Option Investor

Weekly Newsletter, Saturday, 04/15/2006

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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

Time For Some Profit Taking?

Know that sounds like heresy but after stalling at just under $70 all week we could be setting up for a fall. $70 is very strong resistance on the May futures contract and represents the post hurricane high from September and the retest back in January. The close at $69.45 on Thursday came on a short covering spike just minutes before the end of trading. I was watching the activity on a short term chart all day Thursday and it looked like traders were simply scared to be short over the long weekend. I would love to say a breakout was imminent based on the three week uptrend but the three day stall at just under $70 was short on conviction.

I believe we better be ready for a bout of profit taking just in case we are unable to break $70 on Monday. Next week is the final week of trading for the May contract and we are sure to see some expiration volatility. The new contract is June and it shows much more conviction than May. The June contract closed at $70.82 on Thursday, the all time closing high for that contract, although $71.15 was the intraday high. The June contract appears ready to make the breakout leading me to wonder if the stall on the May contract is simply due to traders leaving ahead of expiration next week. Time will tell.

On Wednesday the IEA raised its estimates of demand for 2006. They said OPEC will have to pump more oil to cover a shortfall from Russia, Nigeria and Iraq. Higher than expected consumption in the Middle East and Asia Pacific prompted the IEA to raise its estimate of world demand to 85.1 mbpd up +300,000 bpd from their prior estimate. They claim China has not been the growth engine in the area but the surrounding nations. However, a report issued on Thursday said China's GDP for Q1 showed growth of +8.5% on top of a growth explosion of +9.9% in 2005. China is expected to cool to +7.5% by year end but that is still very strong. China said investments in fixed assets rose +26.4% in Q1 on top of +25.7% growth in 2005. This explosive growth in China is impacting all its neighbors and the entire Asian region is increasing its consumption of energy. Before the year is out I expect the IEA to raise its estimates again.

The IEA said oil production growth outside OPEC would slow to growth of only +1.15 mbpd due to outages in various countries. The IEA said non-opec production could fall short by -300K to -400K bbls per day. The IEA said OPEC will have to produce an additional +400,000 bpd to compensate for the slowing production from elsewhere on the globe. Russia, the worlds second largest oil exporter, will fall short of expectations for the next four years according to the IEA. Bad weather, mechanical problems, start up delays, fires and strikes have affected Norway, Argentina, Brazil, Ecuador, Bolivia, Peru, Canada, India, Vietnam, Sudan, Chad and Yemen. Rebels, insurgents and terrorists have slowed production in Iraq and Nigeria. Venezuela, Bolivia and Ecuador are nationalizing their oil fields and that is slowing outside investment. Mexico said last month that its biggest field was declining at the rate of -7% per year. To put it mildly there is trouble brewing the world over and there is little to be optimistic about for future production gains.

With a little more than six weeks before hurricane season begins again there is still more than 300,000 bpd of crude offline in the gulf. You would think all of these global production problems would have oil on a rocket ride higher but the fly in our soup is the huge inventory of crude in the U.S. Crude inventory levels are at a seven-year high at present. This is due mostly to a very strong refinery maintenance schedule and the need to upgrade some components to make lower emission diesel. Refinery utilization fell again last week to 85.6% an inputs (oil) to refineries was down -3.7%. Gasoline inventories are below last years levels and the combination of the above means higher gasoline prices ahead. I paid $2.69 in Denver on Thursday and I can easily see $3.00 not far ahead and we are not even in hurricane season yet.

The picture I painted above shows problems in almost every part of the production to consumption chain and a clear reason for oil prices to move higher due to rising demand. I do believe that will happen but we could have a sharp bout of profit taking next week. It would be dip buying time for me and I would look for prices in the $68-$69 range on the June contract (CL06M) for support. That could dip as far as $67 but I am not going to wait for that bell to ring. $68 would work for me. We still have an outside chance of a short squeeze as the May contract closes. We have seen it several times recently as contracts expire. Shorts are counting on that seven-year high in crude inventories and thinking a glut has formed. The geopolitical problems are keeping the pressure on and not giving them a dip to exit on. If we do see a short squeeze toward the end of the week I would expect the first week of the June contract to be the dip. We have not had a real dip since mid March.

The rally to $69.50 last week took us out of some more covered calls and some exits were not pretty. The rally from the March 20th lows was stronger than I expected due mostly to the Iran problem but the bottom line was some ugly stop losses on some of the covered calls. Keep the faith we will try another series to lower our cost as the summer progresses.

