huge amounts of oil from Iran it could get complicated. Still Iran will eventually have to answer to the Security Council and the current President of Iran, Mahmoud Ahmadinejad has already warned that he will play the oil card if challenged. Ahmadinejad is a hardliner and has said the implementations of any sanctions will result in Iran holding its oil off the market to punish the rest of the world. They also have plans and the capability to close the Straits of Hormuz at any time and stop the flow of oil from other nations as well. Ahmadinejad has already stated that Israel has no right to exist and should be destroyed. This should give you some idea of what is ahead. Iran already has conventional missiles capable of hitting oil and gas fields across the Persian Gulf region as well as Turkey and Israel. Iran just bought 18 mobile ballistic missiles from North Korea with a 2500-mile range. They also have 12 cruise missiles with a 3,000 mile range capable of striking as far away as Germany. Any first strike on Iran would leave them fully capable of lashing out at targets of opportunity up to 3000 miles away in an effort to cause as much global grief as possible.
The next chapter in this play could come from Venezuela. Chavez has already said he would support Iran in kind if Iran is pushed to act. Essentially Chavez said he would cut off oil shipments if Iran cuts off shipments. Since Iran is not expected to stop oil it is likely to be a symbolic measure. If they cut shipments by say 2 mbpd then Venezuela has said he will cut by 2 mbpd. Iran does not ship to the US but Venezuela does. Neither country can stand a prolonged slowdown since both depend on their oil to survive. BUT, they can restrict oil export to some degree knowing they will reap the financial rewards of higher prices on the remaining oil they do export. Say oil went to $85 a bbl they would receive that $85 on their remaining oil to offset lost revenue on their restricted oil. Since Chavez can't pump at full quota they would benefit from any price hike more than those already pumping at full quota. It is a win-win for Chavez and that makes him as dangerous as Iran only without intercontinental missiles.
That brings us back to our energy positions. Needless to say if you are not in them already the odds are slim we are going to get another strong dip unless the UN declines to pursue Iran. While that is a very remote possibility it is a possibility as long as Russia and China are friends of Iran.
We were triggered on the OIH holders last week and the Canadian National Railway split play. I also added a new split play on Talisman, which announced a 3:1 split last week. Most of the other watch list entries are well above the wished for entry points so I don't expect any new positions soon.
With oil prices at $64 we are right at short-term resistance but any negative news could easily push it to $70 again. The bad news here is that our short calls we sold on Feb-21st in anticipation of a stagnant period ahead of the summer rally are now in danger of being taken out. Trading in the oil patch is never dull.
Stop losses, where applicable, will be left VERY loose due to the potential for oil volatility. If the stops are too wide for your risk profile please adjust them accordingly.
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
OIH - $143.04 - Oil Service Holders ** No stop **
We were triggered on the entry at $135 on Tuesday at the bottom of the last dip. The rebound took us to a new two week high and hopefully the weakness is behind us.
The Oil Service HOLDRS Trust issues depositary receipts called Oil Service HOLDRS, representing an undivided beneficial ownership in the common stock of a group of specified companies that, among other things, provide drilling, well-site management, and related products and services for the oil service industry. The Bank of New York is the trustee. The Oil Service HOLDRS Trust was formed under a depositary trust agreement dated February 6, 2001. The 18 issuers of the underlying securities represented by Oil Service HOLDRS, as of August 1, 2005, were Baker Hughes Incorporated, BJ Services Company, Cooper Cameron Corporation, Diamond Offshore Drilling, Inc., ENSCO International Incorporated, Grant Prideco, Inc., GlobalSantaFe Corp., Halliburton Company, Hanover Compressor Company, Nabors Industries Ltd, Noble Corporation, National Oilwell Varco Inc., Rowan Companies, Inc., Transocean Inc., Smith International, Inc., Schlumberger Limited, Tidewater Inc. and Weatherford International Ltd.
(LEAP PUT SALE)
Position: SHORT 2007 $160 LEAP PUT ZJO-ML @ $29.60
Entry $135 (2/28)
CNI - $48.00 Canadian National Railway
CNI split 2:1 on Wednesday. We entered the October $50 call on Thursday when the strike became available. I expect several days of consolidation as the post split depression passes. Once that occurs I expect CNI to move higher new buyers take advantage of the lower price. CNI has a beautiful chart. Let's hope it continues back to $98 again.
