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Weekly Newsletter, Saturday, 03/11/2006

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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

Tough Week for Longs

While the week was tough for long energy positions we did get some new entries and moved out of danger on our short calls. Oil prices appear to be settling around $60 and right where we expected support to appear. We did lose ground on our longs but it was not unexpected. If you remember we sold those short calls back on Feb-21st in expectation of another profit taking dip before the summer ramp begins. So far everything has gone more or less according to plan. I know it is painful for those positions where we did not have a cost reduction scenario in place but nobody ever said the only direction was up.

Cost reduction strategies in play this week saw some of the exit targets hit for nice profits. Six positions benefited from the strategy. We either closed the short calls and/or the long puts on all six. Many more are very close to an exit. Once we get a new bounce we will institute a new cycle.

Cost reduction strategies
closed for a profit:

SU +$3.60
HP +$2.75
GI +$3.75
KMG +$2.20
NOV +$2.90
UPL +$6.30 !!!

We saw tensions cool in the Iran nuclear debate despite warnings and counter warnings from several of the major players. It is possible the U.N. Security Council will take up the Iran matter as soon as next week and tensions should begin to rise again. The U.N. will probably spend a week or so debating the issue then produce a finding that Iran is in default of past agreements. They will warn Iran that they must comply and give Iran some time to think it over. Iran will probably refuse and the council will then begin discussing sanctions. Iran will be warned that they must comply or action will be taken. Iran will probably refuse again stalling for time. The Security Council will propose some sanctions and Iran will again have some time to comply before the U.N. acts. When the time arrives to put the sanctions in force China and Russia will likely threaten a veto and more time will pass while the potential sanctions are debated. The entire process can take as much as two months.

Iran has warned that they will take action against various nations if the U.N. starts squeezing them. While the action remains unclear they said they would produce "harm and pain" and that "nations of the world remain vulnerable to their attack." Iran is a significant threat but they know they can't succeed in anything but harassment attacks and any such attack would bring swift retribution from the major players. You know the U.S. would love a first strike of some kind by Iran to justify escalating the problem into obliteration of their nuclear sites and the end of their nuclear ambitions for quite some time.

This Iran dispute is simply eye candy for energy traders. Until something really happens they may want to remain cautiously long and very few would be aggressive enough to short oil. That means it is still a supporting factor for at least the next two months.

OPEC met last week and agreed to leave production at the same level it has been for months at 28 mbpd. Iraq, not considered part of the quota/production scenario at present is another 1.5 mbpd. Iraq production has been so volatile that it is not counted as reliable production for OPEC. In reality the production quotas are a sham since three countries can't meet their quota and several others are pumping flat out. Essentially OPEC is pumping every barrel they can with the exception of Saudi Arabia. Saudi has about 500,000 bpd of excess sour capacity. Nigeria is still fighting the rebels and the rebels have pledged to knock out another 500,000 bbls of daily production putting a 1-mbpd crimp in the global supply when it occurs. Because of this OPEC has agreed to leave production alone as long as oil remains over $58-$60.

For our purposes those issues remain a cloud over the market despite the decline to $60. Should we decline much under $60 you can expect OPEC to start talking up the price again and threatening production cuts. That OPEC threat is our real support partner.

As we approach mid March we are right at the start of the normal ramp into the summer driving season. We are already seeing heavier than expected demands for gasoline and diesel due to the warmer than normal weather patterns. Gasoline prices have stabilized in the $2.25-$2.50 range and consumers have become used to seeing those prices at the pump. This has set the stage for normal demand to return with sticker shock a thing of the past.

Keene pointed out on Thursday night that the chart for oil looks very much like a head and shoulders with $59 the rough neckline. While I agree this is a potential we are heading into a strong demand period. I personally believe seasonal demand factors will trump the current chart pattern. This does not mean we are not at risk for a continued dip to $58 or even lower but the global demand picture is not confirming a drop in prices. Interest rates are rising around the globe and that is a direct result of global economic growth. Economic growth consumes oil at a faster pace and upsets normal demand patterns.

Nobody has a failsafe view of the future and can predict oil prices at any specific point. The views I am expressing are simply one scenario based on global demand patterns and geopolitical events. Keene's H&S is a purely technical view. Both views are presented for your analysis.

