Table of Contents
Leaps Trader Commentary
We closed on Friday the 28th at $71.85. Monday and Tuesday were strong with oil prices running back to $74.95 on various geopolitical concerns and the rising gasoline prices. Wednesday's inventory levels showed an unexpected build in crude of +1.7 million barrels. Suddenly, after eight weeks of declines a build appears and the bottom fell out of the contract. Thursday saw crude find a bottom just below $70 and at potentially strong support. Geopolitical concerns were still appearing like popcorn but it was a stalemate between buyers and sellers. $70 held and another weekend break from trading gave our blood pressure a rest.
What a hectic week! Energy earnings were still appearing at random and Tidewater (TDW) had the unfortunate honor of being the scapegoat for the sector. TDW disappointed analysts even though they posted strong earnings. This served to further complicate the energy picture only one day after drillers were downgraded again by over active analysts running short on research.
Repeat after me. Nothing has changed in the long-term energy outlook. Feel better? We know prices will always be volatile and we know that there will be a pause before Memorial Day. Hopefully this was it. Once the driving season begins to kick in and inventory levels begin to decline the price of oil should resume its upward path.
On the geopolitical front South America is turning to the left and the future of energy production and exports from that arena is becoming very cloudy. Venezuela production has fallen so drastically without new investment they had to contact to Russia for 100,000 bpd to run their refinery in Germany. Fortunately it was easier for Chavez to buy it from Russia and ship to Germany than reduce his exports to the U.S. and ship it across the ocean.
Hurricane season is only three weeks away and AccuWeather is predicting another tough season and a season that could see storms impact Long Island and the Carolinas.
See the Option Investor wrap this weekend for further details on South America, China, Russia and the hurricanes.
What do we do now? With crude resting on $70 and even stronger support at $65 I am in dip buying mode one more time. Nearly every reputable energy analyst is predicting $80 before $60 and some are even saying $90 before summer is out. Since some of our long calls are summer options we need to start looking for an exit. Some with monster gains like BTU, SLB, DO, VLO and PCU are begging to be exited but I still think there is a higher high in our future. Since pigs get fat and hogs get slaughtered I am going to target $80 crude as an exit point on some positions, especially those with shorter-term options. For those with LEAPS we will target a fall exit but start tightening stops just in case disaster strikes.
Natural gas has found a new range with $6.50 as support on the June contract and $10.60 on the December contract. Inventory built at a less than expected 53 bcf last week but inventory levels are still +59% over five year averages for this time of year. Summer cooling season is just ahead and with temperatures already over 100 in the south it promises to be a hot one. Inventory injections will be watched closely over the next seven weeks and any further declines in anticipated injections could get the price moving very quickly.
Coal is hot and getting hotter. BTU is coiling at $70 and could breakout at any minute. Console Energy (CNX) and Arch Coal (ACI) are also on a steep ramp. ACI has a 2:1 split on May-15th and CNX has a 2:1 on May 31st. BTU has split 2:1 twice in the last 14 months and both times at $100. With the stop at $70 again nobody can complain about that type of return.
On Friday Iran announced they could now mass-produce centrifuges needed to enrich uranium. Since nobody would sell them the devices with the world spotlight so brightly focused on Iran they had to develop a way to make them internally. This is a major step in their nuclear development. The P5, the permanent members of the UN Security Council, plus Germany met on Thursday to go over the draft of a binding resolution to force Iran to stop their project. The completed draft is expected to be reviewed again at a dinner meeting on Monday and the group is looking for a vote the following day. The draft calls for Iran to cease uranium enrichment and suspend construction of a heavy water reactor by early June. The Franco-British draft invokes Chapter 7 of the UN Charter, which can authorize economic sanctions or even military action to enforce compliance. Since Iran does not respond well to threats or demands the situation could escalate quickly once the resolution passes. Russia and China have said they would not vote for any resolution that called for military action and that is causing some heated discussion of the Chapter 7 clause. Russia and China are barely agreeable to sanctions and the extent of those sanctions should they come to pass will be another challenge to get passed.