Canadian National Railway Company (CN), directly and through its subsidiaries, is engaged in the rail and related transportation business. As of December 31, 2005, the Company had a network of approximately 19,200 route miles of track. CN's network spans Canada and mid-America, from the Atlantic and Pacific oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert, British Columbia, Montreal, Halifax, New Orleans and Mobile, Alabama, and the cities of Toronto, Buffalo, Chicago, Detroit, Duluth, Minnesota/Superior, Wisconsin, Green Bay, Minneapolis/St. Paul, Memphis, St. Louis and Jackson, Mississippi, with connections to all points in North America. The Company's revenues are derived from the movement of seven commodity groups, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, intermodal and automotive.
Position Oct $50 Call CNI-JJ @ $3.00
Entry $47.95 (3/02)
TLM - $56.44 - Talisman Energy
Talisman is an aggressive driller operating worldwide. Net income increased +139% for 2005. Production increased +7% to 470,000 boe/d and Talisman replaced 189% of those reserves produced. This makes Talisman a very likely takeover target for somebody like Conoco looking to acquire Talisman's nearly 2 billion bbls of proven reserves and its worldwide drilling operations.
Talisman recently announced a 3:1 split to be effective on May-25th. This should provide some added lift to the stock price as we move into the summer rally period. I believe we should buy the October $60 call, which will split into (3) $20 calls and hopefully be in the money before the split occurs. A $20 stock of this caliber should be catnip to players on a budget and I expect it to be bought quickly. With option premiums currently $6 they will split to a cost of $2 each. It is hard to go wrong with a price like that.
3:1 Split scheduled for May-25th.
Talisman Energy Inc. (Talisman) is an independent international upstream oil and gas company whose main business activities include exploration, development, production, transporting and marketing of crude oil, natural gas and natural gas liquids. The Company's operations, during the year ended December 31, 2004, were conducted principally in four geographic segments: North America, the North Sea, Southeast Asia and Algeria. The Trinidad Angostura project began production in January 2005. Exploration is being advanced in other areas outside the principal geographic segments, including Alaska, Colombia, Qatar and Peru. During 2004, total production averaged 438 million barrels of oil equivalent per day (mboe/d) and the Company exited the year producing 452 mboe/d in December. In 2004, the Company drilled 641 successful wells.
Buy October $60 Call TLM-JL currently $6.00
Entry $56.44 (3/05)
DO - $82.72 - Diamond Offshore Drilling ** Stop Loss $65 **
No change. Support is at $75 and $72. Maintain the stop loss on the short call at $90. Raise the profit stop on the short call to $75.
DO earnings were reported on the 9th and rose +767% to beat the street by +17 cents. Earnings for all of 2005 were $1.91 compared to a loss of -0.06 in 2004. Diamond predicted another great year in 2006.
Diamond Offshore Drilling Inc. engages principally in the contract drilling of offshore oil and gas wells. As of December 31, 2004, the Company had a fleet of 45 offshore rigs consisting of 30 semisubmersibles, 14 jack-ups and one drillship. Diamond offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and the jack-up market. Its principal markets for its offshore contract drilling services are the Gulf of Mexico, including the United States and offshore Mexico, Europe, principally the United Kingdom and Norway, South America, Africa and Australia/Southeast Asia. From time to time, its fleet operates in various other markets worldwide. Diamond provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.
Position: 2007 $80 LEAP VCT-AP @ $10.00
Tuesday Feb-21st cost reduction strategy:
RIG - $79.35 - Transocean Inc ** No stop **
RIG spiked at the open on Wednesday after getting a $1.7 billion contract for rigs from Chevron and BP. While that was very good news for RIG it did stop us out of our short call for a -80 cent loss. Since the spike sent out $9 LEAP to $12.30 I am not complaining. I am not going to add any new positions this week. Let's see what happens next week then reevaluate.
