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Weekly Newsletter, Saturday, 06/24/2006

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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

Confirmation of Theory

The announcement of Anadarko's acquisition of Kerr McGee and Western Gas Resources for a better than 40% premium above the current stock price was yet another confirmation of Peak Oil theory in progress.

Companies are having a progressively harder time finding new oil reserves and are resorting to buying those reserves instead. Each year every company publishes a statistic known as reserve replacement. You have seen the numbers like XYZ replaced 120% of its reserves in 2005. That means for every 10 barrels of oil produced they discovered 12 more. Unfortunately many companies have been showing negative reserve replacement because they found less than they produced. It is getting progressively harder to find new oil and progressively more expensive.

These companies are now finding it easier to buy another company with reserves to boost their own lack of discovery. In the case of Anadarko it also proved very lucrative. With a recovered cost of $12.40 per boe on Kerr McGee and under $10 boe on Western they have already announced plans to hedge up to 75% of the production from those two companies through 2008. Not only are they buying the companies for a bargain price per bbl but are using their own assets to fund the deal.

The announcement of the deals sent analysts scurrying to find the next most likely targets. In my Option Investor commentary this weekend I listed the targets and I am reproducing that list in the table below.

Takeover Candidates

You should note that all of them are US producers which eliminates the geopolitical risk and the risk of nationalism. It also narrows the targets for us as speculators.

I am not recommending any of these companies for new positions today. The first reason is due to the spikes on Friday's news. Secondly because I am expecting a decline in oil prices and stock prices once the July 4th weekend passes. It is tempting to jump on a couple in hopes of a couple follow on deals but we must use restraint.

The bounce in energy stocks gave us a lift to our current positions although some are still on life support from the -25% drubbing the sector took in May. Despite my expectations for some weakness in oil prices after July 4th we are not going to exit everything. There is always the potential for a string of hurricanes or for Iran to escalate into the danger zone. For these reasons we will continue to manage the positions and attempt to lower our cost in the 2008 positions.

Frontier Oil splits at the close of trading on Monday. It has experienced three days of decent gains and is nearing resistance at $57. It was even mentioned as a takeover target today even though it is a refiner not a exploration company. I am recommending we exit FTO on Monday ahead of the split. I am planning on keeping the July $45 insurance put despite it being well out of the money. After the 2:1 split FTO will be around $27 with the put at $22.50. If we see any post split depression and oil prices begin to decline we could get lucky. At this point I am looking to get our premium back rather than a profit.

To hedge ourselves against a potential August decline we are going to enter a put position on the Oil Index (OIX). The options are not cheap but thanks to the Friday spike we can get in at a reasonable price. If the index declines to only the lows of the prior week at $540 it would be a double and if oil drops to $65 or lower as I expect the index could see $500 and it could be a six hundred percent gain. But, if frogs had wing they could fly. The worst case would be protected from any declines in the other positions.

According to Baker Hughes the weekly rig count in the US fell by -3 to 1,669 compared to 1,370 for the same week in 2005. Active Canadian rigs fell -49 to 392 compared to 257 in 2005. Rigs in the Gulf fell by -2 to 88 compared to 94 in 2005. The overall rig count for North America fell -52 to 2,061 compared to 1,627 in 2005.

The Fed meeting next week could be an added bonus. You may think I am on drugs this weekend but there is a pretty good chance we could see a strong post Fed bounce. There is also a good chance much of that buying could be in energy stocks as the only sector guaranteed to produce strong returns for the rest of the year regardless of what oil does. The acquisitions this week only increased the desire of funds to show how smart they are by having some energy positions at the end of the quarter. Let's hope this scenario plays out and we get a couple good weeks of gains before the end of summer oil slump appears. We do want the slump despite our current positions because it will provide a buying opportunity for new 2008 positions on some of those takeover candidates above. Think long term and we will always win.


August Crude Futures - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 


Changes in Portfolio

New Plays
OIX Oil Index Put Insurance
WLT Walter Industries

Dropped Plays
FTO Frontier Oil

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

OIX - $581.61 - Oil Index Portfolio Hedge

The CBOE Oil Index consists of 11 energy stocks of primarily integrated oils. The index reacts sharply to changes in the price of oil and gas.