For the coming week I expect Wednesday's inventory numbers to be more critical than normal and I expect another decline in crude. If that does not appear then we may test $65. Iran is the wild card. If they start getting blustery earlier in the week then higher prices will result.
Check out any play you are currently holding as stops may have changed. We had a lot of earnings activity and several outlooks have changed.
I did not add the exit targets for $80 oil but will email an update if we start closing on that level. It could be several weeks away.
Crude Oil Futures Chart - Daily
December Crude Oil Futures Chart - Daily
June Natural Gas Futures Chart - Daily
December Natural Gas Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
GG $38.14 - Goldcorp ** No Stop **
That was not how I wanted to get an entry on Goldcorp. The stock spiked up on Monday to open at $36.20 and hit our entry trigger at $36. Still we are profitable at Friday's close and GG looks like it is coiling and ready to break for another big gain.
Geopolitical problems and the sliding dollar are pushing gold higher. I continue to hear prices in the $800 to $1000 range over the next 18 months. Let's hope they are right.
Goldcorp Inc. (Goldcorp) is a North American-based gold producer engaged in exploration, extraction and processing of gold. The Company's primary asset is its Red Lake Mine, a gold mine in Canada. It's other operations include the Bajo de la Alumbrera gold-copper mine (the Alumbrera Mine) in Argentina; a 100% interest in each of the San Dimas gold-silver mine (the San Dimas Mine); the San Martin gold-silver mine (the San Martin Mine); the Nukay gold-silver mine (the Nukay Mine) in Mexico, and a 100% interest in the Peak gold mine (the Peak Mine) in Australia. Goldcorp also has 100% interests in the Los Filos gold development stage project (the Los Filos Project) in Mexico and the Amapari gold project (the Amapari Project) in Brazil. Goldcorp also owns approximately 59% of Silver Wheaton Corp. (Silver Wheaton), a mining company with 100% of its revenue from silver production.
Breakout trigger $36.00 hit on 5/01
Entry $36.00 (5/01)
TS $44.44 - Tenaris ** Stop Loss $40 **
Tenaris was even more frustrating than Goldcorp. TS gapped open on Monday to trigger our entry at $47 but then collapsed on an earnings glitch back to support at $43. That -$4 dip knocked our option for a -$2 loss before I even got the play published.
The gap and crap was due to earnings they announced on Tuesday. Profits jumped from $280 million to $441 million for Q1 but Tenaris said additional earnings were held back due to delays in pipeline projects in Brazil and Argentina. Revenue jumped from $1.45 billion to $1.78 billion despite the delays.
This earnings hiccup caused TS to drop like a rock on Wednesday. We saw buyers come back into the stop on Friday for a gain of $1.14.
Tenaris S.A. is a global manufacturer of seamless steel pipes for the oil and gas industry and a global supplier of seamless steel pipes for process and power plants and for industrial and automotive applications. It is also a regional supplier of welded steel pipes for oil and gas pipelines in South America. Tenaris focus on providing end-user customers a service that integrates manufacturing, procurement, distribution and on-time delivery of products throughout the world. Incorporated in Luxembourg, the Company has manufacturing facilities in Argentina, Brazil, Canada, Italy, Japan, Mexico, Romania and Venezuela. It also has a proprietary global service and distribution network in over 20 countries. Tenaris' customers include many of the world's major oil and gas companies, as well as a large number of engineering and industrial companies.
Breakout trigger $47.00 hit on 5/01
Entry $47.00 (5/01)
FTO - $63.35 - Frontier Oil Corp
A very nice rebound on FTO of more than +$4 on Thr/Fri. This pushed it back to resistance at $63.65 and a potential breakout. Earnings are on Monday so anything can happen.
The board announced a 2:1 split subject to shareholder approval on June 9th. I have never seen one voted down.
FTO is a strong takeover candidate and should be very profitable since they can refine the cheaper heavy crude.