Natural gas surprised everyone with a +55 cent jump on Friday back to $7.20. The December contract roared back to $10.58 and caught all the shorts in the gas market flatfooted. Everybody was thinking glut but gas inventory levels rose much less than expected for the week. Traders were expecting nearly a +30bcf build and got only +19 bcf. Total gas in storage rose to 1714 bcf and +63% over the five-year average BUT this is a sharp decline from the 3282 bcf high we saw back in November. It is almost a 50% decline. It should rise some before the summer cooling ramps up electrical demand but not that much. It is very possible we could have some shortages this summer since the weather has started off a lot warmer than normal.

The bottom line for energy stocks is simply continue to hold them and buy the dips to add to your portfolio. The conditions I described above are terminal. Slowing production, increasing decline rates and rising demand will eventually produce a catastrophic event on a global scale and 2007 is my target date. We want to be fully invested for every up cycle, summer and winter, and take advantage of the spring dips like we did this year.

I would caution everyone that earnings for many energy stocks are next week. If we get a few disappointments, earnings that did not reach the overly optimistic targets set by analysts, we could see a wholesale drop across the board. If you have some nice profits to protect I would raise the stops just to be careful. I am not doing that to the portfolio since this is a long-term hold scenario but I would be careful on an individual basis. Conversely, if profits beat estimates we could see another leg up appear.

Check out Headwaters this week. We exited the LEAP last week for a breakeven. Sure glad we did!

Happy Easter

Oil Service Index - Daily

May Crude Oil futures Chart - Daily

June 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 Energy Plays New Non-Energy Plays


Dropped Plays
HW $38.17 Headwaters

New Watch List Plays Triggered
FTO $57.24 Frontier Oil Corp.

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

FTO - $57.24 - Frontier Oil Corp

We targeted FTO at $56 when it was only a few cents away from a new high at $64. It seemed like an impossibility at the time but fate and a couple of downgrades on price knocked it back to where it was worth buying. I would gladly add additional plays if I could get a -$8 dip individually and not harm the rest of the portfolio.

Friedman Billings, Banc America and Credit Suisse downgraded FTO over the last week. BAC went all the way to a sell saying they had run past their price target of $47. Let's hope everyone is wrong.

FTO is a strong takeover candidate and should be very profitable since they can refine the cheaper heavy crude.

Earnings schedule: Should be late May.

Company Info:

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 hit (4/11)

Position: Oct $60 Call FTO-JL @ $6.50

Entry $56.00 (4/11)


Play Updates

Existing Plays

CSX - $65.05 - CSX Corp

No complaints here with a new high every day. Makes you wonder when it will eventually rest but the short term charts are showing no weakness. Earnings are Tuesday!!

CSX operates the largest railroad in the eastern US and Bear Stearns thought increased operating efficiency and higher volumes of coal would raise earnings dramatically. BSC is targeting $71 for the stock.

Earnings schedule: April 18th

Company Info:

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.

Breakout trigger $60.50 hit Apr-3rd
Position 2008 $65 LEAP Call YYD-AM @ $8.30

Entry $60.50 (4/03)

PBR - $88.84 - Petro Brasileiro ** No Stop **

No change to the play. PBR is still struggling with the rampant nationalism in South America with Bolivia, Venezuela and Ecuador all changing the rules.

Earnings schedule: May 12th.

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 - $62.13 - Schlumberger Ltd. ** No Stop **

SLB split 2:1 last week and our $120 LEAPS split into (2) $60 LEAPS. We saw a -10% haircut on post split depression but Thursday saw a rebound begin. At least I hope that is the beginning. Crammer is pounding the table on SLB almost daily but there is heavy institutional ownership and many have share limits. They must sell some shares after a split. Support was $60 and we saw $60.40 on Thursday before the rebound appeared. Earnings are next week.

Earnings schedule: April 21st

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: (2) 2007 $60 LEAP Call VWY-AL @ $7.00

Entry $57 (3/08) (split adjusted)

BTU - $50.84 - Peabody Energy ** No Stop **

No change. A new high on Tuesday followed by some consolidation but the upward trend is still intact.

The CEO outlined an 8-step plan during a speech last week to reduce America's dependence on foreign oil.

