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Weekly Newsletter, Saturday, 04/01/2006

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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

No Complaints

Despite the dip on Friday we can't complain about the last week. Oil futures rebounded from $61.25 the prior week to a new 7-week high at $67.30 on Thursday. Friday's decline in oil to just under $66 was likely just end of quarter profit taking. Traders bought the dip and the close for the week was right back near $67 at $66.70. We also saw some dips in energy stocks on Friday but I believe that was also profit taking and Google related. Index fund managers were forced to buy 18 million shares of Google at the close on Friday or about $7 billion worth. This means they had to sell $7 billion in other issues to make the books balance. This knocked -$5 off the S&P and about -.50 cents on several hundred S&P components. This appears to have blunted any tape painting or window dressing for quarter end. No harm, no foul.

Monday will be the key day for us. Funds should have been long energy in general going into quarter end. It makes them look really smart on the quarterly statements. Monday is a new quarter and those who feel oil may be over priced can immediately bail and go back to cash without having to tell the fund holders. If oil and energy stocks hold their gains on Monday then we can breath easier again.

The price pressures for oil remain the same. Iran, Nigeria, Norway, France, etc. Iran took a step forward with the UN giving them 30 days to abort their nuclear ambitions and return to the status quo from the last few years with full compliance and full inspections. I believe Iran is too far down the road to back down peacefully. They have made too many threats and have made their defiance public knowledge. If the Iranian leadership backs down now they will lose respect with the Iranian population. There may still be a negotiated settlement but there are none on the horizon at present. Iran has said they would halt oil exports if the UN imposes any kind of sanction. They have also said they would not play the oil card. It depends on what day of the week the question is asked and which way the wind is blowing. As long as the threat is rumored then Iran can say anything they want in public. I have no idea which way this will turn out but traders are afraid there will be a disruption of some sort. That is keeping oil prices high despite a temporary abundance of oil.

Inventories are supposed to build in March. That is no surprise to us as I have been warning you that it would happen for months. We planned on buying the dip and it has worked out very well in most cases. Some we were early on but we will deal with it over time.

The ethanol problem is growing and there does not appear to be an easy fix. With MTBE being phased out over the next few weeks there is going to be a shortage of gasoline and a shortage of ethanol. Prices are going higher with summer driving just ahead. I paid $2.59 for regular unleaded just outside of Denver today with diesel at $2.74. Higher prices and tougher emission rules means light sweet crude will be in even more demand than normal. This is pushing the price of sweet crude to near the panic levels we saw just after the hurricane levels last year.

Boone Pickens was on CNBC on Thursday and he said we would see $75 before $60 again. He has been exactly right for several years now. He pocketed $1.5 billion last year from his oil trades. He said $100-$150 over the next five years was definitely possible. He believes as I do that the current global production ceiling of 85 mbpd will remain despite all efforts to produce more. Depletion of older fields is offsetting new production coming online. China is expected to grow by +9% this year, India +8%. This will increase their consumption substantially. About 10 years ago China had only 1700 miles of paved highways. By 2012 they will have 55,000 miles. That is more than the US. Their gasoline consumption is going to skyrocket over the next five years. They are currently producing 300,000 cars a month for sales inside China.

The bottom line to all of this is simply continuing increases in consumption of oil and oil products and that consumption will exceed production very soon. Oil prices may rise and fall over the next couple years but the trend will still be higher. We need to remain long and weather these minor dips. Our patience will be rewarded.

Remember Titanium Metals (TIE) that I mentioned last week that a possible breakout was imminent? TIE did break and ran from $44 to $52 in three days before pulling back to $48.50 at Friday's close. Nice trade for those who took it.

Word to the wise. Earnings for energy companies are starting to be advertised starting in the third week of April. I expect strong results from the first batch and that could send us to a higher level across the board. However, if those results don't work out as expected we could see a round of analyst downgrades and a couple of ugly weeks. I believe any dip will be bought but we need to listen to the chatter as the next couple weeks pass in order to be properly positioned for the event.