The focus of this play is to hedge our current energy positions against a decline in oil prices as the summer draws to a close. The options are expensive but the Friday spike will allow us to enter the September $550 put for $14.50 or less on Monday. Each reader will have to decide how many contracts needed to hedge their current positions. You do not want to be moving in and out of the OIX position given the relatively wide bid/ask spread.

A drop to $540 should double the premium paid and a drop to $500 should produce a $50 premium or $5000 per contract. At Friday's closing price of $14.50 or $1450 that represents $3500 profit per contract. That would hedge several of our current positions very easily.

Index Components:

Position:

Buy Sept $550 Put OIX-UJ currently $14.50, no stop.

WLT - $48.36 - Walter Industries

Walter Industries is a diversified holding company that owns among other things 700 million tons of high quality low sulphur metallurgical coal. The company has a market cap of $2.1 billion, which includes $1.2 billion in stock of MWA a recent spinoff of their water products company. That values the rest of WLT at barely $900 million or less than half of the value of the rest of their enterprises not counting their coal asset. I heard an analyst preaching the merits of WLT on Friday and after doing some research I have to agree. The company posted a +84% increase in earnings in Q1 and a jump in revenue from $366 million to $753 million. Very few companies can boast of those numbers. They expect to post earnings of $5.65 for the year in 2006. Walter coal is one of the highest quality, low-vol coking coals in the world. It is sold to major buyers in Europe and South America for about $115 per ton FOB Mobile Alabama. Do the math, 700 million tons x $115 = $80 billion. That is very nice insurance of strong income potential for a long time to come.

WLT was hammered by the recent sell off and by a drop caused when Muller Water (MWA) IPOed on May 30th. The spinoff of a business segment always devalues the parent company but coupled with the May correction this dip is overdone. Decent support just below at $45 and very string support at $40.

Company Info:

Walter Industries, Inc. (Walter) is a diversified company with seven operating segments: Mueller, Anvil, Industrial Products, Natural Resources, Homebuilding, Financing and Other. The Company's seven segments are further grouped into Water Products, Natural Resources, Homebuilding and Financing, and Other. The Water Products group, which consists of Mueller (WMA), Anvil and Industrial Products segments, manufactures water infrastructure and flow control products. The Natural Resources segment consists of coal mining and methane gas operations. Walter markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Financing segment provides mortgage financing on such homes and purchases mortgages originated by others. The Other segment includes the manufacturing of foundry and furnace coke, slag fiber and specialty chemicals, as well as the Company's land division.

Position:

Buy 2008 $60 LEAP Call YZG-AL currently $7.30

Entry $48.39 (6/26)


Play Updates

Existing Plays

BHI - $76.33 - Baker Hughes Intl

BHI slipped lower as the week progressed without any apparent reason. Somebody appears to be leaning on BHI with size but the pattern suggests the 100-day average at $75 is going to hold. We are in the position cheap and we just need that seller to run out of stock.

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 $75 has been strong support in the past.

Earnings schedule: July 28th

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
Cost update: Closed short $100 Call, +0.90, cost = $5.30
Cost update: Closed long $80 Put, +2.70, cost = $2.60

Additions 6/08 (closed 6/13)
Short: Jan $100 Call BHI-AT, entry $3.20, exit $2.30, +0.90
Long: Jul $80 Put BHI-SP, entry $4.30, exit $7.00, +2.70

Entry $85.24 (6/6)

SLB - $58.93 - Schlumberger Ltd

SLB rebound nicely from the Tuesday dip to the 200-day on an upgrade from Calyon Securities to a buy with a price target of $75. SLB is picking up business around the world with Russian services an expanding profit center.

Maintain the stop and let's hope the 200-day holds.

Maintain profit stop on July $55 put SLB-SK @ $52.50
Maintain stop loss on July $55 put SLB-SK @ $61.00

Earnings schedule: July 21st, 6:AM, conference call 9:AM

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 (SLB-AN) currently $6.10
Cost reduction: July $60 put closed 6/8, -1.95 = $4.15

Insurance put: Entry 6/12
July $55 Put SLB-SK @ $1.85
Profit stop $52.50
Stop loss $61.00

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

Entry $66.25 (6/04)

ACI - $39.69 - Arch Coal Inc

Arch has a really ugly chart but support appears to be holding at the $37.50 level. Until hotter weather causes a slowing of gas injection into inventory the coal stocks are going to be dormant. There is no rationality to the connection since the coal is contracted many months in advance. It is just a measure of trader sentiment.

