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Weekly Newsletter, Saturday, 06/10/2006

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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

That Was Fun

Despite a rebound in crude from Thursday's $69.05 low energy stocks failed to gain any traction. The calming noises coming out of Iran and the elimination of Al-Zarqawi sent oil prices to a two week low but it was only temporary. Oil continues to trade in its four week range of $68.50-$73.00 as we await the first hurricane of the season.

Energy stocks and metals are still being dumped by panic stricken hedge funds. When cash is needed you sell whatever has value and then buy those positions back when the liquidity crunch eases. With plunging positions in other global markets the strain on cash and liquidity could be very strong. Many funds are highly leveraged using borrowed money and that increases the volatility. I don't believe the boom in the energy sector is over. I believe what we are seeing is forced selling and profit taking. Corrections tend to take on a life of their own with triggered sell stops taking out more stops producing a cascade of selling until bargain hunters appear in volume.

This is a buying opportunity but we need to wait until a new uptrend appears before taking advantage of it. This is not the time to catch falling knives.

Nothing has changed in the outlook for the energy sector. This selling in the equity market has no relation to the long-term fundamentals. This week the EIA raised estimates for oil demand for 2006-2007. This fact went unnoticed by most given the focus on the equity market collapse. The EIA did not say where this oil was going to come from only that we would need more of it. They did not address the depletion factor or the fact that Nigeria has lost production of 800,000 bpd of light crude rather than the 500,000 bpd previously reported. Using the EIA numbers and anticipated new production coming online over the next two years we will have even less oil available at the end of 2007 than we have today. The table below is a very rough approximation of production figures at the end of 2007. Obviously there will be some production increases due to new technology at some existing fields but these are impossible to quantify. Just using these hard numbers buts us in dire straights by the end of 2007 but there are other production events that may offset this decline. For instance Iraq is expected to boost production from 2mbpd to 4mbpd by 2010 with 1mbpd additional expected by the end of 2007. This is not included in any new production estimates because of the uncertainty surrounding Iraq. Accelerated global exploration surrounding existing fields has the potential to add production quickly as opposed to the 3-5 years needed for new fields. This is also not quantifiable since field build out tends to show up in a slower rate of decline rather than an increase in production. These plus hundreds of other factors make it impossible to predict actual future production but predicting future demand is relatively simple.

China is adding 1000 cars a day in Beijing alone and is expected to have more autos than the US by 2030 assuming they can buy enough oil to fuel them. China is the second largest consumer of oil with demand rising +7.5% per year. Currently they consumer 6.5 mbpd compared our 21 mbpd in the US. China's is growing at a +10.3% rate and accounted for 40% of the increased global demand for oil over the last four years. They are expected to account for 45% of the increased global demand over the next four years. They will increase their total consumption by +150% to 20mbpd by 2020. As China bursts into the 21st century and mobilizes its economy the countries surrounding China will do the same. Greenspan warned last week about the growing oil demand in China and its impact on oil prices. 40% of China's oil is imported.

India is only a couple years behind China in the growth boom with +8.5% growth for the year ended on March 31st. India's $775 billion economy is exploding. Housing is expected to expand by 80 million units by 2015. Think about that for a minute. 80 million new homes and apartments built from scratch over the next 9 years at a cost of over $750 billion. Demand for steel in India is expected to quadruple over the next decade. The increase in Indian oil demand over the next four years is going to be astronomical. Currently India consumes 2.5 mbpd of which 70% is imported. That consumption is expected to be more than 12.5 mbpd by 2020.

Additional demand by China and India alone is expected to grow to 23.5 mbpd by 2020 from the current 8.9 mbpd or +14.6mbpd. Add in the rest of the emerging economies and that additional demand will increase to something in the 20mbpd range. There is simply not enough production in the foreseeable future to accommodate that demand. Saudi Arabia is spending $50 billion to increase production to 12.5 mbpd from their current 11.3 mbpd capacity by 2010. $50 billion to increase capacity by 1.2mbpd in four years. The Iraq oil minister said they could increase production to 6mbpd if they had $20 billion in outside investment and peace. Obviously the money is not the problem but peace could take a decade.

The bottom line to this rant is simply demand is increasing faster than supply and oil prices will continue to rise forever. Not in a straight line but in a long-term trend. We need to be long-term investors and ride out these temporary dips.