1. Using coal-to-liquids technologies to enhance the U.S. oil supply by 10 percent.
2. Using coal to produce natural gas to ease supply pressures.
3. Constructing 100 gigawatts of coal-to-clean electricity plants by 2025.
4. Increasing use of coal for heat and electricity to produce ethanol.
5. Developing a fleet of coal-to-hydrogen plants to satisfy at least 10 percent of the nation's transportation needs.
6. Enhanced oil and gas (coalbed methane) recovery as carbon management strategies.
7. Delineate U.S. coal reserves and transportation constraints as part of an effort to maximize U.S. coal production.
8. Stimulate economic growth and enhance national security through the development of U.S. coal reserves.

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.

Earnings schedule: April 18th

Shareholder meeting: May 5th

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 - $92.33 - Southern Copper Corp ** No Stop **

PCU held at the highs and appears to be readying a breakout at $94. June copper futures have gone ballistic with a +27% spike since mid March. Something has got to give soon and I am hoping it is to the upside.

No earnings date available. Est late April

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 - $55.84 - Energy Select SPDR ** No Stop **

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:

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

Entry $52.00 (3/07)

RAIL - $62.50 FreightCar America ** Stop loss $60 **

Rail lost some ground again late in the week but is still holding above our stop. Earnings are just over a week away and I am hoping for them to rebut the analyst predictions.

Earnings schedule: April 26th.

4/02/06: 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 - $151.46 - Oil Service Holders ** No stop **


Our April long put is expiring worthless next Friday. Personally I would just go naked on the position and continue to remain short the $160 LEAP put which is not expiring. However, that may not work for many who can't remain naked. Therefore, buy the July $125 put OIH-SE currently $1.95 to provide protection for the play. We are up over $10 on the position so another two bucks will not hurt us.

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.


Position: SHORT 2007 $160 LEAP PUT ZJO-ML @ $29.60
Position: LONG April $120 Put OIH-PD @ $1.95, expiring worthless

Buy July $125 PUT OIH-SE currently $1.95 to replace April put

Entry $135 (2/28)

CNI - $46.18 Canadian National Railway ** Stop Loss $43 **

CNI has gone into hibernation ahead of earnings with little to no movement for three weeks. I am hoping some strong transportation earnings will break the cycle.

Earnings schedule: April 20th

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 - $56.20 - Talisman Energy ** Stop Loss $45 **

No change. A new six-week high over $58 was hit on Tuesday and Friday's pullback was minimal. Talisman is a takeover candidate and we have a 3:1 split coming in May.

Earnings date unavailable: Estimate is sometime in late May.
Shareholder meeting: May 9th.

3:1 Stock split scheduled for around May-26th

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 @ $6.00

Entry $56.44 (3/05)

DO - $92.10 - Diamond Offshore Drilling ** Stop Loss $70 **

Diamond set a new all time high on Tuesday of $95.35 before pulling back on the Wednesday weakness. No challenge here and no change in plan.

Earnings schedule: April 26th

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 - $82.29 - Transocean Inc ** No stop **

RIG hit a new all time high at $85.49 on Tuesday. Support remains $80 and the upward trend is still intact.

Maintain a profit stop on the long put at $57. I doubt we have a ghost of a chance to hit it and definitely hope we don't.

Earnings schedule: May 4th

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
Added +1.70 on 4/6 call stop. Cost = $11.50

Monday Mar-20TH cost reduction strategy:
Sell the May $85 call RIG-EQ @ $2.80, stopped @ $4.50 4/6, -1.70
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 - $71.03 - Giant Industries ** Stop Loss $60 **

Giant is holding at its highs with support at $69. Everyone is waiting for sector earnings to confirm energy is still the place to be.

No earnings date available: Estimate late May

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.
Cost increased by +2.00 on 4/05 to $6.75

Monday Mar-20TH cost reduction strategy:
Sell the June $75 call GI-FO @ $2.40, stopped 4/05 @ $4.40, -2.00
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 - $70.36 - Helmerich Payne ** Stop loss $62 **

HP hit our stop loss on the covered call on Tuesday for a -0.95 cent loss on the position. It looks like HP has finally started moving higher so no complaints here.

Earnings date: April 27th

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.
Cost increased: Cost increased by +0.95 on 4/11 CC stop to $5.40

Monday Mar-20TH cost reduction strategy:
Sell the June $75 call HP-FO @ $2.05, $3.00, 4/11, -0.95
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 - $67.12 - National Oilwell Varco ** Stop Loss $55 **

NOV caught fire early in the week with nearly a +$5 gain and blew us out of the covered call for a -2.50 loss. Our long call went up by a like amount but that still represents a defeat of sorts. If NOV is starting a pre hurricane ramp we will simply watch and not try to reduce costs again as our August position is growing short compared to a LEAP.