Stock split: 2:1 scheduled for June 26th
Earnings schedule: May 8th.
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
Cost reduction play April 18th
Entry $56.00 (4/11)
CSX - $74.24 - CSX Corp
CSX is unbelievable. Nothing slows it down. After a +$6 ramp early in the week it is coiling again at $74 like it is preparing for another breakout. I am concerned that the transports are overextended and profit taking is imminent. We are up +$9 and I would hate to give it back but we are using a 2008 LEAP. We have plenty of time to ride out any dip.
If you want to stop out and reenter I would look to buy a touch of the 100 period average on the 30 min chart. (Currently $71.50)
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.
Earnings: April 18th $1.06 vs estimates of 89 cents
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
Entry $60.50 (4/03)
PBR - $105.19 - Petro Brasileiro ** New Stop $102.00 **
PBR broke out to a new high and a +$7 gain for the week despite what I would call negative news from South America.
HOWEVER, earnings are Friday and we have nearly $10 of profit in this position. With the potential negative comments about losing their Bolivia investment and production I want to exit the position on Tuesday at the close. That will also help us avoid any inventory drop when the numbers are released at the open on Wednesday.
I placed the stop at $102 but after 10:AM Monday I want to trail it higher at -$2 off the current price. I want to capture any gains but limit any retracements.
Earnings schedule: May 12th.
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
Cost reduction play Apr-18th
Entry $87.00 (3/07)
SLB - $71.46 - Schlumberger Ltd. ** New Stop Loss $67.00 **
SLB blasted off to another new high at $73.50 and triggered the stop loss on the covered call at $72 on 5/02 for a -1.55 loss on the call offset by a +1.60 gain on the LEAP. This is not how I would have diagrammed it but at least there was no loss.
We are up $14.50 on the position on a pre-split basis. ($7.25 x 2:1)
I am going to place a stop at $67 on the entire position just in case disaster strikes. Insurance puts are too expensive given the recent volatility. If you want to continue holding I see $64-$65 as strong support. Hopefully we will not see the stop and this paragraph will not be needed.
Earnings: April 21st, 59 cents vs estimates of 55 cents
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
April 24th cost reduction play:
Entry $57 (3/08) (split adjusted)
BTU - $69.89 - Peabody Energy ** No Stop **
BTU continues to move higher in what seems to be an unstoppable drive to $100 and another split announcement. The BTU shareholder meeting was Friday May 5th and they approved an increase in double the number of shares. Definitely getting ready for another 2:1 split. BTU announced a +105% total shareholder return for the full year ended on March 31st. They were also named to the top ten best performing big cap stocks list.
Unfortunately we were triggered on the covered call stop at $67.50 for a -1.70 loss. The LEAP increased in value by +$5 for the week so we still gained despite the broken play. This was the second time this month we tried to reduce costs by selling an out of the money call. Since April 18th BTU has risen +$18. Very tough to sell a covered call on a stock that refuses to pause. Since we have a 2008 LEAP I am not going to take any more chances. Just sit on it and forget it until 2007.
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, +151% jump on +21% revenue gain.
Shareholder meeting: May 5th
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
April 8th covered
April 24th covered call:
Entry $48.00 (3/07)
PCU - $100.10 - Southern Copper Corp ** New Stop Loss $92.00 **
PCU is still coiling just under $101 and appears about ready to make a new breakout. Part of the loss of traction is due to an announcement by PCU that they are looking to merge with Phelps Dodge (PD), Rio Tinto (RIO), Swiss based Xstrata (XTA.L) or Anglo American (AAL.L). The controlling shareholder of PCU (75% stake) is Grupo Mexico. PCU is looking for a sell off or a dilution of that stake in an effort to join with another global producer and increase profitability. This could be a very good deal for us depending on who end up with the company. PCU should go for a premium.
They are also suffering from the illegal strike at the La Caridad mine in Mexico. It has paralyzed production at the mine for a month. Mexican Labor Ministry has labeled it illegal and PCU is investigating ways to cancel the union agreements and end the strike.