Transocean Inc., formerly known as Sonat Offshore Drilling Inc., is an international provider of offshore contract drilling services for oil and gas wells, related equipment and work crews, primarily on a dayrate basis, to drill oil and gas wells. The Company operates with a particular focus on deepwater and harsh environment drilling services. The Company also provides additional services, including management of third-party well service activities. The Company's Transocean drilling segment consists of drillships, semisubmersibles, jackups and other drilling rigs.
Position: 2007 $80 LEAP VOI-AP @ $9.00
Tuesday Feb-21st insurance strategy:
GI - $60.71 - Giant Industries ** Stop Loss $46 **
Giant gave back nearly all of the +$10 gain from the last two weeks after earnings were announced on Monday. Fortunately we sold that short call just in time. Change the stop loss on the short call to $69 and maintain the profit stop on the short call at $56.
Giant Industries, Inc., through its subsidiary Giant Industries Arizona, Inc. and other subsidiaries, refines and sells petroleum products on the East Coast primarily in Virginia, Maryland, and North Carolina and in the Southwest primarily in New Mexico, Arizona, and Colorado, with a concentration in the Four Corners area where these states meet. Phoenix Fuel Co., Inc., another subsidiary, distributes commercial wholesale petroleum products primarily in Arizona. The Company has three business units: retail group, which operates service stations including convenience stores or kiosks; Phoenix Fuel, a commercial wholesale petroleum products distributor selling diesel fuel, gasoline, jet fuel, kerosene, motor oil, hydraulic oil, gear oil, cutting oil, grease and various chemicals and solvents, and refining group, which operates the Company's Ciniza and Bloomfield refineries in the Four Corners area of New Mexico and the Yorktown refinery in Virginia.
Position: Sept $65 Call GI-IM @ $8.50
Tuesday Feb-21st cost reduction strategy:
Entry $60 (2/14)
HP - $67.88 - Helmerich Payne ** Stop loss $55 **
Maintain the stop on the short June $70 call at $69.95 and the profit target at $61.
Earnings in January rose by +30% to $49 million compared to $17 million in the same quarter in 2004. It is all about day rates and HP commands some of the largest with their state of the art rigs. Unfortunately they were colored with the same brush as RIG on RIG's warning.
Helmerich & Payne, Inc. is primarily engaged in contract drilling of oil and gas wells for others. It is also engaged in the ownership, development and operation of commercial real estate. The Company is organized into two separate operating entities: contract drilling and real estate. The Company's contract drilling business is composed of three business segments: United States land drilling, United States offshore platform drilling and international drilling. The Company's United States land drilling is conducted primarily in Oklahoma, Texas, Wyoming, Colorado, and Louisiana, and offshore from platforms in the Gulf of Mexico and California. The Company also operated in seven international locations during the fiscal year ended September 30, 2005: Venezuela, Ecuador, Colombia, Argentina, Bolivia, Equatorial Guinea and Hungary. In addition, the Company is providing drilling consulting services for one customer in Russia. Its real estate investments are located in Tulsa, Oklahoma.
Position: Sept $75 Call HP-IO @ $7.20
Tuesday Feb-21st cost reduction strategy:
HP Entry $69 (2/13)
NOV - $62.83 - National Oilwell Varco ** Stop Loss $50 **
Very close! We cane within a few cents of the profit stop on the short call at $58 before the rebound began. The premium fell to $1.45 before the rebound began. I am moving that profit stop slightly higher.
Maintain the stop loss on the May $70 call at $69.95 and change the profit stop on that call at $60.
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.
Position: Aug $65 Call NOV-HM $6.90
cost reduction strategy:
NOV Entry $61.50 (2/14)
SUN - $77.85 - Sunoco ** Stop Loss $58 **
Maintain the stop on the May $90 call at $89.95, with a profit stop at $70. Maintain the profit stop on the May $70 put at $66.
Sunoco has refining capacity of nearly 1 mbpd spread over five refineries and controls 4500 miles of pipeline and sells through 4528 retail outlets. They would make a very nice takeover target for Valero with a market cap of only $10.4 billion compared to $33 billion for Valero. Net income rose +61% in Q4 to $974 million. Valero made $1.35B for the same period.
