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Weekly Newsletter, Saturday, 03/18/2006

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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

What Dip?

After testing support at $59.25 the prior week the price of oil rebounded dramatically to near $64 as the week progressed. The dip in energy stocks was erased as multiple days of oil gains of more than a buck attracted buyers like ants to a picnic. The dip on Friday was likely a combination of factors linked to a quadruple option expiration more than anything directly related to oil.

As I explained in the Option Investor commentary this weekend the new rules going into effect for the formulation of gasoline and diesel inside the U.S. will cause prices to rise for those products. The demand for light sweet crude, which will be easier to refine to the new specifications will increase. As the price of refined products increases it will push the price of crude higher despite it being the tail wagging the dog.

Geopolitical risks continue to dominate the oil outlook with some kind of risk for each of the top five exporters. Why is it that high oil reserves tend to be in places with political instability? Is it perhaps the influence of billions in easy revenue that attracts the worst in governments and rulers? Of the top five exporters, Saudi Arabia, Russia, Norway, Iran and Venezuela, political unrest and/or unstable dictators afflict them all.

While that may be unfortunate for the rest of the world it will eventually make us a lot of money. We know that it is only a matter of time before once of those firecrackers explodes and disrupts the delicate balance of oil demand and consumption. Even if we do not have any external event the approach of Peak oil will provide the unsettling influence that triggers the disruption. It is only a matter of time and time is on our side.

The rebound in energy stocks right to resistance has given us another chance to sell covered calls against our leaps but I am not sure we want to take it. The end of March ad early April is typically when prices begin to rise ahead of the summer driving season. We might get one more dip but with the Iran problem and the promise of further attacks in Nigeria I am afraid we could be running the exercise for nothing if we get stopped out almost immediately for our efforts on a continuation of the current bounce. However, there is a good chance a part of the bounce was option expiration related so I am going to take the chance on a few positions where our cost is high. If you would rather not take the risk it is always your call.

I believe anyone invested in the energy sector should pay close attention to the December futures. They are currently trading just below $69 and reflect the potential for further geopolitical events and new disruptions as we enter the hurricane season again. 2005 was the worst hurricane season in the 154 years since records have been kept. The 2006 season is also expected to be very strong with 17 named storms expected. Nine are expected to be hurricane strength and five are expected to be category 3 or higher. In 2005 we had 27 named storms, 9 hurricanes, 8 category 3+ and 4 category 5 hurricanes. If the current 10 year storm cycle is still in place as predicted then the estimates for 2006 could be easily be exceeded. The hurricane forcaasters are predicting a 81% chance if at least one major hurricane striking the mainland (gulf) and 64% chance of a Florida strike. Given the 2005 record and the increasing strength of this cycle I doubt you could find anybody to bet against those odds. The official hurricane season begins June 1st and continues through November 30th. In 2005 storms were still being formed as late as December 30th (tropical storm Zeta) and it continued through Jan-6th, 2006 as only the second storm on record to exist in two different calendar years.

Many rigs and platforms damaged in the 2005 storms have still not returned to production with only three months remaining before the 2006 season. According to the Minerals Management Service 348,253 bpd of oil is still offline in the Gulf along with 1.403 bcf of natural gas. Any storm that forms and heads for the Gulf will set off alarms and evacuations on a greater scale than before. Repair crews are working at full speed trying to finish repair before the new season starts.

Regardless of how the winter season ends we will have no shortage of natural gas. With gas in storage currently +59% higher than average it appears almost a guarantee that we will end somewhere in the +70% range over historical norms. It positively amazes me that CHK, ECA and UPL are trading so much higher given the drop in gas prices.

According to the Baker Hughes rig count for last week there are 1532 active rigs in the US. 238 of those rigs are drilling for oil and 1292 for natural gas. You may find that incredible but the sad truth is that there is little oil left to find in North America and lots of gas. However we will need that gas very soon. That +60% extra we have in storage right now can be gone very quickly if a severe cold front settles in for a couple weeks or more likely a long hot summer appears.

Patterson Energy (PTEN) produced the following slides for the 2006 Small and Mid-Cap Conference on March 14th. The first one shows the faster depletion of gas fields than previously thought. By the end of 2005 existing fields were estimated to be declining at a 30% rate. This requires more gas to be found faster to offset the faster depletion in old fields.

U.S. Natural Gas Depletion Rates

They also posted a slide indicating a trend of smaller discoveries as the number of wells increased but the density of the finds decreased. From 1990 to 2000 wells in the lower 48 states produced -28% less than previous wells. In western Canada they produced 75% less. This is a rapidly growing problem since huge amounts of natural gas are required to melt the oil out of the oil sands.