Oil Service Index - Daily

May Crude Oil futures Chart - Daily

December Crude Oil Futures Chart - Daily

May Natural Gas Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 


Changes in Portfolio

New Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None
 


Play Updates

Existing Plays

PBR - $86.56 - Petro Brasileiro ** No Stop **

PBR took a serious dip on Tuesday after some news hit the wires about their properties in Bolivia and Venezuela. PBR recovered before the week was out and posted a small gain for the week.

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 - $126.57 - Schlumberger Ltd. ** No Stop **

Outstanding week for SLB with a nice gain and new two month high on Thursday. Friday's profit taking was minimal. The split is next Friday so we could see some additional volatility.

2:1 Split April 7th, ex-date April 10th

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 - $50.41 - Peabody Energy ** No Stop **

No change. Slow and steady wins the race.

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 - $84.48 - Southern Copper Corp ** No Stop **

Nice rebound for +$5 for the week and nearly a new high for the month. No change for this play.

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 - $54.40 - Energy Select SPDR ** No Stop **

Resistance at $54.50 was broken on Tuesday and the XLE traded as high as $55.70 before Friday's index beating knocked it back to support once again. No change, this play is measured in $1 per week increments.

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 - $63.60 FreightCar America ** Stop loss $60 **

Train wreck! RAIL took a major beating this week after an analyst said orders could be slowing for the sector due to monster increases in prices of rail cars. Steel is pushing prices higher and buyers are "supposedly" balking. Nobody in the sector has made this claim but the analyst gave everyone a haircut and especially RAIL. Support is $63 and we are nearly there.

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 - $146.90 - Oil Service Holders ** No stop **

No material change. The OIH set a new six week high at just over $150 on Thursday but took the index hit on Friday for a -3 loss.

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 - $47.57 Canadian National Railway ** Stop Loss $43 **

CNI was hit with the same blow that felled RAIL. Apparently the railroads were guilty by association. The rise in oil prices also pressed the transports but overall rails fared worse. CNI is resting on support at $45.

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 - $53.18 - Talisman Energy ** Stop Loss $45 **

Amazing volatility. TLM roared from Monday's opening dip to $52.79 to a Thursday high of $56.48 only to fall back to $53 at Friday's close. The spike was due to a TLM press release of their intent to buyback up to 5% of their outstanding shares over the next 12 months. Talisman is a takeover candidate and we have a 3:1 split coming in May.

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 - $89.50 - Diamond Offshore Drilling ** Stop Loss $70 **

Monster move on Diamond of nearly +$8 even after the Friday decline. There was no material news on Diamond but there were several articles on the health of the offshore drillers. Once resistance broke at $84 the shorts were squeezed hard. We took a major loss on the short call of -$1.80. However our long LEAP jumped from $13 to $17.30 for a +4.30 gain. I will trade $1.80 for $4.30 every week!!

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
Cost adjustment +1.80 on 3/29 short call stop. Cost = $11.80

Tuesday Feb-21st cost reduction strategy:
Sell the September $95 Call DO-IS @ $4.90, stopped 3/29, $6.70
Set a stop loss on the call at DO $90, changed to $89 3/19
Buy back the call on a dip to $68. Changed to $75 on 3/05

Entry $75 (2/15)

RIG - $80.30 - Transocean Inc ** No stop **

New two month high on Thursday at $82.85. No complaints and no change.

Maintain a profit stop on the short call at $74.
Maintain a stop loss on the short call at $84.95.
Maintain a profit stop on the long put at $57.

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
Cost reduction: Added +0.80 cents on 3/1 Call stop. Cost = $9.80

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

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
Maintain a profit stop on the put at $57

Entry $75.00 (2/14)

GI - $69.54 - Giant Industries ** Stop Loss $60 **

Another great week for Giant and a new six-week high. Note that Giant posted a +1.85 gain on Friday when everyone else was weak.