I mentioned in an Option Investor commentary earlier in the week that Saudi cut their production back to 9.1 mbpd last month due to an excess of oil in the system. This was from a comment at the OPEC meeting from the Saudi Oil Minister. He said rather than push prices lower Saudi elected to lower production. This is a major change in attitude by Saudi. They have always been the swing producer relied upon to control prices. When prices rose too high they opened the spigot and pushed prices down with oversupply. If this tactic has changed then oil pricing as we know it has changed. By reducing production with oil at $70 it guarantees oil will stay around $70. Minister Naimi said "We will not leave money on the table" when questioned about the drop. If $70 is the going price they will quietly reduce production to maintain that price. This is a phenomenal change in attitude and it went unnoticed by the mainstream press. Ignore the OPEC chatter saying oil prices are too high. That is a sound bite for TV and not reality. It sounds good that OPEC thinks prices are too high but in reality they are maintaining those prices. As long as the demand remains strong they will continue to let prices rise. The Saudi minister said they continued to have problems selling their different grades of crude. There is not enough refining capacity capable of refining their heavier grades of oil. They are working to remedy this by signing contracts with Total and Conoco to build two 400,000 bpd refineries to begin operation in 2011. The refineries will cost $6 billion each and will process Saudi heavy crude into gasoline and heating oil for export to global markets. By refining their own heavy crude into gasoline at what should be $4 per gallon by 2011 the Saudis greatly enhance their income potential. Saudi heavy crude sells at a steep discount to light crude but gasoline sells for a premium. They get to pocket that additional profit and the gasoline can be sold worldwide. This was a wise move by Saudi Arabia.

Halliburton made the news this week saying earnings would double in the next 3-5 years and announced a major contract with Saudi. The contract is the largest oil development project in the Persian Gulf region since the 1950s. It will use 23 rigs to drill some 300 wells in hopes of producing 1.2 mbpd of light crude by the end of 2009. This Khurais project is part of the Saudi effort to raise production to 12.5 mbpd by 2011. No price was put on the Halliburton contract but Saudi said the entire project would cost more than $6 billion including gas plants and pipelines.

Position Adjustments

It was a rocky week for the portfolio but the Thursday dip allowed us to reduce our costs in several positions by selling our insurance puts. In the Trinity Industries position we now have a negative cost and a nice profit. Others were not so lucky. Petrochina has fallen off the cliff and the previously announced exit on the put insurance was triggered just before that put drop leaving us with a sizeable loss. We will work our way out of that loss but we need a new uptrend in energy stocks to appear before we can start. To save space here I am going to discuss the individual position adjustments in the individual play descriptions.

Tropical Depression One

The National Hurricane Center has formally upgraded the storm off the coast of Cuba to pre hurricane status. The first tropical depression of the season is not expected to morph into a hurricane but the storm track is headed directly into the gulf. High winds and heavy rains are expected and the track will serve to revive hurricane fears now that the season has started. This should help push oil prices higher regardless of whether or not it turns into a real storm.

Map track of Tropical Depression One

Outlook for the week

I believe oil will hold over strong support at $68.50 and any dip to that level should be bought. Iran has said it will make a counter offer to the UN Council but hardliners in Iran continue to say that giving up the enrichment process will never happen. The council has given Iran until June 28th to respond to the offer. The IAEA said on Friday that Iran had begun a new stage in the enrichment process and is planning on having a 3000-centrifuge cascade by the end of the year. Iran is taking pages from the North Korea playbook and will benefit from dragging out the negotiation process as long as possible. The press is sure to brag about the talks proceeding and oil prices could moderate if it appears to be working. The impending hurricane season should counter this decline given the approach of storm one.

I would look to add to existing positions on any further dips. Most are at long term support and any resumption of a bid in the broader market should send bargain hunters back into the energy sector in hopes of a deal.

Check out the watch list commentary tonight for some suggestions for adding to or entering new positions for existing plays.


Oil Service Index - Daily

July Crude Futures - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 


Changes in Portfolio

New Plays

None


Dropped Plays
TRN $50.83 Trinity Industries ** Closed for profit **
XLE $52.80 Energy Select SPDR ** Closed **

New Watch List Plays Triggered
BHI $81.62 Baker Hughes, Inc. (6/6)

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

BHI - $81.62 - Baker Hughes Intl

The sharp drop on Monday to $84 from a new all time high that morning at $89.30 appeared to be enough of a dip to buy. That was a wrong assumption! After a rebound on Tuesday the bottom fell out as the broader market imploded. BHI hit a low of $78 on Thursday before rebounding to $83. You would think we were trading Internet stocks in 1999. I sent an update on Monday night recommending an entry on Tuesday and put us in the position at $6.