Gas Production Rates per Discovery

In order to offset the decline in production per new well and the faster depletion rate of mature fields the number of wells has skyrocketed. 60% of the gas supply for the US comes from US land based wells. 24% comes from offshore wells and 16% is imported, mostly from Canada. Gas imports from Canada declined -8% in 2003 and an additional -1% in 2004. Numbers for 2005 are not yet available but it is assumed there was another decline based on the demand for gas for the oil sands projects. To offset the decline in gas production the number of wells drilled in the US has risen more than 100% in the last five years to more than 23,000 in 2004. 23,000 new holes were drilled and yet total production has remained topped out at just under 23 TCF since the level was first reached in 1996. Just under 130,000 gas wells have been drilled since 1996 without increasing total production more than 1 tcf per year. This is an amazing statistic from the US Dept of Energy.

Gas Wells Drilled

Gas Produced

This entire presentation is available at this address:
http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=PTEN&script=1010&item_id=1196710

I can summarize the gas crisis in two sentences. In order to maintain the current level of gas production more than 23,000 new gas wells must be drilled each year in the US. Gas consumption is increasing daily and within a couple years it will require as many as 30,000 new wells per year just to stay even.

This is the law of decreasing returns in its finest form. We simply cannot continue to punch more holes faster just to stay even. There are simply not enough rigs and they can't be built fast enough. There are an estimated capability to build 170 rigs per year at $10-$12 million each. To continue gas production at the current rate more than 850 new rigs will need to be added over the next five years.

Wells are being drilled deeper which means slower. One of my sons works for a gas driller. They were drilling shallow wells of 6000 ft northern Colorado at one every 7-10 days. When he transferred to the Utah-Wyoming border to drill in the Pinedale anticline they are drilling twice that depth and it now takes them 22-25 days per well. You do the math. 25,000 wells in 2006 to maintain current production at an average of 36 wells per year for a shallow rig and 15 wells for a deep rig. According to Baker Hughes there were only 1292 active gas wells last week. Bottom line the price of gas is going up. Way up! It may not happen this month or next but once the summer heating season arrives the excess in storage will disappear and the race will begin again. That is why the gas stocks are moving higher while gas prices are currently stagnant.

I hope everyone was not bored this weekend with the lengthy dissertation on the gas industry. The oil story is the same only the cast of characters and the stage is much larger. To illustrate briefly the dire circumstances in oil I need to only show one statistic. Saudi has averaged less than 20 active rigs for the last decade. Sometimes only 10-12. Over the last year they have contracted for rigs from every part of the globe and currently have more than 100 rigs under contract with 52 active as of last week. Why would Saudi suddenly launch into what could only be described as an extremely aggressive exploration campaign if they had all the oil capacity they claim to have? It is obvious to anyone who studies this daily. Their aged super giant fields have begun to decline rapidly and they need to add new production from satellite wells as fast as possible or the world will find out before they are ready that the oil giant has no more oil.

If anyone tells you there is plenty of oil don't try to argue with them. You can't teach a pig to talk or a cornucopian energy math. It will only frustrate you both. Just agree with them and smile and then go buy some more leaps.


AApril Crude Oil futures Chart - Daily

December Crude Oil Futures Chart - Daily
(390 min to remove bad ticks)

April Natural Gas Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 


Changes in Portfolio

New Energy Plays New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None today

 


Play Updates

Existing Plays

PBR - $88.38 - Petro Brasileiro

Nice recovery on PBR but the -$3 drop from Thursday's highs took us out of call selling range for the April calls. The next series available this weekend is July and I don't want to risk selling that far in advance. Let's give it another week and see what develops. The rebound put us back in profitable territory so there is no rush.

Company Info:

Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a mixed-capital enterprise of which a majority of voting capital is 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.

Position: 2007 $95 LEAP Call VDW-AS @ 8.40

Entry $87.00 (3/07)

SLB - $123.21 - Schlumberger Ltd.

Very nice rebound of more than +$7 for the week. I considered selling a call here given the strong premiums but with the split only three weeks away we could see a split run and give up our profits. The rebound produced a +$3 profit in our leap so there is no rush to reduce the cost. Let's wait for the split and then make our cost reduction play.

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.

Position: 2007 $120 LEAP Call VWY-AD @ $14.00

Entry $114 (3/08)

BTU - $47.26 - Peabody Energy

Peabody is not blowing the doors off with its breakneck speed but the trend is still up. We are hampered by the drop in gas prices making gas temporarily cheaper than coal for what little electricity is being used for heating while we transition from winter to summer.