Sunoco, Inc. operates through its subsidiaries as a petroleum refiner and marketer, and chemicals manufacturer with interests in logistics and coke making. Sunoco's petroleum refining and marketing operations include the manufacturing and marketing of a range of petroleum products, including fuels, lubricants and some petrochemicals. Sunoco's chemical operations consist of the manufacturing, distribution and marketing of commodity and intermediate petrochemicals. The Company's operations are organized into five business segments: refining and supply, retail marketing, chemicals, logistics and coke.
Position: 2007 $80 LEAP VUN-AP @ $8.70
Tuesday Feb-21st insurance strategy:
COP - $62.41 - Conoco Phillips ** No Stop **
Conoco continues to hover in the $58-$64 range. This should be support as the acquisition of Burlington Industries approaches. The companies expect it to conclude in the first half of 2006. Burlington reported earnings that nearly doubled the prior year in Q4 and Conoco reported earnings that rose more than +50%. Together they should receive some synergistic benefits and increase shareholder value. Conoco is the most aggressive integrated oil company when it comes to adding reserves. They are not afraid to pay for them and they are clearly planning for the future.
Conoco Phillips 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 Conoco Phillips 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.
Position: 2007 $65 LEAP OJP-AM @ $5.00
Insurance Put: May $55 PUT COP-QK only if COP trades at $57.50
Entry $60.00 (02/08)
SU - $78.28 - Suncor Energy ** Stop loss $55.00 **
Maintain the stop on the short March call at $79.95 and a profit stop at $72. Maintain a profit stop on the long put at $70.
Suncor is very active in the Canadian oil sands and has a strong plan to ramp production for the next decade. This is a very strong company in charge of their own fate. There are no OPEC concerns, no terrorists and no problems like Hugo Chavez. With the new government in Canada their business problems will likely ease instead of get worse.
I ate lunch with the Vice President of Suncore a couple months ago and he answered my questions very positively and with lots of confidence. I strongly believe this will be a good company for a long time. That does not mean profits cannot be hurt if we suddenly end up with an oil glut but that is not likely.
Suncor Energy Inc. (Suncor), formerly Suncor Inc., is a Canadian integrated energy company that explores for, acquires, develops, produces and markets crude oil and natural gas, transports and refines crude oil and markets petroleum and petrochemical products. Periodically, the Company also markets third-party petroleum products. Suncor also carries on energy trading activities focused principally on buying and selling futures contracts and other derivative instruments based on the commodities the Company produces. The Company has four principal operating business units: Oil Sands; Natural Gas; Energy Marketing and Refining, Canada, and Refining and Marketing, United States of America.
Position: 2007 $85 LEAP
OYX-AQ @ $10.40 2/06
Tuesday Feb-21st insurance strategy:
CCJ - $38.01 - Cameco ** No stop **
CCJ closed at a two week and post split high on Friday and buyers are starting to come back in as the post split depression eases. Higher oil prices are not hurting.
They are not making any more uranium and those that own it will continue to prosper. Put this in your portfolio and forget it.
Original Play Description:
We were triggered on the breakout at $72.50 on Monday and again on the $67 breakdown target on Wednesday. Each trigger was for a 1/2 position giving us a full position with an average cost of $9.80 each. That turned out to be the closing price on Friday so if you missed either opportunity you did not miss anything. We are going to add another full position after CCJ splits on Feb-23rd.
This is my best single play in the list. Cameco just announced record earnings and raised their forecast for 2006 and beyond. They projected a +40% rise in revenue and a rise in margin from 23% to 28% for 2006. At the same time they announced a 2:1 split for Feb-23rd on the NYSE. They also raised the dividend to 32 cents from 24 cents payable on April 13th.
They also announced they were buying Zircatec for $108 million. Zircatec is a maker of nuclear fuel bundles for Canadian designed heavy water reactors. They said the acquisition would moderately boost 2006 earnings assuming no material changes in operations.
The combination of events including the purchase of Zircatec caused the stock to plunge from its all time high of $82.15 on Feb-1st to close at $69.97 on Friday Feb-3rd. That level remained support for the entire week through Feb-10th.