We are up nearly +$10 on the position and I am going to add a stop loss at $92 just in case disaster strikes. I would go ahead and exit the position if it were not for the merger talks and the comments from BHP last week. BHP said there was insufficient copper to meet demand until sometime in 2008.
PCU was upgraded by UBS to a "Buy" and Bear Stearns to an "Outperform". Deutsche Securities upped them to a "buy" on April 11th.
Earnings date Apr-26th: EPS +41%, revenue flat due to strikes.
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 - $58.82 - Energy Select SPDR ** No Stop **
Approaching resistance at $59.50 for another attempt at a breakout. Every rebound seems to find one sub sector running into trouble and preventing a new high.
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 - $70.90 FreightCar America ** Stop loss $63 **
Rail finally mounted a credible rally and appears ready to tackle a new high. Earnings for RAIL and TRN, the two biggest car manufacturers are behind us and the transports are screaming higher.
I am going to raise the stop to $63 because any future dip could be a change in trend.
Earnings: April 26th. +1.67 EPS compared to .22 in 2005.
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. That backlog fell to nearly 18,000 cars at the end of Q1 but still substantial. As more energy products are shipped from Canada and into Mexico the demand will continue to grow.
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 - $165.19 - Oil Service Holders ** No stop **
The uptrend continues and resistance at $165 is weakening. We need one more good spike to bring the short put down to our $10 price target. It is currently quoted at $13.80 and well under the $29 sales price. I should take the profit but I think we will get that $80 oil before summer is out.
Maintain a profit stop on the short $160 ZJO-ML put at $10.00
The Oil Service HOLDRS Trust issues depositary receipts called Oil Service HOLDRS, representing an undivided beneficial ownership in the common stock of a group of specified companies that, among other things, provide drilling, well-site management, and related products and services for the oil service industry. The Bank of New York is the trustee. The Oil Service HOLDRS Trust was formed under a depositary trust agreement dated February 6, 2001. The 18 issuers of the underlying securities represented by Oil Service HOLDRS, as of August 1, 2005, were Baker Hughes Incorporated, BJ Services Company, Cooper Cameron Corporation, Diamond Offshore Drilling, Inc., ENSCO International Incorporated, Grant Prideco, Inc., GlobalSantaFe Corp., Halliburton Company, Hanover Compressor Company, Nabors Industries Ltd, Noble Corporation, National Oilwell Varco Inc., Rowan Companies, Inc., Transocean Inc., Smith International, Inc., Schlumberger Limited, Tidewater Inc. and Weatherford International Ltd.
(LEAP PUT SALE)
Position: SHORT 2007 $160 LEAP PUT ZJO-ML @ $29.60
Entry $135 (2/28)
TLM - $56.40 - Talisman Energy ** Stop Loss $54 **
TLM can't seem to find any traction and I would exit now for a minor loss were it not for the 3:1 split coming later this month and earnings on Tuesday. I am probably hoping against hope that it will catch fire and return to its winning ways.
I am raising the stop loss to $54 and placing a profit target at $60. That should be enough to take us out for a profit and we can put this money to work somewhere else.
Earnings date: 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.
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 - $95.04 - Diamond Offshore Drilling ** Stop Loss $88 **
DO recovered from its recent weakness and appears to be testing the current resistance at $96 in preparation for a breakout. I am closing the covered call we instituted last week for a -80 cent loss rather than wait for the breakout to make it worse. We are simply getting no weakness in these energy stocks that lasts for more than a few days. Better to exit early than pay the price.
I raised the stop loss on the position to $88 in case the current $90-$96 range breaks.