I did not specify any put insurance thinking we could do that this weekend. On Wednesday night I recommended the following changes to the BHI position.

Sell Jan $100 Call BHI-AT, stop loss @ BHI $85
Buy Jul $80 Put BHI-SP, stop loss @ BHI $85
Exit target on July $80 Put BHI @ $75.

After observing the action on BHI on Thr/Fri I am making the following changes.

New exit targets:
Jan $100 Call BHI-AT, stop loss @ BHI $84
Jan $100 Call BHI-AT, profit stop @ BHI $75
Jul $80 Put BHI-SP, stop loss @ BHI $84
Jul $80 Put BHI-SP, profit stop @ BHI $75

The high volatility caused a significant jump in premiums and I want to avoid that premium deflation if we do get a rebound. If we are stopped out of the insurance at $84 I want to add the following July put as insurance on a return to $80.

If the July $80 put is stopped at $84 place an order to buy the July $75 put BHI-RO if BHI trades at $80 again.

Company info:

Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. The Company supplies wellbore-related products and technology services and systems to the oil and natural gas industry on a worldwide basis, including products and services for drilling, formation evaluation, completion and production of oil and natural gas wells. Baker Hughes operates through subsidiaries, affiliates, ventures and alliances. It operates in three business segments: Drilling and Evaluation, Completion and Production, and WesternGeco. The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids, Hughes Christensen, INTEQ and Baker Atlas divisions. The Completion and Production segment consists of the Baker Oil Tools, Baker Petrolite and Centrilift divisions. The WesternGeco segment consists of the Company's 30% equity interest in WesternGeco, a seismic venture with Schlumberger Limited. WesternGeco provides reservoir imaging, monitoring and development services.

Position: Jan $95 Call BHI-AS @ $6.20

Additions 6/08
Short: Jan $100 Call BHI-AT, entry $3.20
Long: Jul $80 Put BHI-SP, entry $4.30

Exit targets:
Jan $100 Call BHI-AT, stop loss @ BHI $84
Jan $100 Call BHI-AT, profit stop @ BHI $75
Jul $80 Put BHI-SP, stop loss @ BHI $84
Jul $80 Put BHI-SP, profit stop @ BHI $75

Entry $85.24 (6/6)

 


Play Updates

Existing Plays

SLB - $59.15 - Schlumberger Ltd

What a difference a week makes. After signaling a potential breakout at $67 the prior Friday the market weakness hit SLB like the proverbial ton of bricks. SLB fell to strong support near $57.

In the Wednesday night update I recommended closing the insurance put if SLB hit $57.50. After the initial drop on Thursday it appeared SLB was not going to hit $57.50 and the 11:30 email update recommended closing it at the then current price of $3.60. Our cost was $1.65 giving us a reduction in our LEAP cost of -1.95.

That leaves us naked on insurance and given the current market I would rather not be unprotected.

Buy July $55 PUT SLB-SK only if SLB trades at $57.50. Target $52.50 as the profit stop and $62.50 as the stop loss.

Company Info:

Schlumberger Limited (Schlumberger) is an oilfield services company, supplying technology, project management and information solutions. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. WesternGeco, 70% owned by Schlumberger and 30% owned by Baker Hughes, is an advanced surface seismic company.

Position: Jan $70 Call VWY-AN currently $6.10
Cost reduction: July $60 put closed 6/8, -1.95 = $4.15

Insurance put:
Jul $60 Put SLB-SL @ $1.65 6/6 @ $63, exit $3.60, 6/8, +1.95

Entry $66.25 (6/04)

ACI - $41.85 - Arch Coal Inc

Arch started the week at $50 but the selling was immediate and lasting taking it down to $40.31 on Thursday. Part of the problem was a ruling by the Supreme Court that kept a West Virginia coal tax.

On Wednesday I targeted $40 as a profit target on the $45 insurance put. When it appeared ACI would not hit $40 I recommended an immediate sell in the 11:30 update. The exit at $5.30 produced a profit of +$3.45 reducing our cost in the Jan $55 call to only $1.05. I am very happy about that exit.

With a cost of only $1.05 in the call we will not be adding any further insurance or cost reduction strategies.