Maintain a profit stop at $62 on the short call.
Maintain a stop loss at $72.50 on the short call.

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.

Monday Mar-20TH cost reduction strategy:
Sell the June $75 call GI-FO currently $2.40
Set a profit stop at $58.50
Set a stop loss at $72.50

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 - $69.82 - Helmerich Payne ** Stop loss $62 **

Outstanding week for HP to a new two-month high but Friday saw nearly a -$2 drop. Fortunately this gives our short call some breathing room.

Maintain a profit stop on the short call at $62.
Maintain a stop loss on the short call 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.

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

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 - $64.12 - National Oilwell Varco ** Stop Loss $55 **

Another good week for NOV continuing the rebound from $56 back in early March. No change in the play with hurricane season just ahead.

Maintain a profit stop on the short call at $56.50.
Maintain a stop loss on the short call at $66.75.
(Yes it is in the money)

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.

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.

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 - $77.57 - Sunoco ** Stop Loss $58 **

SUN finally retested the upper edge of resistance at $81 and is starting to show life after the analysts downgrade the prior week. I believe that once we move over $80 in volume the buyers will be back.

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, closed 3/27 @ .85, +2.10
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 - $63.15 - Conoco Phillips ** No Stop **

Conoco closed the Burlington deal on Friday and said the final value of the deal was $33.9 billion. Conoco said the deal would immediately generate cash that would be used to reduce the debt associated with the acquisition. After the close Conoco said it now had proven reserves of 11.5 billion bbls of oil equivalent and makes them the highest volume gas producer in the US at 3.0bcf per day.

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: None

Entry $60.00 (02/08)

SU - $77.02 - Suncor Energy ** Stop loss $65.00 **

Suncor reversed its downtrend and rallied to nearly a new two-month high on Thursday. Friday's profit taking cooled the advance and resistance at around $79 is coming into play. No change.

Maintain a profit stop on the short call at $72.
Maintain a stop loss on the short call 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.

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

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 - $36.00 - Cameco ** No stop **

CCJ has now recovered all of its dip from the prior week but still can't break the resistance at $36.50 for more than a brief period. No change in the play with more uranium consumed than found. Like oil this play only has one possible ending. Uranium will continue to rise in price and traders will return.

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
Cost reduction: -.75 on 3/21, cost now $4.15

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

Monday Mar-20TH cost reduction strategy:
Sell the June $40 call CCJ-FH @ $1.75
Set a profit stop at $33.50, hit 3/21, exit $1.00, +0.75
Set a stop loss at $39.95

HAL - $73.02 - Halliburton ** No Stop **

HAL continued to rally over resistance and even with the -1.28 drop on Friday managed to add +2 for the week. HAL is receiving some positive press as the spinoff talks for KBR continue. Unfortunately HAL is also receiving some negative press for overcharging in IRAQ. Still, we are moving higher and that is all that counts.

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 to be approved at May 17th shareholder meeting.

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.

Current position: 2007 $80 LEAP Call VHW-AP @ 11.25

Original Position: 2007 $85 LEAP Call VHW-AQ @ $9.80
Monday March 20th: Position change
Sold the 2007 $85 LEAP VHW-AQ, exit $4.25.
Bought the 2007 $80 LEAP VHW-AP, entry $5.70.

Our adjusted cost in the 2007 $80 LEAPS is now $11.25
The strike is lower and will split into (2) $40 LEAPS @ $5.63

Insurance Put: None until after the split

Entry $79.00 (2/06)

KMG - $95.48 - Kerr Mcgee ** Stop Loss $85.00 **

KMG is nothing if not volatile. The rebound from $93 last week made it to just over $100 on Thursday before falling to $95.50 at Friday's close. The gap and crap appears to have returned to fill the gap. I raised the profit stop on the short call to $93.

Maintain the profit stop on the short call at $93.00.
Maintain the stop loss on the short call at $108.50.
Change the profit stop on the April $90 put to $88.50.