Peabody profits are not related to the price of oil and coal prices will rise along with gas prices. 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 the largest 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.

Position: 2008 $55 LEAP Call LLW-AK @ $9.50

Entry $48.00 (3/07)

PCU - $83.92 - Southern Copper Corp

Nice +$6 rebound from our $78 entry and PCU closed at the high for the day on Friday. Copper also hit a new historic high and global demand is booming. The options are cheap and I can't make a cost reduction scenario work this weekend that balances risk and reward. We are profitable on this play so plenty of time to find the right offset that works.

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.

Position: Sept $85 Call PCU-IQ @ $6.20

Entry $78.00 (3/07)

XLE - $53.67 - Energy Select SPDR

The XLE rebounded to resistance at $54.50 before pulling back slightly on Friday. The XLE is poised to break out of its $51-$54 trading range and all we need to do is wait. 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

Position: 2007 $55 LEAP Call OJW-AC @ $4.10

Entry $52.00 (3/07)

RAIL - $69.41 FreightCar America

Very nice +$6 rebound and the news from Union Pacific served to light the fire under RAIL once again. With our cheap $4 option we do not need to increase risk by attempting to reduce our cost.

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.

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.

Position: Sept $80 Call RQN-IP @ $4.00

Entry $67.00 (3/07)

OIH - $141.19 - Oil Service Holders ** No stop **

No material change. The OIH returned to resistance at $143 and held its gains. Once we break over that level the put premium should begin to decelerate rapidly.

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 - $45.90 Canadian National Railway ** Stop Loss $37 **

CNI seems to be suffering from some lingering post split depression. The UNP upgrade on Wednesday provided some lift but Friday saw the sellers return. Nothing has changed in the fundamentals and this is probably some lingering consolidation from the split.

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 - $53.33 - 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 $4.50 they will split to a cost of $1.50 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.

Position: October $60 Call TLM-JL currently $6.00

Entry $56.44 (3/05)

DO - $83.06 - Diamond Offshore Drilling ** Stop Loss $70 **

That was TOO close! DO rallied +6 and came within ten cents of our stop loss on the short call at $85. Despite the close call the ratios are working for us. The LEAP jumped +$3 while the short call only increased +40 cents. $85 is resistance on DO so I am going to raise the stop on the short call to $89. Hard to believe we came within 10 cents of the profit stop on the short call during the prior week at $75 and then 10 cents from stopping us out at $85 the very next week.

Maintain that profit stop at $78. Support is at $75 and $72. Raise the stop loss on the short call to $89.

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 - $80.06 - Transocean Inc ** No stop **

RIG continued to move higher but began to fade once over $80. I am going to add a short call this weekend in case we get some further profit taking.

Monday Mar-20TH cost reduction strategy:
Sell the May $85 call RIG-EQ currently $2.80
Set a profit stop at $74
Set a stop loss at $84.95

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 - $62.47 - Giant Industries ** Stop Loss $50 **

Nice rebound on Giant to just under $65. After last weeks success on reducing our cost I am going to try it again with the June $75 call. We have a shot at cutting our cost in half again.

Monday Mar-20TH cost reduction strategy:
Sell the June $55 call GI-FO currently $2.40
Set a profit stop at $58.50
Set a stop loss at $72.50

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 - $66.60 - Helmerich Payne ** Stop loss $55 **

We got a very nice bounce on HP from $61 to near $68 with only a minor pullback on Friday. $68.50 is resistance and I am going to sell the June $75 call to further reduce our cost.

Monday Mar-20TH cost reduction strategy:
Sell the June $75 call HP-FO currently $2.05
Set a profit stop at $62.00
Set a stop loss at $74.50

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 - $60.01 - National Oilwell Varco ** Stop Loss $50 **

The bounce in NOV was less than exciting compared to some of the other oil movers. I am going to sell another call in hopes of reducing our cost again.

Monday Mar-20TH cost reduction strategy:
Sell the May $65 call NOV-EM currently $2.40
Set a profit stop at $56.50
Set a stop loss at $66.75 (yes it is in the money) I am betting on resistance at $65 to hold ahead of hurricane season.

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 - $79.55 - Sunoco ** Stop Loss $58 **

No change. SUN is holding at support at $75 and trying to break over resistance at $80.

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 - $61.36 - Conoco Phillips ** No Stop **

No change. Nice ramp over the last week but COP closed -1.50 off its highs on Friday. I was considering selling a call but the Friday decline deflated the premiums. The $65 call is right at resistance and the $70 call has no value. Patience!