Company Info:

Arch Coal, Inc. operates as a coal producer in the United States. The Company's primary business is the production of steam and metallurgical coal from surface and underground mines throughout the United States, for sale to utility, industrial and export markets. Its mines are located in southern West Virginia, eastern Kentucky, Virginia, southern Wyoming, Colorado and Utah. As of December 31, 2005, it operated 21 mines, and controlled approximately 3.1 billion tons of proven and probable coal reserves. During the year ended December 31, 2005, the Company sold approximately 140.2 million tons of coal. The Company has three business segments, which are based on the low-sulfur coal producing regions in the United States, in which the Company has operations. These segments are the Central Appalachia region, the Powder River Basin and the Western Bituminous region. On December 31, 2005, the Company sold its 100% interest in Hobet Mining, Inc., Apogee Coal Company and Catenary Coal Company.


Position: Jan $55 Call ACI-AK @ $4.50
Cost reduction: July $45 put closed 6/08, +3.45 = $1.05 cost

Insurance put:
July $45 Put ACI-SI @ $1.85, (6/5), exit $5.30, (6/8), +3.45


Entry $48.36 (5/31)

FTI - $62.68 - FMC Technologies

FTI imploded from $69 to $60 on the market weakness. Unfortunately our insurance put was a June $60 we added back in May and the combination of only one week left in June options and the hold by FTI just above $60 did not generate enough premium to do much good. We exited on Thursday and we did recover $1.00 of the $1.10 we spent on the insurance. Now we just need FTI to rebound instead of breaking support at $60.

Since we can't count on that in the current market I am recommending we add another insurance put if FTI trades at $69.

Buy July $55 Put FTI-SK only if FTI trades at $59.


Company info:

FMC Technologies, Inc. provides mission-critical solutions for the energy, food processing and air transportation industries. The Company designs, manufactures and services machinery and systems for its customers through four business segments: Energy Production Systems, Energy Processing Systems, FoodTech and Airport Systems. Energy Production Systems segment designs and manufactures systems, and provides services used by oil and gas companies involved in land and offshore, including deepwater, exploration and production of crude oil and gas. Energy Processing Systems segment designs, manufactures and supplies high-pressure valves and fittings for oilfield service customers. FoodTech segment designs, manufactures and services food processing and handling systems to the food industry. Airport Systems segment is a global supplier of passenger boarding bridges, cargo loaders, and other ground support products and services.

Earnings update on May 9th
The Houston-based machinery manufacturer earned $47 million, or 67 cents a share, compared with breakeven a year ago. Analysts polled by Thomson First Call were estimating earnings of 45 cents a share, in the most recent quarter.
First-quarter revenue rose 27.5% from a year ago to $869.3 million. Analysts were estimating revenue of $819.3 million.
For fiscal 2006, the company increased its earnings guidance to $2.60 to $2.80 a share from $2.20 to $2.40 a share. Analysts surveyed by Thomson First Call are estimating earnings of $2.43 a share.
Its inbound orders in the first quarter increased 74.9% to $1.1 billion from the prior-year quarter. Order backlog climbed to $2.2 billion in the quarter on strong subsea inbound orders.
Energy systems revenue, which contributed 78.2% to total revenue, increased 34.1% to $679.9 million from a year ago. FoodTech business segment revenue rose 10.2% to $123.3 million and airport systems revenue rose 5.4% to $68.2 million.
"We are pleased with the outstanding performance in first quarter. Our results were driven by our subsea systems business as well as our surface systems and fluid control businesses," the company said.

Breakout trigger $63.50 Hit 5/23
Position: Oct $65 Call FTI-JM @ $5.80
Cost update: Closed June $60 put, +0.10, cost = $5.90

Insurance put:
June $60 PUT FTI-RL @ $1.10, closed 6/8 $1.00, -0.10

Entry $63.50 (5/23)

TIE - $34.31 - Titanium Metals

TIE fell -$8 during the market carnage. We did not have an existing insurance put on TIE but a put trigger in case of a drop. I modified that trigger in the Wednesday night email to $34.57 and we were triggered at the open on Thursday. We have a July $30 put with TIE over strong support at $31 and $34.