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

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

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. Changed to $88.50, 3/26

Entry $107.00 (2/06)

UPL - $62.31 - Ultra Petroleum ** No Stop **

This was a phenomenal week for UPL with a +$5 gain and a new two-month high on Thursday. Friday's index dip was bought and we saw a nice uptick as Friday closed. Considering the price of gas is hovering around $7 this is amazing strength. The changed the profit stop on the short call to $56.

Maintain the profit stop on the short call at $56.
Maintain the stop loss on the short call 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

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

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 - $59.78 Valero ** No Stop **

VLO should be making money by the barrel in this rising price environment for gasoline and diesel. However, it has slowed as it hit resistance at $61. This should be temporary since VLO is in the position to set the price and profit margins for summer driving demand.

Maintain the profit stop on the short call to $56.50
Maintain a stop loss on the short call 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 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

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 - $39.76 - Headwaters ** No Stop **

HW is like watching grass grow but at least it is growing. $40 remains resistance but the trend is in our favor.

********

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 - $31.41 Chesapeake Energy ** No Stop **

The high for the week on CHK was exactly $32.50. It was an intraday spike on Thursday before falling back to $30.87 on Friday's weakness. Unfortunately $32.50 was exactly our stop loss on the short call. Despite the untimely stop we still escaped with a small profit for our efforts of 40 cents. Better than a visit to the dentist but only barely.

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
Cost reduction: -40 cents on 2/21 covered call. Cost = $3.60

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, stop 3/30, 1.00, +.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

Maybe Just One, Or Two

I have been watching CSX for the past week and it is struggling with resistance at $60 but appears to be generating strength for a breakout. It has been a low volatility climber and I am going to add it to the list. If we are triggered I will remove Headwaters from the official portfolio next week.

I know I said just one but Frontier Oil has also shown a remarkable trend and very little weakness on Friday. Since we missed Holly I am going to take a chance on FTO.

Jim Brown
 

Dropped Entries

None


New Watch List Entries
FTO
Frontier Oil
   

Current Watch List

CSX - $59.81 - CSX Corp

CSX Corporation (CSX) based in Jacksonville, Florida, owns companies providing rail, intermodal and rail-to-truck transload services that combine to form transportation companies, connecting more than 70 ocean, river and lake ports. CSX's principal operating company, CSX Transportation Inc. (CSXT), operates the railroad in the eastern United States with approximately 21,000-mile rail network linking commercial markets in 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal Inc. (Intermodal) is a coast-to-coast intermodal transportation provider, an integrated intermodal company serving customers from origin to destination with its own truck and terminal operations, plus a dedicated domestic container fleet. Containers and trailers are loaded and unloaded from trains, with trucks providing the link between intermodal terminals and the customer.

Only enter the first one triggered.

Breakout trigger $60.50
BUY 2008 $65 LEAP Call YYD-AM

Breakdown trigger $58.00
BUY 2007 $60 LEAP Call OBC-AL

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

FTO - $59.27 - Frontier Oil Corp

Frontier Oil Corporation (Frontier) is an independent energy company engaged in crude oil refining and wholesale marketing of refined petroleum products. The Company operates refineries (the Refineries) located in Cheyenne, Wyoming, and El Dorado, Kansas, with a total annual average crude oil capacity of 162,000 barrels per day (bpd). Both of the Refineries are complex refineries, capable of processing heavier, less expensive types of crude oil, while producing gasoline, diesel fuel and other high-margin refined products. Frontier purchases crude oil to be refined and markets refined petroleum products, including various grades of gasoline, diesel, jet fuel, asphalt and other by-products. The Company focuses its marketing efforts in the Rocky Mountain region, which includes the states of Colorado, Wyoming, Montana and Utah, and in the Plains States region, which includes the states of Kansas, Oklahoma, Nebraska, Iowa, Missouri, North Dakota and South Dakota.

Breakdown trigger $56.00
BUY Oct $60 Call FTO-JL
 


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