I know we have a lot of new readers this month and I want you to know what to expect. My goals in the LEAPS newsletter is to establish positions with a view for long term investment. We will manage those positions to reduce cost and risk. Ideally our cost in the eventual positions will be less than $5 with substantial upside possible as oil prices ramp into the summer and fall. We will deal with whatever oil price the market gives us and plan our trades accordingly. I am not planning on jumping in and out of trades as the change in geopolitical events produces volatility in oil prices. We will deal with it by managing the positions rather than exiting and reentering.

If oil prices do dive below $58 our long positions will probably be in negative territory for several weeks but we will continue to hold them. It is a proven fact in investing that strong reversals of down trends tend to produce strong gains over a very short period of time. The only ones who capture those gains are those already in long positions. Trying to time the market or pick a bottom typically produces sub standard results. We will continue to enter positions when nobody else wants them because the long-term outlook has not changed.

The watch list was decimated this week after the majority of our targets were hit on Wednesday. Only two targets remain, Tenaris and Titanium Metals. I will not be adding any new candidates since we are now carrying more than 20 positions.

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.


Natural Gas Chart - Daily

Crude Oil futures Chart - Daily

 


Changes in Portfolio

New Plays

None


Dropped Plays

None


New Watch List Plays Triggered

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

PBR - $84.58 - Petro Brasileiro

PBR dropped back to our entry target of $87 on Tuesday and continued on to test support at $82 before rebounding. This was -$12 off its high for the month and should be a strong support point assuming we don't get an implosion in oil prices. Once we get a bounce to reflate call premiums we will sell a call to reduce our cost.


Company Info:

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 hit on 3/07
Position: 2007 $95 LEAP Call VDW-AS @ 8.40

Entry $87.00 (3/07)

SLB - $116.86 - Schlumberger Ltd.

We got the pullback from $123 and the RIG induced spike back on March 3rd. We were triggered on the drop at $114 and right at current support. SLB has been rather tame since the drop and rose +2.12 on Friday. I am happy with our position despite it being expensive. The split on April 7th will give us (2) $60 LEAPS at $7 each before we start working on reducing the cost. SLB and RIG should be less dependent on the price of oil than a major oil like Conoco or Exxon.

2:1 Split April 7th

Company Info:

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 hit on 3/08
Position: 2007 $120 LEAP Call VWY-AD @ $14.00

Entry $114 (3/08)

BTU - $46.20 - Peabody Energy

Peabody was knocked back to earth this week after coming very close to a new high the first week of March. $52 appears to be resistance and the 100 dma at $43 is support. Peabody split 2:1 baco on Feb 23rd and should find new buyers once the sector recovers. Peabody profits are not related to the price of oil and coal prices are continuing to rise. Summer cooling season is just ahead and BTU is going to be a long term hold. We bought the 2008 LEAP in anticipation of a long term position.

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.

Breakdown target $48.00 hit 3/07
Position: 2008 $55 LEAP Call LLW-AK @ $9.50

Entry $48.00 (3/07)

PCU - $79.84 - Southern Copper Corp

PCU is not technically an energy play but a commodity play focusing on the global growth fed by oil. Copper and oil are linked in the growth scenario and PCU is my favorite copper stock. Strong support exists at $76.

Company Info:

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.

Breakdown target $78.00 hit on 3/07
Position: Sept $85 Call PCU-IQ @ $6.20

Entry $78.00 (3/07)

XLE - $51.38 - Energy Select SPDR

The XLE declined to our entry target at $52 on Tuesday and held just above support at $51. This is exactly where we want to be and options are cheap. A break of $51 finds support again at $50 and I would be very surprised to see any further declines. With a mix of integrated oils, drillers and service companies the XLE should not be as volatile as oil prices. This is the vehicle for those with a very low risk tolerance.

SPDR Info:

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 of components of the XLE:
http://www.spdrindex.com/spdr/index.cfm?story=composition&symbol=XLE

Breakdown target $52.00 hit 3/07
Position: 2007 $55 LEAP Call OJW-AC @ $4.10

Entry $52.00 (3/07)

RAIL - $63.63 FreightCar America

You may think RAIL is not an energy play but you would be wrong. 78% of its rail cars are for coal. You may remember in mid 2005 the coal companies saw a period of soft earnings because there was not enough rail capacity to get their coal to market. RAIL saw a +120% increase in orders in Q4 and saw a backlog of nearly 21,000 cars at year end. As more energy products are shipped from Canada and into Mexico the demand will continue to grow.