Maintain a profit stop: Long July $30 Put @ $25.00

Company info:

Titanium Metals Corporation (TIMET) is a producer of titanium sponge, melted products and a variety of mill products for aerospace, industrial and other applications. For the commercial aerospace industry, the Company supplies titanium products to manufacturers of commercial airframes. Outside of aerospace markets, the Company manufactures a range of products for customers in the chemical process, oil and gas, consumer, sporting goods, automotive, power generation and armor/armament industries. Approximately 15% of the Company's sales revenue, during the year ended December 31, 2005, was generated by sales into industrial and emerging markets. TIMET markets and sells its products in the United States, the United Kingdom, France and Italy.

Position: December $45 Call TIE-LI @ $5.70 (no LEAPS)

Insurance put:
Position: July $30 PUT TIE-SF @ TIE $34.75, entry 6/8 @ $2.00


Entry $38.22 (5/28)

BHP - $39.31 - BHP Billiton Limited ** No Stop **

BHP actually declined less than most commodity stocks with slightly more than a $3 decline. We closed the June $40 insurance put on Thursday for $2.60 when our stop loss of $38.50 was hit.
I am recommending we buy the August $35 put BHP-TG currently $1.30 to replace it. I would like to think the commodity crunch is over but until we see a rebound that sticks we can't count on it. We have a 2008 LEAP so all we need is disaster insurance rather than a complicated strategy.

Insurance put change:
Buy: August $35 Put BHP-TG currently $1.30

Company Info:

BHP Billiton Limited is a diversified resources group. The Company is an exporter of metallurgical coal for the steel industry; an exporter of energy coal; a producer of iron ore, copper, nickel metal, manganese ore, primary aluminium and manganese and chrome ferroalloys. It also has substantial interests in oil, gas, liquefied natural gas (LNG), diamonds, silver and titanium minerals. BHP Billiton operates in seven segments: Petroleum (oil, natural gas and LNG), Aluminium (aluminium and alumina), Base Metals (copper, silver, zinc and lead), Carbon Steel Materials (metallurgical coal, iron ore and manganese), Diamonds and Specialty Products (diamonds, titanium minerals and metals distribution), Energy Coal (energy coal) and Stainless Steel Materials (nickel metal, and chrome and nickel ferroalloys).

Breakdown trigger $46.75 hit 5/15
Position: 2008 $50 LEAP Call LPH-AJ @ $7.50
Cost update: Closed June $40 Put 6/12, -1.10, cost = $6.40

Insurance put:
Closed: JUNE $40 Put BHP-RH @ $1.50 (5/22), exit $2.60, 6/8
Position: Aug $35 Put BHP-TG @ $1.30 (6/12)

Entry $46.75 (5/15)

MDR - $44.00 - McDermott ** No Stop **

McDermott was the miracle stock last week losing only -$2. $40 is long term support and I am thinking about adding some more MDR to my personal portfolio given the strength and market sector.

Our June insurance puts at $40 will expire worthless and I am not complaining. I am going to add an August insurance put with a trigger despite my confidence in MDR.

Maintain $37.50 profit stop on June $40 put MHH-RH
Buy August $36.625 Put MHH-TV only if MDR trades at $39.
(MHH options are 150 shares to match our current long $46.66 leaps. The 150 shares are the result of the 3:2 split.)

Company Info:

J. Ray McDermott is a leading provider of engineering, procurement, construction, and installation services for offshore oil and gas field developments worldwide. McDermott International, Inc. is a leading worldwide energy services company. McDermott's subsidiaries provide engineering, construction, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy and power industries, including the U.S. Department of Energy.

3:2 split on June 1st reduced the strike price by 1/3 and increased the contract size to 150 shares.

Position 2007 $70 LEAP Call OYZ-AN @ $8.50
Split into 2007 $46.66 LEAP OYZ-AX @ $5.66
or
Position 2008 $75 LEAP Call YAE-AO @ $12.50
Split into 2008 $50.00 LEAP YAE-AJ @ $8.33

Insurance put:
Position: June $60 Put MDR-RL @ $1.25 (5/22)
Split into June $40 Put MHH-RH @ $0.83

Entry $44.02 (5/18)

TRN - $50.83 - Trinity Industries ** closed for profit **

Trinity continued to decline another -$8 to $50 after topping out at $71.50 on May 10th. The decline was due to profit taking, the pricing of $450 million in convertible notes and the sale of a company unit to the management team without disclosing the terms.
This is how you kill a perfectly good stock.