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

Entry $48.36 (5/31)

FTI - $62.47 - FMC Technologies

Nice recovery by FTI with a strong bounce off the Tuesday retest of $57. The +$5 bounce is probably going to put our insurance put out of range but that is not a problem as long as FTI continues to post gains. FTI should not be impacted as much by the price of oil as the exploration companies but there is always an impact. Hopefully funds will want to add this quality company during their end of quarter window dressing.

FTI announced on Tuesday a $130 million contract from Chevron for undersea pipeline equipment and production systems.

I am canceling the stop loss on the July put at $64. The bid is currently 30 cents and I would rather maintain the insurance as a catastrophe shield than collect what would probably amount to $15 at the $64 stop.

Maintain a profit stop on the long July $55 put FTI-SK @ $51.
Cancel the stop loss on the long July $55 put FTI-SK @ $64.

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:
July $55 Put FTI-SK @ $1.40, 6/13
Stop loss FTI @ $64, cancelled
Profit stop FTI @ $51

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

Entry $63.50 (5/23)

TIE - $32.42 - Titanium Metals

TIE flatlined just above $32 as the market wandered in its range. No change in the play other than a raised stop on the current insurance put. Analyst Chris Olin of FTN Midwest Securities said this week that demand for TIE products will continue to surge through 2012. TIE is already at 88% capacity and has a backlog of $860 million in orders. Despite additional capacity plans by both TIE and ATI the market is expected to be undersupplied through at least 2010. Chairman Harold Simmons personally owned 2.6% of TIE shares as of March 31st but a holding company he controls owns 37.1% and SEC documents show that he and the company are aggressively increasing their positions. Boeing has orders for 393 of its 787 jumbo jet which contains a high percentage of titanium components to keep the weight under control. Flight tests of the 7E7 Dreamliner showed it was still too heavy and suggests even more components will be switched over to titanium in the production fleet.

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 @ $28.00

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 - $40.55 - BHP Billiton Limited ** No Stop **

Nice bounce from the lows for the week and the +19% jump in prices for iron ore announced early this week should continue to keep a floor under the stock. BHP has found resistance at $41 but end of quarter buying could finally push it higher.

Maintain a profit stop on the long $35 Put BHP-TG @ $31.

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 - $44.10 - McDermott ** No Stop **

McDermott spiked a buck on Friday but somebody is still leaning on the stock with a solid top at $44.50 all day. Eventually that seller will run out of shares but it is really frustrated waiting for it to happen. I am going to close the $36 put which resulted from the split before the premium declines even further. We will go naked unless our trigger is reached on any drop and then pickup a standard put for insurance.

Close August $36 put MHH-TV currently.60 cents

Buy August $40 Put MHH-TH if MDR trades at $41.

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 YAB-AJ @ $8.33
Cost increase put close 6/26 +1.40, cost = $9.73

Insurance put:
Position: August $36.625 Put MHH-TV @ $2.00, 6/13,
closed .60 6/26, -1.40

Position: June $60 Put MDR-RL @ $1.25 (5/22)
Split into June $40 Put MHH-RH @ $0.83, expired worthless 6/16


Entry $44.02 (5/18)

PTR - $100.65 - Petrochina ** No Stop **

Looks like PTR has finally begun to trend higher with Friday's close a three-week high. This has been a painful drop but the current gains are encouraging. Because of the fill prices on the last drop we may never return to breakeven in 2006 but the prospects are promising. We have a 2008 LEAP and PTR could be $200 before expiration. As long as we maintain the positive trend the long-term price of oil should be our salvation. Both insurance positions were stopped when PTR hit $101 on Friday.

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.

Position: 2008 $120 LEAP Call LJC-AD @ $16.20
Cost adjustment: Close short Dec $115 call +1.30 = $17.50
Cost adjustment: Close long July $90 puts +3.00 = $20.50

Insurance combo: Closed
Short: Dec $115 Call PTR-LC @ $3.20, 6/13, exit $4.50, -1.30
Long: (2) July $90 Puts PTR-SR @ $3.70, 6/13, exit $0.70, -3.00


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

Entry 5/14 $116.20

GG $28.17 - Goldcorp ** No Stop **

A continued rebound in GG from the Monday low and gold has failed to rally. The gold bugs are still promising higher highs and we have a 2008 LEAP. Keep the faith!