After a meteoric spike from $20 in July to $70 in February it was due for a substantial pullback. That arrived last week and afforded us our entry opportunity.

Company Info:

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.

Currently the longest option you can buy is the September series.

Breakdown target: $67 hit 3/07
Position: Sept $80 Call RQN-IP @ $4.00

Entry $67.00 (3/07)

 


Play Updates

Existing Plays

OIH - $134.35 - Oil Service Holders ** No stop **

No material change. The OIH has two trendlines showing support in the $128-$130 range and we are resting on decent support at $134.

Holder Info:

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
Position: LONG April $120 Put OIH-PD @ $1.95

Entry $135 (2/28)

CNI - $45.50 Canadian National Railway ** Stop Loss $37 **

CNI finally saw a little post split depression but it appears to be easing just above strong support at $44.

Company Info:

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 - $51.88 - Talisman Energy ** Stop Loss $45 **

No change. Just waiting for oil to firm and the split to arrive.

Prior play commentary:

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.

Company info:

Talisman Energy Inc. (Talisman) is an independent international upstream oil and gas company whose main business activities include exploration, development, production, transporting and marketing of crude oil, natural gas and natural gas liquids. The Company's operations, during the year ended December 31, 2004, were conducted principally in four geographic segments: North America, the North Sea, Southeast Asia and Algeria. The Trinidad Angostura project began production in January 2005. Exploration is being advanced in other areas outside the principal geographic segments, including Alaska, Colombia, Qatar and Peru. During 2004, total production averaged 438 million barrels of oil equivalent per day (mboe/d) and the Company exited the year producing 452 mboe/d in December. In 2004, the Company drilled 641 successful wells.

Buy October $60 Call TLM-JL currently $6.00

Entry $56.44 (3/05)

DO - $77.37 - Diamond Offshore Drilling ** Stop Loss $65 **

We came within 10 cents of the profit stop on the short call at $75. Maintain that profit stop at $75 because I don't think DO has fully recovered yet. Support is at $75 and $72. Lower the stop loss on the short call to $85.

Company Info:

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:
Sell the September $95 Call DO-IS @ $4.90
Set a stop loss on the call at DO $90, changed to $85 3/12
Buy back the call on a dip to $68. Changed to $75 on 3/05

Entry $75 (2/15)

RIG - $76.23 - Transocean Inc ** No stop **

RIG continues to display significant volatility after the $1.7 billion contract announced in early March. We are naked on this position at present but given the volatility I want to wait another week before applying a cost reduction strategy.

Company info:

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:
Sell the March $75 Call RIG-CO @ $1.90, stopped at $2.70 3/01
Buy the May $65 Put RIG-QM @ $2.00
Set a profit stop on the put at $57

Entry $75.00 (2/14)

GI - $59.61 - Giant Industries ** Stop Loss $46 **

Volatility evaporated on GI and the premium on the short call has dropped substantially. If you feel lucky you can move the profit stop to $58 from $56 but I believe the gain will be minimal. I am officially closing the short call today @ $1.85 for a +$3.75 profit. This reduces our cost in the Sept call from $8.50 to $4.75. Not bad for a couple weeks effort.

Company info:

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
Cost reduction: Cost reduced by -3.75 on 3/12 to $4.75.

Tuesday Feb-21st cost reduction strategy:
Sell the June $75 Call GI-FO @ $5.60, closed 3/12 $1.85, +3.75
Set a stop loss on the call at $73, changed to $69 3/05
Set a profit stop on the call at $52, changed to $56 on 2/26

Entry $60 (2/14)

HP - $61.00 - Helmerich Payne ** Stop loss $55 **

The profit stop on the short call was hit on 3/8 at $61 and the call was closed at $1.95 for a profit of $2.75. This reduces the cost on the long call from $7.20 to $4.45.


Company info:

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
Cost reduction: Cost reduced by -2.75 on 3/8 to $4.45.

Tuesday Feb-21st cost reduction strategy:
Sell the June $70 Call HP-FN @ $4.70, closed 3/8 $1.95, +2.75
Set a stop loss on the call at $69.95
Set a profit stop on the call at $59, changed to $61 2/26

HP Entry $69 (2/13)

NOV - $57.25 - National Oilwell Varco ** Stop Loss $50 **

I should have left the profit stop at $58 for the short call. After moving it last week to $60 we got a dump back to just below $58 on the drop in oil prices. It did not make any difference because the premium never recovered anyway.