Earnings: April 26th, $1.06 compared to 23 cents in 2005
Diamond Offshore Drilling Inc. engages principally in the contract drilling of offshore oil and gas wells. As of December 31, 2004, the Company had a fleet of 45 offshore rigs consisting of 30 semisubmersibles, 14 jack-ups and one drillship. Diamond offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and the jack-up market. Its principal markets for its offshore contract drilling services are the Gulf of Mexico, including the United States and offshore Mexico, Europe, principally the United Kingdom and Norway, South America, Africa and Australia/Southeast Asia. From time to time, its fleet operates in various other markets worldwide. Diamond provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.
Position: 2007 $80 LEAP
VCT-AP @ $10.00
Tuesday Feb-21st cost reduction strategy:
May 1st cost reduction strategy:
Entry $75 (2/15)
RIG - $88.35 - Transocean Inc ** New Stop Loss $79 **
That was a monster earnings spike on RIG after posting earnings that more than doubled the comparison quarter. Jeffries and Company reiterated their BUY and raised their target to $99. Merrill also reiterated their BUY and $110 price target.
RIG did say that Q2 earnings would be impacted by higher expenses due to reactivation and maintenance on rigs going back into service. It appears nobody cared with a +$5 post earnings bounce.
I raised the stop loss to $79
Earnings: May 4th, +61 cents vs +28 cents in prior qtr
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
Monday Mar-20TH cost reduction strategy:
Tuesday Feb-21st insurance strategy:
Tuesday April 18th cost reduction call
GI - $73.46 - Giant Industries ** Stop Loss $68 **
Giant posted earnings that were actually a loss after one of their refineries lost 30% of its capacity for most of the quarter due to a fire. Insurers are working with Giant on how much of the loss is reimbursable.
GI rose after earnings despite the loss. I am raising the stop to $68 just in case this bullishness does not hold.
Earnings: May 3rd, loss of -85 cents vs +80 cents. Refinery fire cost nearly 1/3 of production capacity for the full qtr.
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
Monday Mar-20TH cost reduction strategy:
Tuesday Feb-21st cost reduction
Entry $60 (2/14)
HP - $76.19 - Helmerich Payne ** Stop loss $69 **
HP made a nice move higher and is approaching the prior historic high at $79. Earnings were very strong and buyers are coming back. I raised the stop to $69.
Earnings date: April 27th, +1.22 vs 43 cents in 2005.
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
Monday Mar-20TH cost reduction strategy:
Tuesday Feb-21st cost reduction strategy:
HP Entry $69 (2/13)
NOV - $71.42 - National Oilwell Varco ** Stop Loss $65 **
National Oilwell Varco appears to be coiling at $72 in anticipation of a breakout ahead. Earnings were strong and hurricane season is coming. That is good business for NOV.
I raised the stop to $65.
Earnings: April 26th, EPS 68 cents vs 33 cents in 2005
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
Monday Mar-20TH cost reduction strategy:
Tuesday Feb-21st cost reduction strategy:
NOV Entry $61.50 (2/14)
SUN - $78.91 - Sunoco ** Stop Loss $76 **
SUN was knocked for a -$6 loss after posting lower than expected earnings on Wednesday. How can a refiner lose ground in this environment? Dang! I raised the stop to $76 and just under the current price. If SUN recovers I will ride it out but any further weakness and we are done.
Earnings: May 3rd, profits fell -32% on higher expenses
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.
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:
Entry $72.51 (2/12)
COP - $66.89 - Conoco Phillips ** Stop loss $64 **
Conoco lost ground after failing a retest of $69 resistance. It should not be earnings worry since they are already behind us but something is bothering COP. There was nothing in the news and I suspect it was some profit taking after the +$14 ramp from mid March. Also, since COP acquired Burlington they are more exposed to the price of natural gas which has been sliding.
I raised the stop to $64.
Earnings: April 26th, EPS $2.37 vs $2.06
Conoco continues to hover in the $58-$64 range. This should be support as the acquisition of Burlington Industries approaches. The companies expect it to conclude in the first half of 2006. Burlington reported earnings that nearly doubled the prior year in Q4 and Conoco reported earnings that rose more than +50%. Together they should receive some synergistic benefits and increase shareholder value. Conoco is the most aggressive integrated oil company when it comes to adding reserves. They are not afraid to pay for them and they are clearly planning for the future.
