Table of Contents
Leaps Trader Commentary
Who knew the energy sector was going to explode off the bottom on Thursday? Next time you know in advance please email me. Without any warning energy and materials stocks and almost every other sector exploded on Thursday and fizzled on Friday.
I had several stocks I was watching for new entries but with oil still in a downtrend and riding support at $68.50 I was reluctant to call an entry given the recent market history. We went from impending doom on Wednesday morning to flying high in the blink of a buy program. Shorts were squeezed just like we have seen a hundred times before. Now the true test will be direction next week.
With no hurricanes in sight and a sharp rise in gasoline inventories there is growing pressure on crude prices. Iran is cooling off with the Iranian president saying positive things about the package of carrots and sticks. I am sure both arms are black and blue from twisting by Russia and China to at least appear interested.
There is nothing new on horizon to pressure prices and summer is rapidly ticking away. I know, it seems like only June but after the July 4th holiday the summer gasoline binge will begin to slow. With it will be a cooling of oil prices unless of course a few hurricanes appear headed for the gulf. Prices will again rise as we near the end of summer and the coming of fall as refineries switch to heating oil production. This is still a long way off but the market typically looks at expected demand three months ahead for pricing.
This may sound negative for energy stocks but remember oil is still hovering around $70 and most energy stocks are priced for $40 oil or even lower. Stocks will continue to trend higher just not in a straight line.
There was an item of importance on Friday afternoon that went largely unnoticed by the general media. I want to preface the event with some background first. Since 1956 when M. King Hubbert first correctly predicted the peaking of U.S. oil production in the 1970s there have been many peak prophets using the same decision process to predict a global peak. Hubbert's prediction came true in 1971 for the U.S. but the correct prediction of a global peak has yet to occur. Several have tried with almost a yearly target by someone since 1987. Most were flawed studies with limelight grabbing than actual science. The most recent prediction was Kenneth Deffeyes with a target date somewhere around New Years Eve 2005. Deffeyes has been steadfast in his support of that date and issued an update as recently as June 14th. Because Peak Oil does not mean the end of oil it can and will pass unnoticed and possibly for as long as a couple years. With thousands of fields, tens of thousands of producing wells and about 2000 wells currently being drilled it is a major undertaking to chart current and future production from all of them. Nobody in their right mind would go out on a limb in a very public fashion unless they were reasonably sure of their facts.
If somebody worth billions and with billions invested said Peak Oil was here we should believe them until proven wrong. On Friday Boone Pickens was arguing Peak Oil with John Stossel on the Kudlow and Company program on CNBC. Pickens went on record as saying Peak Oil is occurring now. He said based on his research 85.1 mbpd was the global peak in oil production. He said current global production was declining by -4% per year, the same number I have quoted many times over the last couple of years. That equates to a drop in existing production of 3.4 mbpd per year. He said all new production was going to offset that -4% decline in existing fields. If we only add 3.4 mbpd this year, which is exactly the number I used in my Option Investor commentary two weeks ago, we will only break even on total production. Just to stay even we have to add 3.4 mbpd every year from no on and that assumes no growth in demand.
Pickens also quoted the drop in Saudi production in May to 9.05 mbpd. He indicated it may not have been voluntary as they claimed. Saudi is spending $50 billion in a race to add 1.2 mbpd by 2009 and avoid a global shortfall. Unfortunately the race outcome is already known. By the time that production arrives the demand will already be much higher.
Think what you want about Boone Pickens. He has been called a crack pot by some but he has made millionaires of many. Last year Boone made over $1.5 billion personally and a significant amount for his investors. Stossel was quoting the oft-misused comment that the Canadian Oil Sands held enough oil to supply the U.S. for the next 100 years. It may hold that much but that does not mean they can get it out of the ground. Pickens quickly pointed out that for every 1 mbpd of new production from the oil sands it requires an investment of $70 billion and 5-7 years to build the facilities. Secondly, getting the oil out of the sands requires massive amounts of natural gas as fuel to heat the sand to the temperature required to release the oil. Currently there is a shortage of gas in Canada due to the already huge demand. Ramping up production by several million more barrels would require export of gas from the U.S. and that is NOT going to happen. Despite the apparent glut at present we barely have enough gas to get us through the year as it is. We produce gas all year and pipe it into storage just so we have enough to get us through the winter. With every new house, office building, factory and mall built that demand for gas increases. There is enough oil in Canada to feed the U.S. for 100 years but only if the U.S. goes on a crash diet.
