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Weekly Newsletter, Saturday, 07/08/2006

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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

Record Prices, No Gains

The August crude contract hit a record for a front month contract of $75.78 in trading on Friday. A late day sell off on profit taking produced a close at $74.08 or -$1.74 off the highs. Despite the record prices most energy stocks were already well off the Thursday morning highs. Why? I believe investors were selling resistance and taking profits after a strong two-week gain.

The play for traders had been to buy energy ahead of the high demand July 4th weekend and ahead of the initial Iran deadline on the 5th. When it appeared the US was not going to launch cruise missiles on Thursday and the Iran problem was going to drag on another week or maybe even a month there was a dash for the exits. Profits are not profits until they are turned into cash. An implosion in natural gas prices also produced a drag on oil and coal prices.

Natural gas prices fell more than 50 cents for the week to close on fictional support at $5.50. I say fictional because we have not seen this $5.50 level since July 2004. The +73BCF injection into storage over the last week pushed inventories to 29% above the five-year average. Cooler than normal weather across much of the south should continue to prevent drains on those inventories. Eventually this situation will change but not until we see some seasonal weather appear. The damage to gas supplies in the Gulf will slow future replenishment and the appearance of any hurricane should produce a premium in prices. Lots of shoulda and coulda in the outlook but reality for gas stocks is still ugly. Most have held up well but eventually that reality has got to come home to roost.

Saudi Arabia announced the activation of its 100th drilling rig and a milestone in development. Never before in the history of the kingdom has there been 100 rigs actively looking for energy. This shows they are going to follow through on their promise to raise capacity to 12 mbpd. Only 43 of the 100 active rigs are searching for oil. In comparison there are 1666 active rigs in the US with 302 drilling for oil. Natural gas has become a big business in Saudi Arabia for multiple reasons. It takes gas to refine their heavy crude and for electricity generation. The extreme heat in the kingdom and the rapid modernization and increased air conditioning requirements are draining existing electric power. Saudi also injects natural gas back into oil fields to maintain pressure necessary for oil flow. Once the oil is depleted the gas will be extracted and put to other uses.

Oil prices hit the $75.78 level on Friday despite news from Iraq that production was increasing from their northern fields. This production is typically lighter crude of the type that is in short supply. After nearly four weeks of production out of the Kirkuk area no significant interruptions have been seen from terrorist activity. Iran also announced they were going to award exploration contracts soon but finding bidders could be tough until security is strengthened.

I am still expecting a top in oil prices soon but soon is a vague term. To date we have not seen any hurricanes although the season is still young. The Iran issue is dragging and will likely not be resolved or brought to a head until late August. Traders will tire of holding contracts while waiting for that event if inventories begin rising and prices begin falling. If Iran can maintain its northern production and no hurricanes appear we could see prices begin to slip quickly. However, ANY external event could quickly push those prices even higher once shorts load up for the rise down to September. This promises to be a volatile time for oil prices.

I wanted to sell some calls to offset some of our premium decay once the decline begins but I believe we are still early. The Iran event could boil by the G8 meeting on July 15-17 but I doubt it will explode. We should see increased gasoline demand in next week's report but that is past tense and declines should follow. Speculation is the only thing that will keep prices high after July 15th unless a hurricane appears. Once a decline begins it could be very sharp. If we do see a spike to $80 I will definitely sell some calls. Until then patience is still the key. With energy earnings over the next two weeks there is no future in adding any new positions. Once past earnings we can begin setting up for the potential August decline and September buying opportunity.

I am going to answer some emails in this newsletter so everyone can benefit from the answers. Have a great week!


1. Should all plays on the watch lists be entered by us with a limit order for a trade if the trigger is hit?

No. I do not recommend that anyone enter all positions listed in the newsletter. Each investor should only enter the positions that appeal to their risk/reward profile. Some options are $4-$6 while others are over $10 each. Some are shorter term 4-6 months while others are up to two years away. Chose those that fit your profile. I would not recommend using limit orders. Many times our triggers are hit with a gap move and a limit order would prevent you from being filled.