Conoco Phillips is an integrated energy company. The Company's business is organized into six operating segments. The Exploration and Production segment primarily explores for, produces and markets crude oil, natural gas, and natural gas liquids on a worldwide basis. The Midstream segment gathers and processes natural gas produced by Conoco Phillips and others, and fractionates and markets natural gas liquids. The Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of the Company's equity investment in LUKOIL, an international, integrated oil and gas company. The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Emerging Businesses segment encompasses the development of new businesses, including new technologies related to natural gas conversion into clean fuels and related products, technology solutions, power generation and emerging technologies.
Position: 2007 $65 LEAP OJP-AM @ $5.00
Insurance Put: None
Entry $60.00 (02/08)
SU - $86.96 - Suncor Energy ** Stop loss $80.00 **
Suncor is consolidating just under resistance at $90, which is also the historic high. Support at $85 now. No change in the play.
I did raise the stop to $80.
Earnings schedule: May 4th
Suncor is very active in the Canadian oil sands and has a strong plan to ramp production for the next decade. This is a very strong company in charge of their own fate. There are no OPEC concerns, no terrorists and no problems like Hugo Chavez. With the new government in Canada their business problems will likely ease instead of get worse.
I ate lunch with the Vice President of Suncore a couple months ago and he answered my questions very positively and with lots of confidence. I strongly believe this will be a good company for a long time. That does not mean profits cannot be hurt if we suddenly end up with an oil glut but that is not likely.
Suncor Energy Inc. (Suncor), formerly Suncor Inc., is a Canadian integrated energy company that explores for, acquires, develops, produces and markets crude oil and natural gas, transports and refines crude oil and markets petroleum and petrochemical products. Periodically, the Company also markets third-party petroleum products. Suncor also carries on energy trading activities focused principally on buying and selling futures contracts and other derivative instruments based on the commodities the Company produces. The Company has four principal operating business units: Oil Sands; Natural Gas; Energy Marketing and Refining, Canada, and Refining and Marketing, United States of America.
Position: 2007 $85 LEAP OYX-AQ @ $10.40 2/06
Monday Mar-20TH cost reduction strategy:
Tuesday Feb-21st insurance strategy:
CCJ - $42.01 - Cameco ** No stop **
Cameco reported earnings on April-30th well after the close at 10:16PM. Why they wanted to slip in under the radar with a +357% increase in profits is beyond me. Prices received for uranium increased +29% for the year, +45% in Q1-2006 alone. Spot prices for uranium increased +79% compared to Q1-2005. Cash from operations jumped to $286 million from $84 million in the same qtr in 2005. In the uranium business earnings jumped to $89 million from $7 million with a 34% margin. Revenue jumped +265%. The profit margin on their gold business increased +34% mainly due to the rise in gold prices. The outlook for all of 2006 is expected to see revenue rise +50% and profits +32%.
There were tons of footnotes to their earnings where they described anticipated declines in several areas offset by improvements in others. There was a lot of qualifications that made it nearly impossible to understand if certain units will do well or poorly. I believe this is why the stock die not react strongly to the news.
CCJ is holding just under its resistance high at $43.50 and the uptrend is still in place. I believe we will see higher prices soon but right now it is a stealth stock given the complexity of the earnings report.
Earnings: April 30th. 32 cents vs .07 cents in prior qtr.
Original Play Description:
We were triggered on the breakout at $72.50 on Monday and again on the $67 breakdown target on Wednesday. Each trigger was for a 1/2 position giving us a full position with an average cost of $9.80 each. That turned out to be the closing price on Friday so if you missed either opportunity you did not miss anything. We are going to add another full position after CCJ splits on Feb-23rd.