To summarize any 25 individual researchers could predict various dates for Peak Oil and unless I knew them personally I would have to take their claims on blind faith that they actually knew what they were talking about. Or, I could choose to believe somebody that has billions invested in oil and makes billions for his investors based on his research. When Boone Pickens claimed Peak Oil had arrived on national TV and backed it up with facts I already knew to be true and had been reporting for a long time it is hard not to believe him. I also have read Twilight in the Desert by Matthew Simmons and spoke with him at last years Energy Conference in Denver. He is a very well respected investment banker to the energy business. He is not a crackpot and his research is so well documented it is extremely boring to read.
I choose to believe Simmons and Pickens but that does not make their claims 100% accurate. BUT, even if their claims are off target by a couple months or even a year or two the fact remains that Peak Oil is upon us and it is only a matter of time before it become irrefutable fact. In Dec-2005 by combining the research of dozens of authors and production data readily available on the Internet I predicted Peak Oil should arrive in 2007. Granted I could just be propagating somebody's bad research but the same facts kept appearing in dozens of unrelated places. The acceleration of demand growth in China and India coupled with production declines in places like Venezuela and Nigeria may have accelerated the schedule. Every day that passes without the addition of 10,000 bpd of new production is a day that we get that much farther behind on the supply curve.
Current production is 85.1 mbpd or 31 billion barrels per year. We have not added 30 billion bbls to known reserves in any year since the early 1980s. You can't continue to burn 31 gallons of gas in the family car every week and only add 10 gallons every Saturday. It is a simple fact that eventually you will be walking. I used the graphic below last week in a different commentary. It still applies. The IEA raised demand growth estimates for 2006 to an additional 1.7 mbpd and raised 2007 growth estimates by 1.9 mbpd. That means we have to produce 88.6 mbpd by early 2007 or somebody is going to be short some oil. Existing fields are declining at a 4% rate each year. This is the same rate Pickens used on Friday. That is a drop of -3.4 mbpd each year. Add up the new demand and the declining production and you get a negative number and it is coming our way fast.
Back to the present. Oil prices are sliding because of the seasonal demand curve. We had nearly the warmest winter on record and heating oil and natural gas usage at multiyear lows. Inventories rose and we currently have a surplus in both. It is only temporary. Unless the U.S. thermometer suddenly sticks at 68 degrees year round it will get hot as the summer progresses and it will probably get cold this winter. When demand returns to normal those surplus inventories with suddenly begin to shrink. Eventually, either in the winter of 2006 or sometime in 2007 the global demand is going to outstrip global supply. The you know what is going to hit the proverbial fan and $100 oil is just around the corner. Actually $150 oil will not be far behind.
China and Russia have already taken steps to safeguard their future supplies. Analysts tell us not to worry because oil is fungible. That means if Venezuela suddenly quit selling oil to the U.S. and sent 2mbpd to China instead then whomever had been selling 2mbpd to China would then sell it to someone else freeing up someone else's 2mbpd to sell to us. In other words as long as there was 85 mbpd of production and an equal 85 mbpd of demand it would not matter who sold to who since it would all equal out.
THIS IS A WRONG ASSUMPTION! China is buying oil reserves and production with an intent to HOARD. They know their demand will continue to grow. They are NOT planning on selling that oil on the open market but saving it for future use. Why sell it now for $68 a bbl when it could cost them $150 five years from now to replace it? Some people just don't get it but China does. So does Russia and Russia is taking steps to protect their reserves and limit the amount that can be taken out of the country. Within a very short period it will be clear to the world that whoever has oil and can protect it will win. Those who have no oil or not enough oil to continue business as usual will lose. Inflation will not be a concern. High interest rates will not be a concern. $5, $6 or even $7 gasoline will be a strong concern and those who can find a station with gas will gladly pay it.