We had a June $60 put and I recommend exiting at the open on Thursday. TRN gapped down and the put gapped up to open at $9.40. Our cost was $1.00 and the cost of the long call was $4.00 giving us a total profit of $4.40 on the position. Close the call position on Monday at the current bid of 30 cents giving us +4.70 as a closing profit.

Sometimes being lucky is better than making the right decision.
I considered taking the profit and reinvesting in Trinity but given the circumstances decided to pass.


Company Info:

Trinity Industries, Inc. is a diversified industrial company that provides a variety of products and services for the transportation, industrial, construction and energy sectors. The Company is engaged in the manufacturing and marketing of railcars, inland barges, concrete and aggregates, highway products, beams and girders used in highway construction, weld pipe fittings, tank containers and structural wind towers. In addition, it leases railcars to customers through a captive leasing business, Trinity Industries Leasing Company. Trinity has five business groups: Rail Group, Railcar Leasing and Management Services Group, Construction Products Group, Inland Barge Group and the Energy Equipment Group.

(No LEAPS)
Position: October $70 Call TRN-JN @ $4.00, Exit 6/12 @ 30 cents

Insurance put:
Position: June $60 Put TRN-RL @ $1.00 (5/22) Exit 6/08 @ $9.40

Profit recap:
Sold June $60 Put, $9.40, cost -1.00, = +$8.40
Sold Oct $70 Call, 30 cents, cost $4.00, = -$3.70
$8.40 - $3.70 = $4.70 profit.


Entry $64.88 (5/18)

PTR - $97.91 - Petrochina ** No Stop **

When it rains it pours. PTR lost another $10 and declined to strong support at $95. The drop took out our insurance put at last weeks target of $103 for almost exactly what we had in it. Considering it was high priced to begin with that was a small consolation.

I have great confidence in PetroChina and after much soul searching I want to double down on the current position. BUT, I would also like to see a positive trend return before throwing good money after bad. $95 is strong support and after the carnage the put options are very expensive insurance. I explored several ways to reduce that expense but none felt right given the potential for an upside explosion once the current carnage is over. The only solution is to put in a combination play with a trigger and hope it is never hit.

If PTR trades at $94
Sell the Dec $115 Call PTR-LC currently $3.70
Buy two July $90 Puts PTR-SR currently $1.80
Target $82 to close both positions
Once initiated put a stop loss @ PTR $100 on both positions

Prior commentary:

Petrochina is the fourth largest energy company in the world. It is a government monopoly but it acts like an independent. PTR is aggressively acquiring leases and rapidly expanding its drilling program. It currently has over 10.9 billion bbls of proven reserves and more than 44 TCF of gas. Warren Buffet owns $2.3 billion of PTR stock. It trades at less than $12 per BOE and has a 3.5% dividend yield. PTR owns 14,000 service stations and has 2,900 franchised stations. It is majority owned by China and has unlimited capital for expansion if China likes the deal. I expect several acquisitions by PTR over the next couple years but with a $208 billion market cap and China as the owner it will not be a target itself. China would never give up control of those oil assets. PTR saw its output rise +6.3% in Q1 to 267.7 million bbls when most companies were posting declines in reserves and production. Gas output rose +35.6%. PTR owns 75% of the oil and gas reserves in China and supplies 40% of its needs. This is as close to a permanent lock on a profit as we can get given the rapid growth of China's economy.

Cramer was pounding the table on PTR on Friday saying it was not afraid to drill in communist countries, places torn apart by strife or run by two-bit dictators like Chavez or Morales. With the Chinese government and military behind it there is little chance of somebody trying to confiscate PTR assets.

Company info:

PetroChina Company Limited operates a range of petroleum and related activities through four primary business segments: Exploration and Production Segment, Refining and Marketing Segment, Chemicals and Marketing Segment, and Natural Gas and Pipeline Segment. The activities include the exploration, development, production and sales of crude oil and natural gas; the refining, transportation, storage and marketing of crude oil and petroleum products; the production and sales of basic petrochemical products, derivative chemical products and other chemical products, and the transmission of natural gas, crude oil and refined products, and the sales of natural gas.

I am using the $120 LEAP instead of the higher strikes because the dip reduced the price to a manageable level. The choice is $120 or $130 and there is only a $3.60 difference in price. Amortized over the next 18 months that is nothing. I only wanted round number strikes in case there is a stock split.