Cameco Corporation is engaged in exploring, developing, mining and milling uranium ore to produce uranium concentrates. The Company is also a commercial converter of uranium concentrates (U3O8) to UF6 (uranium hexafluoride), as well as a supplier of services to convert uranium concentrates to UO2 (uranium dioxide). Cameco, through its subsidiaries, has a 31.6% limited partnership interest in Bruce Power Limited Partnership, which operates six nuclear reactors in Ontario, Canada. Cameco also owns 53% of Centerra Gold Inc. (TSX: CG), a growth-oriented gold mining and exploration company engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.
Breakdown target $67.00
Pre-split average cost: $9.80
Additional Position: 2008 $40 LEAP LTA-AH @
$9.00 on 2/25.
Put insurance: None today
HAL - $71.06 - Halliburton ** No Stop **
Halliburton appears to be trying to form a bottom in the $68 range but somebody is still sitting on the ask at $72. I don't want to add any new positions for insurance until after the split in two weeks.
Halliburton is planning on spinning off KBR, its construction and engineering unit. This should produce a significant bounce in HAL stock. (KBR stands for Kellogg, Brown and Root) HAL is a very strong service company and should soar when it is no longer held in check by the sins of KBR.
2:1 Split scheduled for March 23rd.
Halliburton Company is an oilfield services company, and a provider of engineering and construction services. The Company provides services, products, maintenance, engineering and construction to energy, industrial and governmental customers. Its six business segments are Production Optimization, Fluid Systems, Drilling and Formation Evaluation, Digital and Consulting Solutions, collectively the Energy Services Group, and Government and Infrastructure, and Energy and Chemicals, collectively known as KBR. In August 2004, the Company sold its surface well testing and sub-sea test tree operations to Power Well Service Holdings, LLC. In January 2005, the Company emerged out of the chapter 11 proceedings and can operate the businesses without Bankruptcy Court supervision.
Position: 2007 $85 LEAP Call VHW-AQ @ $9.80
Insurance Put: None until after the split
Entry $79.00 (2/06)
KMG - $99.56 - Kerr Mcgee ** Stop Loss $78.00 **
Maintain a stop loss on the short April $105 call at $104.95 and raise the profit stop at $95. Maintain a profit stop on the put at $85.
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 March 8, 2005, the Company annonced its decision to proceed with the proposal to pursue alternatives for the separation of the chemical business, including a spinoff or sale.
Tuesday Feb-21st insurance strategy:
Entry $107.00 (2/06)
UPL - $54.72 - Ultra Petroleum ** Stop Loss $45.00 **
Very close! We came within 22 cents of being stopped for a profit on the short call and long put at $50. I don't think the gas glut is over.
Maintain the stop loss on the short June $65 call at $64.95 and a profit stop on the call at $50. Maintain a profit stop on the June $55 put at $50 as well.
Gas prices are going down and I fully expect to exit the insurance at $50 for a nice profit and a reduction in the cost of our LEAP.
Original play description:
Ultra was one of the few that did not get hit on Monday. The breakdown target at $62 was our trigger on Tuesday but unfortunately it was followed by a -$7 drop on Thursday. They announced earnings on Tuesday that beat the street but they were hammered on Thursday after announcing they entered into a pipeline agreement with Rockies Express Pipeline (REP) for $70 million a year for ten years starting in 2007. REP is obligated to build pipelines to southwestern Wyoming and transport 200,000 MMBtu per day of gas to connecting hubs for Ultra.
Ultra's finding and development cost for 2005 was $0.56 per MCFe and reserve replacement was 773%, both the best in the industry. Ultra has 17 years of drilling planned with 160 wells planned for 2006 in Wyoming alone. They produced 73.4 Bcfe of gas in 2005 which suggests the 200,000 MMBtu capacity being contracted above is only a portion of their expected Wyoming production. With Wyoming gas selling for more than $8 per MMBtu in January that represents $1.6 million in gas production through the pipeline per day or roughly $584 million per year. I would gladly pay $70 million for pipes to carry $584 million of gas to market.
Ultra ended 2005 with no debt. Their profit per MCFe was $6.94 in Q4. Net profit increased +111% in 2005, ROE was 55%. Proved reserves in Wyoming at the end of 2005 were 2.022 TCFe of gas, a +32% increase over 2004. Proved and probable reserves were 6.29 TCFe. This represents better than a 2000% increase in reserve growth since 1999. Ultra has more than 2877 scheduled wells to drill in Wyoming over the next 17 years.