I know I wandered off on a tangent today but you need to realize this problem is coming our way faster than a speeding locomotive and there is no fix. Nothing anyone can do can stop it. When it appears it is going to devastate the global economy, which was built on cheap oil. Oil will be around another 100 years in decreasing supply but it will no longer be cheap. Wars are going to be fought over oil in the very near future.
Now that I have exhausted my allotted space I will get to the point.
1. We need to buy the late summer dip with the longest LEAPS we can afford.
I know the last several weeks have been rocky. Market corrections normally are and the fact this one was led by a commodity implosion made it even worse. Keep the faith our time is coming.
December Crude Oil Futures Chart - Daily
December Natural Gas Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
No new plays today.
BHI - $79.94 - Baker Hughes Intl
The carnage continued with a decline in BHI to $74 and the 100-day average on Tuesday. This allowed us to exit our insurance positions when our profit stop was touched at $75. The combination of the long put and the short call provided us with a +$3.60 profit which reduced our cost in the long call from $6.20 to $2.60. A successful week for BHI!
With our cost now at $2.60 we will not add any new insurance puts. We could end up doubling our cost without any real benefit. The 100-day average at $74 has been strong support in the past. If the market appears weak we could sell another call but put premiums are too high at present to use at insurance. Once expiration week passes that may change.
Baker Hughes said the U.S. rig count increased by 11 to 1,672 while the offshore count dropped by -3 to 94. Active Canadian rigs fell by -2 to 441. Overall the North American rig count was up by +533 compared to the same period in 2005.
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.
SLB - $58.25 - Schlumberger Ltd
The dip, which began on Monday triggered our entry into a new insurance put and we are currently long the July $55 strike with a profit target of $52.50 and a stop loss at $61. I would rather not be given the opportunity to take that profit stop.
SLB rebounded nicely but I fear for the sector without any geopolitical event to push oil prices higher. Maintain the stop and let's hope the 200-day holds.
Maintain profit stop on July $55 put SLB-SK @ $52.50
Earnings schedule: July 21st, 6:AM, conference call 9:AM
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 (SLB-AN) currently $6.10
Insurance put: Entry 6/12
Insurance put: (Closed 6/8)
Entry $66.25 (6/04)
ACI - $40.61 - Arch Coal Inc
Arch took the sector dive on Monday but recovered nicely with the market rally. The slowing of gas injection into storage due to increased summer demand is bullish for coal. If this pattern continues Arch should continue higher.
With a cost of only $1.05 in the call we will not be adding any further insurance or cost reduction strategies.
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.
Insurance put: (closed 6/8)
FTI - $60.99 - FMC Technologies
FTI continued its plunge through Wednesday but recovered nicely along with the market. We were triggered on a new insurance put on the dip to $58 and we are now positioned for any coming weakness or prosperity.
Maintain a profit stop on the long July $55 put FTI-SK @ $51.
Buy July $55 Put FTI-SK only if FTI trades at $59. ($1.40)
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
Breakout trigger $63.50 Hit 5/23
Insurance put: (closed 6/8)
Entry $63.50 (5/23)
TIE - $32.47 - Titanium Metals
TIE has been nothing if not the most volatile metals stock. We had a chance to close the insurance put for a profit on Tuesday but with plunging markets I held off from raising the exit from $25 to $28. At $25 we could knock -$3 off the cost of our long call. I would rather the put expire worthless with TIE over $40 and we have plenty of time for that to happen.
TIE was the poster child for runaway stock prices with (3) 2:1 splits in the past year. Hopefully that momentum will return but without a positive market it could be a long road.