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.

Maintain a profit stop on July $27.50 put GG-SY to GG @ $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
Maintain a profit stop on GG @ $24

Entry $36.00 (5/01)

FTO - $54.29 - Frontier Oil Corp ** Call Closed **

I am closing the FTO position ahead of its 2:1 split on Monday after the close. FTO has shown too much weakness and I am afraid the combination of post split depression and weakening oil prices in July could push us deeper into a negative position.

Close the Oct $60 Call FTO-JL on Monday.

Maintain a profit stop on the July $22.50 PUT FTO-SI @ FTO $21

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:
July $45 Put FTO-SI @ $1.75, 6/13

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

Entry $56.00 (4/11)

CSX - $65.53 - CSX Corp ** No Stop **

The FDX outlook and the rising transport index helped to push CSX higher but the pre crash fire has yet to return. Current resistance at $66 will be followed by $68 and then it should start getting exciting again. The insurance put is out of range but we will leave the profit stop on it just in case the market rolls over.

Maintain a profit stop on the Aug $55 Put CSX-TK @ CSX $52

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:
Position: August $55 Put CSX-TK @ .95 cents. 6/12
Maintain profit stop at CSX $50.

Insurance Put: (closed 6/08)
Closed: June $65 PUT CSX-RM @ $1.20, exit 6/08, $4.25, +3.05

Entry $60.50 (4/03)

BTU - $50.78 - Peabody Energy ** No Stop **

BTU can't seem to get over the resistance at $52 due to falling gas prices. It is holding at the current consolidation level while we wait for summer electric demand to increase.

The July $45 put still has value at 85 cents but I am reluctant to close it with BTU hovering in the $48-$51 range. We might still see another dump and I would rather have the insurance than the 85 cents. Unfortunately with time expiring we may only get our premium back if the dump to $44 appears.


Maintain a profit stop on the July $45 put at BTU $44.
Maintain stop loss on the July $45 put at BTU $55.

Earnings schedule: July 20th

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:
July $45 Put BTU-SI @ $2.40, 6/13
Maintain profit stop at BTU $44
Maintain stop loss at BTU $55

Insurance put: (closed 6/9)
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)

CCJ - $39.25 - Cameco ** No stop **

CCJ continued to rise and a new trend appears to be developing. We have plenty of time and the demand for uranium is larger than current production. There is no reason for CCJ not to continue higher if the market weakness is behind us.

I am not going to put another insurance put yet. Strong support at $35 should last unless the market implodes again. Hopefully the correction is past and only aftershocks remain.


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: (expired 6/18)
Position: June $35 PUT CCJ-RG @ 1.20 (5/22), expired -1.20

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 - $71.81 - Halliburton ** No Stop **

HAL took a turn for the worse on Monday with a sharp drop to $71 where it struggled for the rest of the week. There was no news and I have to think this was simply more funds unloading on the weak oil prices. I finally received some news from HAL on the KBR spinoff. Unfortunately there is still no schedule.


Mr. Brown,

No definitive dates have been set for the KBR IPO. We are currently in the SEC review process. We have filed an amendment to the Form S-1 Registration statement. However, we still do not know exactly how long the SEC review process will take. Once it is complete, it is managements priority to complete the transaction as quickly as possible. Please continue to monitor our website for updates on the KBR IPO.

Thanks.

Rob Kukla, Jr.
Manager - Investor Relations
Halliburton Company


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.

Stock split: 2:1
Record date June 23rd
Split date July 14th

Earnings schedule: July 21st

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 - $62.15 Valero ** No Stop **

VLO broke over resistance at $61 and has gained more than $8 since the June-14th low. Morgan Stanley reiterated a buy on VLO saying refining margins would remain high as demand outstrips supply. No change in the play.

Commentary from 6/18

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!


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
6/18 Cost increased by +1.50 on expired $55 put, now $4.45

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


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

Nice Bounce, Holding My Breath

The bounce in energy stocks could be a suckers rally but it may not fail until after quarter end. Be careful going long any energy positions until after the FOMC meeting and preferably after July 4th. The rebound from the June lows is fragile and we need funds currently sitting on piles of cash to become brave enough to reenter the sector. This may not happen until the lows are retested.

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.

Jim Brown
 

Dropped Entries

None


New Watch List Entries

None

Current Watch List

None
 


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