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.
Position: 2007 $70 LEAP Call OZH-AN @ $10.70
Tuesday Feb-21st insurance strategy:
Entry $62 (2/08)
VLO - $56.52 Valero ** No Stop **
No change in VLO other than the continuation of the nice bounce. The cost in our LEAP is only $1.60 so we can put this one on the back burner and forget it.
Valero Energy Corporation (Valero) owns and operates 18 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 3.3 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 gasoline, 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.
Position: 2007 $60 LEAP Call VHB-AL @ $6.60
Insurance Put: March $45 Put VLO-OI @ $1.20 ** Still open **
Close the March $65 Call VLO-CM @ $1.50, +1.00
Sell March $65 Call
VLO-CM @ $2.50 bid
Entry $52.30 (12/16)
HW - $37.94 - Headwaters ** No Stop **
No change in the play.
Maintain the stop loss on the short call at $39.95.
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.
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.
Dec-27th Insurance Combo:
Entry $35.50 (11/22)
CHK - $31.56 Chesapeake Energy ** No Stop **
CHK is moving contrary to the gas market and rebounded substantially from the Tuesday drop. There was no insider activity but something is supporting the stock. I am not complaining but we are getting very close to the stop on the short call.
Maintain the stop loss on the short April $32.50 call at $32.50 and maintain a profit stop at $28.
Target $25 to sell the existing put.
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.
Position: 2007 $35 LEAP VEC-AG @ $4.00
Covered Call 12/27:
Tuesday Feb-21st cost reduction strategy:
Entry $29 (11/04)
Leaps Trader Watch List
No Buying At the Top
We entered two plays from the watch list last week, OIH and CNI. I am not adding any new targets because oil prices are moving higher and we don't want to buy at the top of a spike. We already have 18 positions and that is a full load at this time.
Tenaris has gone vertical and I doubt we will get an entry even if I raised the target price substantially from the current $135. It has rallied +$40 from the February lows we were trying to target. +$40, DANG IT! +$23 this week alone. Option prices are off the scale so I would not try to snipe it even at this range.
I am going to raise the target on BTU. That sucker just will not dip post split. I thought we were going to see some post split depression last week but it lasted only one day.
Check the targets again for changes.
Current Watch List
TS - $183.60 - Tenaris
The potential for a 3600-mile gas pipeline sent TS soaring even though they are not in the business of making 52 inch tube.
Tenaris S.A. is a global manufacturer of seamless steel pipes for the oil and gas industry and a global supplier of seamless steel pipes for process and power plants and for industrial and automotive applications. It is also a regional supplier of welded steel pipes for oil and gas pipelines in South America. Tenaris focus on providing end-user customers a service that integrates manufacturing, procurement, distribution and on-time delivery of products throughout the world. Incorporated in Luxembourg, the Company has manufacturing facilities in Argentina, Brazil, Canada, Italy, Japan, Mexico, Romania and Venezuela. It also has a proprietary global service and distribution network in over 20 countries. Tenaris' customers include many of the world's major oil and gas companies, as well as a large number of engineering and industrial companies.
This is a wild card shot. If we do get the drop I would love to buy the option but the options are expensive!
PBR - $92.83 - Petro Brasileiro
Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a mixed-capital enterprise of which a majority of voting capital must be owned by the Brazilian Government. The Company is engaged in a range of oil and gas activities, which include segments such as exploration and production, refining, transportation and marketing, distribution, natural gas and power, international, and corporate. Besides the dominant market position in Brazil, Petrobras has oil and gas activities in international locations, with significant international operations in Latin America, the Gulf of Mexico and West of Africa. 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 $87.00
SLB - $122.22 - Schlumberger Ltd.
2:1 Split April 7th
Schlumberger Limited (Schlumberger) is an oilfield services company that supplies technology, project management and information solutions for the oil and gas industry. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company that supplies a range of technology services and solutions to the international petroleum industry. WesternGeco, jointly owned with Baker Hughes, is a surface seismic company. On January 29, 2004, Schlumberger completed the sale of its SchlumbergerSema business to Atos Origin. During the year ended December 31, 2004, Schlumberger completed the initial public offering of Axalto and no longer retains any ownership interest in this business.