Maintain a profit stop: Long July $30 Put @ $25.00
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)
BHP - $39.86 - BHP Billiton Limited ** No Stop **
BHP made a nice stop right on support at $36.50 and a nice rebound. BHP has been getting a lot of press for its various segments including copper, gold and uranium. Unlike most of the other producers BHP has assets in multiple metals and multiple locations. The rally in overseas indexes helped lift BHP but it will take a continued recovery to provide support.
Maintain a profit stop on the long $35 Put BHP-TG @ $31.
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
Entry $46.75 (5/15)
MDR - $43.12 - McDermott ** No Stop **
McDermott continues to be the most stable of the energy plays with a sideways consolidation just over $40. Once MDR begins to move I am confident there are plenty of buyers waiting.
I believe MDR is just shaking off the results of the 3:2 split on June 1st and the repurchase of $500 million in 11% notes. That should be a positive event but the market has been leaning on the sector rather hard.
Maintain profit stop on Aug $36 Put MHH-TV at MDR $33.
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
Position: June $60 Put MDR-RL @ $1.25 (5/22)
PTR - $98.70 - Petrochina ** No Stop **
Nothing like an $8 range for the week to stir up some aggravation. We saw a drop to $90 to trigger out insurance but then a nearly instant rebound to $99.50 and just under our stop loss. Like I said last week, when it rains it pours.
$100 is decent resistance and I am going to raise the stop loss to $101 on both the Dec $115 call and the July $90 puts. I would rather be stopped out for a loss on the insurance due to a rebound of PTR to $110 than have PTR decline to the $82 profit stop but then I don't get to choose.
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.
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 6/7)
Entry 5/14 $116.20
GG $27.38 - Goldcorp ** No Stop **
A very strong rebound to post a gain for the week. We missed the profit stop on the insurance put by 12 cents at $24.12 for what would have been a 100% gain on the put. Hopefully we will not get another chance. I would rather have the 2008 LEAP run for $20 than take the $1.95 profit on the put.
Goldcorp declared its 6th monthly dividend for 2006 payable on June 30th. Goldcorp received $450 million in exchange for early execution of some outstanding warrants. The money will be used to pay down the debt incurred on the purchase of some Placer Dome assets from Barrick Gold.
Goldcorp expects to produce 2 million ounces of gold in 2006 at an average cost of $125 an ounce. Goldcorp does not hedge its gold production. This will represent nearly $1 billion in profits at the current price of gold.
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)
FTO - $51.67 - Frontier Oil Corp
FTO declined just enough to trigger the new insurance put before rebounding to erase the losses for the week. While FTO did nothing different than the rest of the positions I am starting to ponder the wisdom of remaining in the play over the 2:1 split on June 26th. Recently we have seen substantial post split depression from energy stock splits. It appears to be more severe depression than normal. I am wondering if the magnitude of the long-term gains is not prompting more investors to exit. The FTO split is labeled as a "stock dividend" which makes the distribution taxable at a lower rate. This could accelerate the post split depression as investors dump those dividend shares. I am going to research this further and I will update the position with an email before the week is out. We may exit the call and keep the put.
Maintain a profit stop on the July $45 PUT FTO-SI @ FTO $43
Stock split: 2:1 scheduled for June 26th
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.
Position: Oct $60 Call FTO-JL @ $6.50
reduction play April 18th
Insurance put: (closed 6/8)
Entry $56.00 (4/11)
CSX - $64.36 - CSX Corp ** No Stop **
Excellent! CSX actually posted a gain of more than $3 last week and it appears a new trend may have actually appeared. It may only be the dead cat bounce but CSX did rally +$4 from the lows which occurred right at the 100-day average of $60. Of course we did not know CSX was going to perform so well when we entered the new insurance put on Monday. No harm, no foul and the put was cheap.
CSX executives only had good things to say at a conference in New York on Thursday with strong profit growth estimates and positive comments on economic growth.
Maintain a profit stop on the Aug $55 Put CSX-TK @ CSX $50
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.