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 - $74.17 - Suncor Energy ** Stop loss $65.00 **

Nice bounce but -$3 decline going into Friday. This should give us another chance to reduce the cost with less risk.

Monday Mar-20TH cost reduction strategy:
Sell the June $85 call SU-FP currently $2.65
Set a profit stop at $71.00
Set a stop loss at $83.50

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 - $35.91 - Cameco ** No stop **

Monday was a great day as CCJ recovered a significant portion of its prior week's loss. $35.75 has emerged as short-term support. The Cameco CEO was on CNBC last week and he had nothing but good things to say about the state of the nuclear power business around the world. He said their should be a 25% increase in the number of plants over the next 10 years based on the number in the planning stages or under construction.

Monday Mar-20TH cost reduction strategy:
Sell the June $40 call CCJ-FH currently $1.80
Set a profit stop at $33.50
Set a stop loss at $39.95
** Sell enough contracts to offset your (4) 2007 $40 LEAPS **

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 hit
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $10.60 (2/06)

Breakdown target $67.00 hit
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 - $70.39 - Halliburton ** No Stop **

Nice rebound to $71 from the $65 low and just in time for the split on Thursday.

** IMPORTANT **

On Monday March 20th:
SELL the 2007 $85 LEAP VHW-AQ and close the current strike.
Buy the 2007 $80 LEAP VHW-AP to reinitiate the position.
There is a $1.50 difference in the strikes but it gives us a pair of even money LEAPs after the split on Thursday. The $80 LEAP will split into (2) $40 LEAPS. Once the split passes we will work on recovering and reducing our cost.

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 - $97.36 - Kerr Mcgee ** Stop Loss $85.00 **

Nice bounce to near resistance at 100.50 giving us another opportunity to reduce our cost.

Monday Mar-20TH cost reduction strategy:
Sell the July $110 call KMG-GB currently $2.50
Set a profit stop at $92.00
Set a stop loss at $108.50

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
Cost reduction: Cost reduced by -2.20 on 3/7 to $6.80

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 - $58.57 - Ultra Petroleum ** No Stop **

After a near perfect cost reduction play in February we have been presented with another opportunity after a +$10 bounce from the support test at $50.

Monday Mar-20TH cost reduction strategy:
Sell the June $70 call UPL-FN currently $1.85
Set a profit stop at $52.00
Set a stop loss at $70.50

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
Cost reduction: Cost reduced by -3.00 on 3/7 to $7.70
Cost reduction: Cost reduced by -3.30 on 3/7 to $4.40

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 - $57.82 Valero ** No Stop **

Very nice rebound above resistance at $57. We have an insanely good position here with a cost of only $1.75. However, the bounce has given us an opportunity to reduce it to near zero. I am going to sell one more call but way out of the money.

Monday Mar-20TH cost reduction strategy:
Sell the June $67.50 call ZPY-FR currently $1.25
Set a profit stop at $53.75
Set a stop loss at $64.50

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
2/14 Cost increased by +0.15 on exited Mar-$45 put, now $1.75

Monday Feb-13th
Set profit stop on March $45 put at $48 on VLO, exit $1.05 2/14

Insurance Put: March $45 Put VLO-OI @ $1.20
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 - $39.21 - Headwaters ** No Stop **

Stopped out on the short call at $39.95 by 3 cents when HW hit $39.98 on Friday. We lost -.25 cents on the call but the leap increased +1.40. No complaints here. We still have our long May put as insurance at $35.

********

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, stopped @ 2.30, 3/17, -.25
Buy May $35 Put HW-QG @ $2.15

Entry $35.50 (11/22)

CHK - $31.49 Chesapeake Energy ** No Stop **

Nice move higher by CHK is putting us in danger of being stopped on our short call at $32.50. Resistance is $32 so I am sticking with it.

Maintain the stop loss on the short April $32.50 call at $32.50 and maintain a profit stop at $29.50.

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

Please No More

None of our remaining watch list positions came even close to our trigger points. I am not going to adjust them higher and just watch for another week. We have 24 active positions and don't need any more at present. It is very hard tracking this many and managing the positions. We are currently profitable on 15 of the 24 and we are just now entering the summer demand season.

I did drop TIE as a potential entry.

Jim Brown
 

Dropped Entries
TIE Titanium Metals

New Watch List Entries

None

Current Watch List

TS - $183.20 - 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 $170.00
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 - $66.80 - 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 $60.00
Sept $65 Call HOC-IM
 


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