This is my best single play in the list. Cameco just announced record earnings and raised their forecast for 2006 and beyond. They projected a +40% rise in revenue and a rise in margin from 23% to 28% for 2006. At the same time they announced a 2:1 split for Feb-23rd on the NYSE. They also raised the dividend to 32 cents from 24 cents payable on April 13th.
They also announced they were buying Zircatec for $108 million. Zircatec is a maker of nuclear fuel bundles for Canadian designed heavy water reactors. They said the acquisition would moderately boost 2006 earnings assuming no material changes in operations.
The combination of events including the purchase of Zircatec caused the stock to plunge from its all time high of $82.15 on Feb-1st to close at $69.97 on Friday Feb-3rd. That level remained support for the entire week through Feb-10th.
Cameco Corporation is engaged in exploring, developing, mining and milling uranium ore to produce uranium concentrates. The Company is also a commercial converter of uranium concentrates (U3O8) to UF6 (uranium hexafluoride), as well as a supplier of services to convert uranium concentrates to UO2 (uranium dioxide). Cameco, through its subsidiaries, has a 31.6% limited partnership interest in Bruce Power Limited Partnership, which operates six nuclear reactors in Ontario, Canada. Cameco also owns 53% of Centerra Gold Inc. (TSX: CG), a growth-oriented gold mining and exploration company engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.
Breakdown target $67.00 hit
Pre-split average cost:
Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
Put insurance: None
Monday Mar-20TH cost reduction strategy:
HAL - $79.79 - Halliburton ** No Stop **
HAL is holding in the $77-$81 range after earnings and approaching the shareholder meeting on May 17th. There is plenty of confusion over KBR and how/when the spin-off will impact HAL.
Support at $76 should hold any further weakness unless crude prices dip to below $68. We should begin to see some play on the split now just two weeks away.
Earnings: April 21st, 91 cents
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.
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
Our adjusted cost in the 2007 $80 LEAPS is now $11.25
Insurance Put: None until after the split
Entry $79.00 (2/06)
UPL - $64.66 - Ultra Petroleum ** No Stop **
UPL rallied early Friday to resistance at $67.50 on very strong earnings but declined before the close to rest on support at $64. UPL received high prices for its Wyoming gas and $62.50 for the oil over the qtr. I suspect the drop in gas prices on Friday helped remove some of the excitement from the stock price.
Ultra is planning 160 wells in Wyoming this year and now that winter restrictions have been removed they are in full production mode. They may linger in this price range until gas prices begin to firm we have plenty of time.
Earnings: May 5th, 41 cents +81% vs 23 cents in 2005 qtr.
Original play description:
Ultra was one of the few that did not get hit on Monday. The breakdown target at $62 was our trigger on Tuesday but unfortunately it was followed by a -$7 drop on Thursday. They announced earnings on Tuesday that beat the street but they were hammered on Thursday after announcing they entered into a pipeline agreement with Rockies Express Pipeline (REP) for $70 million a year for ten years starting in 2007. REP is obligated to build pipelines to southwestern Wyoming and transport 200,000 MMBtu per day of gas to connecting hubs for Ultra.
Ultra's finding and development cost for 2005 was $0.56 per MCFe and reserve replacement was 773%, both the best in the industry. Ultra has 17 years of drilling planned with 160 wells planned for 2006 in Wyoming alone. They produced 73.4 Bcfe of gas in 2005 which suggests the 200,000 MMBtu capacity being contracted above is only a portion of their expected Wyoming production. With Wyoming gas selling for more than $8 per MMBtu in January that represents $1.6 million in gas production through the pipeline per day or roughly $584 million per year. I would gladly pay $70 million for pipes to carry $584 million of gas to market.
Ultra ended 2005 with no debt. Their profit per MCFe was $6.94 in Q4. Net profit increased +111% in 2005, ROE was 55%. Proved reserves in Wyoming at the end of 2005 were 2.022 TCFe of gas, a +32% increase over 2004. Proved and probable reserves were 6.29 TCFe. This represents better than a 2000% increase in reserve growth since 1999. Ultra has more than 2877 scheduled wells to drill in Wyoming over the next 17 years.