Position: 2008 $120 LEAP Call LJC-AD @ $16.20

Insurance puts:

Closed: June $105 PUT PTR-RA, @ $4.20 (5/22), exit 6/7 @ $4.30

Entry 5/14 $116.20

GG $26.45 - Goldcorp ** No Stop **

After three weeks of holding above $28 support Goldcorp finally cracked under the plunge in gold. We have a July $27.50 put already in the money with support at $25. I do believe gold got ahead of itself with the overseas commodity boom but I also believe it will be back. As the price of oil rises so does the need for gold. Petrodollars always seem to find their way into the safety of the yellow metal. Demand is up around the globe and production is down. We just need to wait and we do have a 2008 option. Once a positive trend returns we can sell some calls to defray our costs.

I considered selling the 2008 $50 LEAP Call, currently $2.70 and buying the Jan-2007 $30 calls currently $3.40. If Goldcorp did recover as expected to something in the $40 range this year we would reap a $10 profit in the 2007 calls. If it continued to $50 in 2008 we could capture another $10. The only risk is no protection against further downside after July expiration. Use your own judgment about this strategy.

Change the profit stop on the July $27.50 put to $24.


Company Info:

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
Position: 2008 $35 LEAP Call LGX-AG @ $10.00 5/01

Insurance put:
Position: July $27.50 PUT GG-SY @ $1.95

Entry $36.00 (5/01)

FTO - $52.40 - Frontier Oil Corp

FTO held on until the Thursday dip and rebounded strongly when it was over. We have a June $50 put and $50 is strong uptrend support with a split just ahead.

The June $50 insurance put was closed on Thursday for $1.70 when our stop loss was hit at $50.25.

Buy July $45 Put FTO-SI only if FTO trades at $48

Stock split: 2:1 scheduled for June 26th

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
Cost reduced by -60 cents 4/25. Cost = $5.90
Cost update: Closed June $50 put, +.10, cost = $6.00

Cost reduction play April 18th
Sell May $65 Call FTO-EM @ $2.15, exit $1.55 4/25, +.60
Stop loss $64.95
Profit stop $60.00, hit 4/25

Insurance put:
Closed: June $50 Put FTO-RJ, @ $1.80 (5/22), exit $1.70, 6/8

Entry $56.00 (4/11)

CSX - $61.89 - CSX Corp ** No Stop **

CSX failed at the $68.50 support test and the imploding market sent it into free fall. The close on Friday was right at the 100-day average. CSX is one of the few stocks that has held above the 100-day. We have a 2008 leap so we just need to manage the premiums until we get to zero. That will be a rather large task in a falling market but we got a good start last week.

We had a June $65 put and the exit target last week was $61. That was hit on Thursday for $4.25 compared to our cost of $1.20 for a +3.05 cost reduction in the LEAP and reducing our cost by one third.

New insurance put:
Buy August $55 Put CSX-TK currently .95 cents.

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
Cost update: Closed June $65 put, +3.05, cost = $5.25

Insurance Put:
6/12/06: Buy August $55 Put CSX-TK currently .95 cents
Closed: June $65 PUT CSX-RM @ $1.20, exit 6/08, $4.25, +3.05

Entry $60.50 (4/03)

BTU - $52.18 - Peabody Energy ** No Stop **

Unbelievable! BTU had rebounded from the $51 low we saw in May to $66 last Friday. In one week BTU fell right back to $51. It is very disgusting to watch the fluctuations and the premiums jump up and down.

Since the June insurance put was closed on Thursday I considered not adding another but common sense prevailed. The deciding factor for me was a profit warning by International Coal (ICO) on Wednesday. They had extenuating circumstances but all coal producers were painted with the same brush.

Buy July $45 Put BTU-SI only if BTU trades at $49.


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
Cost increased 4/19 by +1.30 to $10.80
Cost increased 5/01 by +1.70 to $12.50

Insurance put:
Closed: JUNE $52.50 PUT BTU-RT, @ $2.70 (5/22), exit $2.65, 6/8

April 8th covered call:
Sell June $60 Call BTU-FL @ $2.20, stopped $3.50, 4/19, -1.30

April 24th covered call:
Sell Sept $70 Call BTU-IN @ $4.20, exit $5.90 5/01 -1.70
Set stop loss at $67.50, hit 5/01
Set profit stop at $58.00, changed to 58.50 4/30

Entry $48.00 (3/07)

XLE - $52.80 - Energy Select SPDR ** Closed **

After a nice rebound to $57 the XLE closed back below the 200-day on Friday. I am closing the play where we started for a breakeven. I think with the current state of the energy sector we are better off playing individual stocks than the SPDR. The good stocks are going to be held back by the marginal components now that the bloom is off the market.