Put: (closed 6/08)
Entry $60.50 (4/03)
BTU - $52.38 - Peabody Energy ** No Stop **
Another $7 range for the week as BTU continues to exhibit Internet stock like volatility. The slowing gas injection rate should be bullish for coal and hopefully resistance at $55 will be broken on the next attempt.
We were triggered on a new insurance put on Tuesday.
Maintain a profit stop on the July $45 put at BTU $44.
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
Insurance put: (closed 6/9)
April 8th covered call:
April 24th covered call:
Entry $48.00 (3/07)
CCJ - $37.95 - Cameco ** No stop **
CCJ dipped to $34.16 but it was not enough to rescue the June $35 insurance put from expiring worthless. The profit stop or in this case the recovery exit was $33.50 and that was close but no cigar. I considered closing it but at the time the market was teetering on the brink of a disaster and I chose the better safe than sorry option. The gap up on Thursday took it out of range and any remaining premium disappeared instantly.
I am not going to put another insurance put on this weekend. Strong support at $35 should last another week unless the market implodes again. Hopefully the correction is past and only aftershocks remain.
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: $9.80
Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
Put insurance: (expired 6/18)
Monday Mar-20TH cost reduction strategy:
HAL - $74.43 - Halliburton ** No Stop **
After bragging about doubling their earnings in the prior week we did not see any new revelations this week. There is still no news about the KBR spinoff and investor relations will not answer my emails on the subject.
After a market induced dip to $68 on Tuesday we saw a +6 rebound. HAL is one of the strongest stocks in the sector and I believe that any sustained market strength will give HAL wings.
There is a 2:1 split scheduled for next Friday and I am hoping HAL will perform better than other recent energy splits.
Maintain a profit stop at $61 on the July $65 put and hope like heck we don't need it.
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.
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
VLO - $59.95 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. The June put expired worthless and that makes three consecutive insurance or cost reduction efforts to actually add to the cost due to market volatility.
The +$5 bounce off the Tuesday lows put VLO right back at initial resistance of $60.
Petrie Parkman analyst Chi Chow produced a 20 page report on Valero explaining why VLO trades at a discount to its peers. He blames it on the Valero spending spree that put Valero on the top in the United States. Despite very strong profits it left little cash to return to shareholders in the form of stock buybacks so prevalent recently. Valero also had a change in management with founding CEO Bill Greehey passing the baton to Bill Klesse. Chow thinks this is a very positive shareholder development. Chow suggested Valero sell five refineries currently processing the expensive light sweet crude and running on tight margins. Chow said Valero could get up to $5.8 billion in after tax proceeds. He also said Valero could generate $550 million from selling its retail gas stations and focus only on the refining business. He said Klesse is a shareholder friendly CEO and total share repurchases as a result of those actions above could amount to as much as $11 billion or up to 22% of outstanding shares.
This would be huge news and rumor has it that Valero is considering dumping some refinery assets in order to concentrate on the more profitable sour crude operations. This would be a windfall for shareholders and I hope it comes soon!
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.
2007 $60 LEAP Call VHB-AL @ $6.60
Entry $52.30 (12/16)
Leaps Trader Watch List
The market drop on Monday/Tuesday gave everyone an opportunity to make some nice entries on additional contracts of existing positions at the levels I suggested last week. Of particular interest were the dips by BTU and VLO. They represented entry points near multi month lows. Halliburton failed to reach my $65-$67 target with a dip to $68 before rocketing off to close on Friday at $74.43.
I am still not adding any new watch list entries due to the instability in the market. If you read my Option Investor commentary this weekend you know my outlook is flat to down. While I think an eventual hurricane and more obstinance out of Iran will pump up oil prices the energy stocks may be in for a tough uphill battle. I would rather only buy the dips on those stocks we already own. My favorites this week are still BTU, MDR, BHI and VLO.
We are going on a summer position diet with a target of 7-8 positions total before late July in anticipation of a late August price dip in oil. If we get some hurricane activity it should push prices higher for one last rally before the demand drop in August. That will be buying time again for energy.
Current Watch List
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