That short call was stopped out on the 7th at $1.30 cents for a profit of $2.90. This reduces the cost in our August call from $6.90 to an even $4.00. Given the substantial drop in NOV the last week we may need to do it again to take our cost lower. We need a spike in prices to make it work again.


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.

Position: Aug $65 Call NOV-HM $6.90
Cost reduction: Cost reduced by -2.90 on 3/3 to $4.00.

Tuesday Feb-21st cost reduction strategy:
Sell the May $70 Call NOV-EN @ $4.20, closed 3/7 $1.30, +2.90
Set a stop loss on the call at $69.95
Set a profit stop on the call at $58

NOV Entry $61.50 (2/14)

SUN - $77.85 - Sunoco ** Stop Loss $58 **

No change. SUN is holding at support at $75.

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.


Original play description:

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.

Company Info:

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:
Sell the May $90 Call SUN-EA @ $2.95
Buy the May $70 Put SUN-QN @ $2.75
Set a stop loss on the call at $89.95.
Set a profit stop on the put at $65, changed to $66 2/26.
Set a profit stop on the call at $70.

Entry $72.51 (2/12)

COP - $59.12 - Conoco Phillips ** No Stop **

No change.

Play description:

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.

Company Info:

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 - $73.02 - Suncor Energy ** Stop loss $55.00 **

Great week for our Suncor position. We were stopped on the short call on the 8th at $72 for a +2.45 profit. We were stopped on the long put on 3/8 at $70 for a +1.15 profit. The total gain for the week was +3.60 reducing our LEAP cost from $9.05 to $5.45. We will do this again on the next spike to resistance.

Play description:

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.

Company Info:

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
Position: 2007 $85 LEAP OYX-AQ @ $7.70 on 2/13,
average cost $9.05
Cost reduction: Cost reduced by -3.60 on 3/8 to $5.45.

Tuesday Feb-21st insurance strategy:
Sell the March $80 Call SU-CP @ $2.65, closed 3/8 .20, +2.45
Buy the March $70 Put SU-ON @ $0.85, closed 3/8 $2.00, +1.15
Set a stop loss on the call at $79.95.
Set a profit stop on the put at $65, changed to $70 2/26.
Set a profit stop on the call at $68, changed to $70 2/26.

CCJ - $34.25 - Cameco ** No stop **

That was really painful! The post split high of just over $39 collapsed to just under $33 in only three days. We are going to need a cost reduction strategy here once a real bounce appears. Currently you have to look out to June to find any premium and I don't want to bet that far away. I know Cameco will come back if we wait.

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.

Company Info:

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.

Pre-split entries:
Breakout target $72.50
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $10.60 (2/06)

Breakdown target $67.00
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $9.00 (2/08)

Pre-split average cost: $9.80
Post split position: (4) 2007 $40 LEAP ZBK-AH @ $4.90

Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
Added after the 2:1 split on 2/24

Put insurance: None today

HAL - $66.99 - Halliburton ** No Stop **

One more week until the split and HAL is sinking fast. We are approaching strong support and I think we will see some decent buying once the split passes. I don't want to add any new positions for insurance until after the split in two weeks.

Play description:

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.

Company Info:

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 **

We were stopped out on the short call on 3/7 at $95 for a profit of +$2.20 reducing our cost in the LEAP from $9.00 to $6.80. We still have a long put worth about double what we paid for it. Raise the profit stop on the long put to $91.00.


Company Info:

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


Position: 2007 $115 LEAP Call OGM-AC @ $9.00

Tuesday Feb-21st insurance strategy:
Sell the April $105 Call KMG-DA @ $3.00, closed 3/7, .80, +2.20
Buy the April $90 Put KMG-PR @ $1.25
Set a stop loss on the call at $104.95.
Set a profit stop on the call at $93.
Set a profit stop on the put at $85. Raised to $91 3/12

Entry $107.00 (2/06)

UPL - $52.82 - Ultra Petroleum ** Stop Loss $45.00 **

Outstanding! We were stopped out of the short call on 3/7 for a +$3.00 profit and the long put for a +3.30 profit for a total gain of +$6.30! This reduced the cost of our LEAP from $10.70 to only $4.40! One more cycle and we could get very close to two bucks or less. First we need a realistic bounce.