Earnings date: April 26th

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.
Cost increased: Cost increased by +2.50 on 4/11 to $6.50

Monday Mar-20TH cost reduction strategy:
Sell the May $65 call NOV-EM @ $2.40, exit $4.90, 4/11, -2.50
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 - $81.00 - Sunoco ** Stop Loss $72 **

SUN continues to test upper resistance at just over $81 and I believe a breakout is coming. No change in the play.

Maintain the profit stop on the May $70 put at $66. We should never hit it but we should be ready if it comes.

Estimated earnings date: Early May
Shareholder meeting: May 4th

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 - $67.14 - Conoco Phillips ** No Stop **

Conoco reached resistance at $68 and paused to refresh. Earnings are still more than a week away and with a refinery offline for more than seven months now I am concerned they may not hit their numbers. We are up +$3.00 so tighten up those stops.

Earnings Schedule: April 26th

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 - $83.00 - Suncor Energy ** Stop loss $69.00 **

Suncor rallied to nearly a new historic high on Tuesday and retreated very little on the end of week weakness. We were tagged out for a loss on the covered call on April 6th at $83.50 and I did not catch it last week. This was really ugly. We gave back -3.95 and 100% of our prior cost reduction on the first covered call of $3.60. Nothing ventured, nothing gained but I sure hate to lose under these circumstances.

Earnings schedule: May 4th

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.
Cost increased: Cost increased by +3.95 on 4/6 to $9.40

Monday Mar-20TH cost reduction strategy:
Sell the June $85 call SU-FP @ $2.65, exit 4/6, $6.60, -3.95
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 - $38.47 - Cameco ** No stop **

CCJ has finally begun a new uptrend and we are getting a lot of press about the need for uranium and the nearly 100 nuke plants on the drawing boards. This is a very long-term play and Mother Nature is not making any more uranium. Be patient.

Earnings schedule: April 27th.

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 - $77.07 - Halliburton ** No Stop **

No change in this play as we await the split in May.

Earnings schedule: April 21st

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 - $100.65 - Kerr Mcgee ** Stop Loss $90.00 **

KMG is still stuck under resistance at $102 and fought bravely all week to make the break. Unfortunately the only spike above that level stopped us out of the covered call position for a loss of -$1.00. Earnings in two weeks and it looks like a breakout in the making.

Earnings date estimate: April 26th

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
Cost increased: Cost increased by +1.00, 4/10 to $7.80

Monday Mar-20TH cost reduction strategy:
Sell the July $110 call KMG-GB @ $2.50, exit 4/10, 3.50, -1.00
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 - $62.18 - Ultra Petroleum ** No Stop **

UPL continues to move sideways under $65 but the gas jump on Thursday failed to give it a boost. I was tempted to close the covered call for a breakeven but the lack of any response on Thursday could be a softening of the trend so I left it open.

Maintain the profit stop on the short call at $56.
Maintain the stop loss on the short call at $65.50.

Earnings date: April 26th

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 - $64.32 Valero ** No Stop **

VLO broke over resistance at $63.50 and a new historic high. This triggered the lowered stop loss on the covered call for a -1.20 loss. The upward trend has returned as summer refining season begins.

Earnings date: April 25th

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
4/11 Cost increased by +1.20 on CC stop loss, now $2.95

Monday Mar-20TH cost reduction strategy:
Sell the June $67.50 call ZPY-FR @ $1.25, exit 2.45, 4/11, -1.20
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 - $35.22 - Headwaters ** LEAP Closed 4/09 **

I closed the HW LEAP play last week for a breakeven and I am very glad I did. We did have a long May $35 put and with the drop this week that put is back in play. I am not going to continue to follow HW in this newsletter but be advised that previously worthless put has jumped +1.50 for the week and there is a good possibility it will become even more valuable next week if this implosion in HW continues.

Earnings date: May 8th


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 - $31.48 Chesapeake Energy ** No Stop **

No change for CHK with another range bound week between $31 and $32.50.

The April $25 put insurance will expire next Friday.

Earnings date: May 1st

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

No Watch List Entries

With the successful entry on FTO last week there are no entries. We have a very full portfolio and no need to add to our plate.

Dropped Entries


New Watch List Entries


Current Watch List



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