Breakdown target $114.00
BTU - $51.10 - Peabody Energy
2:1 Split 2/23
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 $48.00
PCU - $85.55 - Southern Copper Corp
Southern Copper Corporation, formerly Southern Peru Copper Corporation (SPCC), is an integrated producer of copper that operates mining, smelting and refining facilities in the southern part of Peru. The copper operations of the Company involve mining, milling and flotation of copper ore to produce copper concentrates, the smelting of copper concentrates to produce blister copper and the refining of blister copper to produce copper cathodes. SPCC also produces refined copper using the solvent extraction/electrowinning (SX/EW) technology. Silver, molybdenum and small amounts of other metals are contained in copper ore as by-products. Silver sold is recovered in the refining process or as an element of blister copper. Molybdenum is recovered from copper concentrate in a molybdenum by-product plant.
HOC - $61.95 - Holly Corp
Holly is a very strong company despite its small size. It has a huge cash pile and no debt. The ratio of cash to equity is currently 67% and Holly is trading at only a 9 PE. The $2B company is a huge takeover target given its inland refineries and pipeline capacity. Forbes named it one of America's best managed companies with a five year annualized return of 80.7%, the best in the oil and gas industry.
Holly Corporation (Holly) is an independent petroleum refiner that produces and distributes high-value light products, such as gasoline, diesel fuel and jet fuel. As of December 31, 2004, the Company, through its principal subsidiaries, operated and managed three refineries located in Artesia and Lovington, New Mexico (operated as one refinery); Woods Cross, Utah (Woods Cross refinery), and Great Falls, Montana (Montana Refinery). Holly also holds ownership interests in Holly Energy Partners, L.P. (HEP), a limited-liability company that owns and operates pipeline and terminally ailing assets, as well as 70% interest in the Rio Grande Pipeline Company (Rio Grande). Rio Grande owns a 249-mile pipeline that transports liquid petroleum gases (LPGs) from West Texas to the Texas/Mexico border. During the year ended December 31, 2004, gasoline, diesel fuel and jet fuel (excluding volumes purchased for resale) represented 59%, 26% and 5%, respectively, of the refinery's sales volumes.
XLE - $54.07 - Energy Select SPDR
The Energy Select Sector SPDR Fund (the Fund) is an index fund that seeks to replicate the total return of the Energy Select Sector Index of the Standard & Poor's 500 Composite Stock Index (S&P 500 Index). During the fiscal year ended September 30, 2004 (fiscal 2004), the Fund had a return of 48.27%, as compared to the Energy Select Sector Index return of 48.91% and the S&P 500 Index return of 13.87%. The Fund invests in industries, such as energy equipment and services, and oil and gas services, among others. In fiscal 2004, its top five holdings were Exxon Mobil Corp., ChevronTexaco Corp., ConocoPhillips Inc., Schlumberger Ltd. and Occidental Petroleum Corp.
Breakdown target $52.00
RAIL - $69.27 FreightCar America
FreightCar America, Inc. is a manufacturer of aluminum-bodied railroad freight cars (railcars) in North America. The Company specializes in the production of coal-carrying railcars, which represented 78% of its deliveries of railcars, during the year ended December 31, 2004, while the balance of its production consisted of a broad spectrum of railcar types, including aluminum-bodied and steel-bodied railcars. It also refurbishes and rebuilds railcars and sells forged, cast and fabricated parts for all of the railcars that the Company produces, as well as those manufactured by others. Prior to April 1, 2005, the Company was named FCA Acquisition Corp. On April 1, 2005, a former parent company, also named FreightCar America, Inc., merged with and into FCA Acquisition Corp., with FCA Acquisition Corp. being the surviving corporation. In connection with the merger, FCA Acquisition Corp. changed its name to FreightCar America, Inc.
Breakdown target: $67.
BUY Sept $80 Call RQN-IP
TIE - $43.46 Titanium Metals
2:1 Split 2/17
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.
Breakdown target: $38.
BUY Sept $45 Call TIE-II
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