Ultra Petroleum Corp. is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. During the year ended December 31, 2004, it owns interests in approximately 166,974 gross (92,997 net) acres in Wyoming covering approximately 260 square miles. The Company owns working interests in approximately 241 gross productive wells in this area and is operator of 41.5% of the 241 gross wells. Through Pendaries Petroleum Ltd., it is active in oil and gas exploration and development in Bohai Bay, China. The Company also owns interests in 15,518 gross (14,652 net) acres in Pennsylvania, as well as interest in approximately 720 gross (320 net) acres and interests in three productive wells in Texas.
Position: 2007 $70 LEAP Call OZH-AN @ $10.70
Monday Mar-20TH cost reduction strategy:
Tuesday Feb-21st insurance strategy:
Entry $62 (2/08)
VLO - $64.95 Valero ** No Stop **
VLO recovered half of the -$10 post earnings drop but has been very lethargic the latter half of the week. The rise in crude inventory levels has spooked investors and they are taking profits in the refiners. This should be only temporary with the summer driving season just ahead.
Our cost is so low we will wait this one out until January if necessary.
Earnings: April 25th, +60%
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
Monday Mar-20TH cost reduction strategy:
Entry $52.30 (12/16)
CHK - $32.87 Chesapeake Energy ** No Stop **
CHK posted earnings that saw revenue jump to $1.94 billion from $783 million just a year earlier. This more than 100% increase produced earnings of $1.44 beating analysts estimates of 98 cents and earnings the prior year of only 36 cents. Production in Q1 rose +31% over the same period in 2005. CHK is expanding its fleet and expects to have 57 active rigs within the next year. They bought 13 rigs when they sold their interest in Pioneer Drilling last quarter. CHK has hedged 80% of 2006 production, 56% of 2007 and 41% of 2008. This is up from 71%, 36% and 22% respectively. Analysts expect them to buy back these hedges if prices take their historical end of summer dive.
Until gas prices start to rise I fear CHK is going to be locked in the $31-$35 range. No stop and no change in the play. We just need to wait until summer cooling drives prices higher.
Earnings: May 1st
Chesapeake Energy Corporation is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs and the marketing of natural gas and oil for other working interest owners in properties that it operates. The Company's properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota and New Mexico. The proved oil and natural gas reserves as of December 31, 2004 were approximately 4.9 trillion cubic feet of gas equivalent (tcfe). At December 31, 2004, approximately 89% of the Company's proved reserves (by volume) were natural gas, and approximately 70% of its proved oil and natural gas reserves were located in the primary operating area, the Mid-Continent region of the United States, which includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle.
Position: 2007 $35 LEAP VEC-AG @ $4.00
Covered Call 12/27:
Tuesday Feb-21st cost reduction strategy:
Entry $29 (11/04)
Leaps Trader Watch List
I am not adding any new watch list entries this week but I have a couple short-term trades that might be worth considering. True confessions, I own them both.
Oceaneering International (OII) spiked +8 on Friday on better than expected earnings. The stock was already trending higher before posting earnings that more than doubled the comparable quarter. Revenue jumped +37% on heavy repair activity in the Gulf. They followed the earning with a +25% hike in earnings guidance for 2006. While this is a very strong report it is a niche player in a very large market. I have and would buy them on any weakness.
However, I think the spike is overdone and we could see some retracement next week. I own the May $70 puts for a very short term trade.
McDermott (MDR) is the same type of play. MDR jumped +$10 on better than expected earnings and I believe they too will come back to earth before moving higher. I own the June $70 puts on MDR.
These are very short term trades with tight stops and I expect to be out of them probably by the Wednesday inventory numbers.
If you are looking for something else to trade I think there is a Goldcorp breakout just ahead. TIE and TRN also represent opportunities for short term trades. I am long GG and short puts (long) on TIE. I will be long TRN if we ever get a decent pullback.
Current Watch List
No entries, full position load at this time
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