SPDR Info:

The Energy Select Sector SPDR Fund (the Fund) is an index fund that seeks to replicate the total return of the Energy Select Sector Index of the Standard & Poor's 500 Composite Stock Index (S&P 500 Index). During the fiscal year ended September 30, 2004 (fiscal 2004), the Fund had a return of 48.27%, as compared to the Energy Select Sector Index return of 48.91% and the S&P 500 Index return of 13.87%. The Fund invests in industries, such as energy equipment and services, and oil and gas services, among others. In fiscal 2004, its top five holdings were Exxon Mobil Corp., ChevronTexaco Corp., ConocoPhillips Inc., Schlumberger Ltd. and Occidental Petroleum Corp.

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

Position: 2007 $55 LEAP Call OJW-AC @ $4.10, exit 6/12, $3.90

Entry $52.00 (3/07)

CCJ - $37.56 - Cameco ** No stop **

No difference here. Cameco performed with the market and lost -$7 for the week. Our June insurance put at $35 will hopefully expire worthless because of a rebound next week. If not I would target $33.50 to get our premium back. That is strong support that should not be broken unless the Dow heads for 10,000.

Maintain profit stop on June $35 put CCJ-RG @ CCJ $33.50

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:
Position: June $35 PUT CCJ-RG @ 1.20 (5/22)


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 - $72.60 - Halliburton ** No Stop **

HAL has turned into a growing favorite. It has rebounded strongly every time it nears support of the 200-day average at $68. With the split two weeks away any rebound in the oil sector should give HAL a strong boost. Our July $65 insurance put is well out of range of Friday's close and hopefully will not be needed.

HAL announced a major contract, the largest in the Persian Gulf since the 1950's to drill 300 wells in Saudi Arabia. It will take 23 rigs three years to complete. They also will be building the infrastructure needed produce 1.2 mbpd of crude for Saudi.

HAL warned last week that earnings would double over the next 3-5 years and that business was very good with backlogs growing.

Still no word on the KBR spin off date.

Maintain a profit stop at $61 on the July $65 put and hope like heck we don't need it.


Play description:

Halliburton is planning on spinning off KBR, its construction and engineering unit. This should produce a significant bounce in HAL stock. (KBR stands for Kellogg, Brown and Root) HAL is a very strong service company and should soar when it is no longer held in check by the sins of KBR.

2:1 Split scheduled for June 23rd.

PAR on HAL is $100 after the spin off.

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:
Position: July $65 Put HAL-SM @ $2.00 (5/22)


Entry $79.00 (2/06)

VLO - $59.18 Valero ** No Stop **

VLO continues to honor support at the 200-day average at $56 and has managed to stay above our $55 insurance put. No change in the outlook with refining season well underway.

Maintain a profit stop on the June $55 put at $52.50


Company Info:

Valero Energy Corporation (Valero) owns and operates 18 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 3.3 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.

Position: 2007 $60 LEAP Call VHB-AL @ $6.60
1/30 Cost reduced by spread on put/call -0.90, now $5.70
2/06 Cost reduced by -1.00 on closed call, now $4.70
2/09 Cost reduced by -3.10 on closed $57 put, now $1.60
2/14 Cost increased by +0.15 on exited Mar-$45 put, now $1.75
4/11 Cost increased by +1.20 on CC stop loss, now $2.95

Insurance put:
Position: June $55 PUT VLO-RK @ $1.50 (5/22)


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)

 


Leaps Trader Watch List

Target Rich Environment

The decline in everything with a symbol has produced what could be considered some screaming buys. Unfortunately I am not ready to catch a falling knife. There are so many we could bleed to death from the cuts. I think this week is a perfect week to add to existing positions.

I would not hesitate to add to these:

BHI above $78
MDR above $40
CSX above $60 with a $57.50 stop on the new position
FTI above $60 with a $58.00 stop on the new position
SLB above $57 with a $54.00 stop on the new position
TIE above $31 with a $29.00 stop on the new position
BTU at $47
CCJ at $35
FTO at $50
VLO at $56

My favorite after last week's action is Halliburton.

Strong support at $65-$67 and nothing but good news.
Buy the dips!

Jim Brown
 

Dropped Entries

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New Watch List Entries

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Current Watch List

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