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.

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.

Position: 2007 $70 LEAP Call OZH-AN @ $10.70

Tuesday Feb-21st insurance strategy:
Sell the June $65 Call UPL-FM @ $4.30, closed 3/7 $1.30, +3.00
Buy the June $55 Put UPL-RK @ $4.30, closed 3/7 $7.30, +3.30
Set a stop loss on the call at $64.95.
Set a profit stop on the put at $50.
Set a profit stop on the call at $50.

Entry $62 (2/08)

VLO - $53.56 Valero ** No Stop **

No change in VLO other than the same sideways motion above support. The cost in our LEAP is only $1.60 so we can put this one on the back burner and forget it.

Company Info:

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
1/30 Cost reduced by spread on put/call -0.90, now $5.70
2/06 Cost reduced by -1.00 on closed call, now $4.70
2/09 Cost reduced by -3.10 on closed $57 put, now $1.60

Monday Feb-13th
Set profit stop on March $45 put at $48 on VLO

Insurance Put: March $45 Put VLO-OI @ $1.20 ** Still open **
Put entered on 12/27 when VLO traded at $51

Monday Feb-6th:

Close the March $65 Call VLO-CM @ $1.50, +1.00
Set a profit target on the March $57 put at $54, exit $4.70 (2/9)

Monday Jan-30th:

Sell March $65 Call VLO-CM @ $2.50 bid
Buy March $57.50 Put VLO-OY @ $1.60 ask
Set a stop loss on the call at $64. Profit stop at $54
Set a profit stop on the put at $52.

Entry $52.30 (12/16)

HW - $37.28 - 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.

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.


Position: 2007 $40 LEAP Call ZPP-AH @ $4.30

Dec-27th Insurance Combo:
Sell May $40 Call HW-EH @ $2.05, set stop at $39.95
Buy May $35 Put HW-QG @ $2.15

Entry $35.50 (11/22)

CHK - $30.00 Chesapeake Energy ** No Stop **

CHK is still moving sideways above support and holding up very well considering the drop in gas prices. Note the support of the 200-dma on the chart.

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.

Prior commentary:
The CEO said on Wednesday (2/01) that CHK is more likely a buyer of other companies and assets than a target of a takeover itself. He said there were many potential targets smaller than Chesapeake and the drop in gas prices made them attractive. He said gas prices should remain in the $7.50-$10.50 range the rest of the year. He did not expect any major to make a big play like Conoco did when it purchased Burlington late last year for $35 billion. He also said CHK's $2.2 billion acquisition of Columbia Natural Resources was going better than planned and the opportunity appears to be bigger than originally thought. McClendon said CHK had actively hedged its output when prices were higher and were profiting from the swings in prices. He said the plunge in gas prices was "fantastic" because it made acquisitions cheaper, stemmed demand destruction and gave consumers a break on their utility bills. CHK also announced the private placement of $500 million in 6.5% notes due in 2017. The proceeds would be used to pay off bank debt. What a deal! Gas will be $30 by then and the $500 million plus interest will be chump change.

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.

Position: 2007 $35 LEAP VEC-AG @ $4.00

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

Covered Call 12/27:
Sold the April $35 Call CHK-DG currently $2.15
Set a stop loss on the call at $34.95, exit @ $2.70, -55, 1/30

Tuesday Feb-21st cost reduction strategy:
Sell the April $32.50 Call CHK-DZ @ $1.40
Set a stop loss on the call at $32.50.
Set a profit stop on the call at $27, change to $28 on 2/26.

Entry $29 (11/04)

 


Leaps Trader Watch List

Boat Is Loaded

With 24 positions I have no desire to add any more. Surely there is something for everyone in the play list. With stock prices down along with oil prices I believe an entry on any existing play over the next couple weeks is a bargain.

Jim Brown
 

Dropped Entries

None


New Watch List Entries

None

Current Watch List

TS - $174.92 - Tenaris

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.


Breakdown target $160.00
Buy Sept $180 Call TSW-IP 1/2 position

This is a wild card shot. If we do get the drop I would love to buy the option but the options are expensive!


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

HOC - $60.51 - 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.


Breakdown target $57.00
Sept $65 Call HOC-IM


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

TIE - $41.70 Titanium Metals

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.


Currently the longest option you can buy is the September series.

Breakdown target: $38.

BUY Sept $45 Call TIE-II
 


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