2. Are insurance puts protective puts?

Yes, insurance puts are protective puts. Different people refer to them by different names but they are long puts purchased to protect against a loss if a drop in the underlying appears. Investors should buy these puts only if it fits their risk profile. Sometimes buying puts increases exposure and reduces profits. Other times the put is a money saving investment that lowers the cost of the LEAP. Some readers would rather "stop out" of the LEAP rather than incur the cost of the put.

3. Under the NewPlays you have some with the word "Buy" and others there is no such word or the word position.

If the recommendation is new the word "buy" is used. Once the position has been entered the action word is removed or replaced with "position".

4. What is the difference between a breakout target, a breakdown target, and a split target?

A breakout target is normally a price above the current stock price. A breakdown target is normally a price below the current stock price. Typically we want to enter a position on a dip (breakdown target) but we can't always guarantee a future dip. When we don't want to miss the trade on a move higher without a dip we place a entry point above the current price. (breakout target) The split target has no meaning of its own and was mentioned in several play descriptions when discussing even money strike prices such as $60 or $80 when picking strikes. You want to avoid odd number strikes such as $55 or $65 when facing a 2:1 split. Those strikes result in an odd increment strike post split like $27.50 or $32.50. Those will always have decreasing volume as time passes. Stick with strikes that result in even numbers.

5. You give prices of the options. Should we assume that this number is say $10.00 or better? Should we use a limit order?

No! The price listed in the play description is the price at the time the play was written. It is not a suggested limit order price. Do not use limit orders or you may not be filled in a fast market.

6. Some of the positions say "Calls" and other do not?

Some of the companies listed do not have LEAPS. In place of LEAPS we use the farthest "Call" option available at the time. In the play description the recommended strike is listed as "LEAP Call" when it is a LEAP and simply "Call" when it is a call. A reader should enter the short-term calls positions only if it matches their risk profile.

7. You don't say in the portfolio if past recommendations are still buys. Should we assume so unless you say otherwise?

Normally yes. However reader discretion should be practiced. If a position has moved substantially above the initial entry level it would not normally be advisable to take the entry. Sometimes a stock can move $20 to $30 from our entry making the original strike and play description obsolete. Recently we have had some move substantially below our entry levels during the May massacre. These would represent better entries but I would not use the original LEAP strike if the move has been significant. PetroChina would be an example. We entered the position at $116 before the May massacre and it dropped to $90 before the rebound began. It hit $111 again this week. Anyone entering that position on the dip would have been well ahead of the game. We have a 2008 $120 LEAP so there was never any real danger with 18 months of time on our hands. You could have entered that $120 LEAP or a lower strike based on your risk/reward profile. If a position is not acceptable for future entries I will note that in future play descriptions. See question 10.

8. What is the best way to get started? Should one just invest in new positions? Which current positions are OK to invest in?

The best way to get started to enter cautiously. Read a couple back editions of the newsletter. Get familiar with the mindset for the current energy market. For instance, with oil at record highs I would not enter any new energy plays this week. We are expecting a decline in August so waiting for this dip would be preferable. Review current positions and see which ones are near support. Once you have decided to make an entry those would represent the best options. Above all be patient. In most cases we are buying LEAPS 12-18 months into the future. Waiting a week or two will not kill you and sometimes will result in a better entry.

9. Do you ever take LEAP positions in Puts or Indexes.

Yes, we do take positions on indexes and we do sometimes enter put positions on indexes. Since the focus of this newsletter is mostly energy as it relates to Peak Oil we are primarily focused on long positions in the energy sector or a related sector like transportation or mining. Our put positions are normally hedge positions or protective puts on individual positions.

10. Would you consider putting an action indicator on each play description to let us know if you still think the position is still good for a new entry? Maybe a "Buy" or "Hold" descriptor.

I think that is a good idea and I will implement it with the coming format change in two weeks.

11. In the case of an all cash buyout such as KMG, if the acquisition closes before an in-the-money call option expires, how is the option settled?

If you have an in-the-money call option on KMG you gain nothing by waiting for the deal to close. Because it is a cash deal for a substantial premium there is not likely to be a higher bidder. Time premium has already evaporated due to the minimal likelihood of the price rising over the acquisition price. KMG is currently $69.55 and the Jan-2007 $60 call is $9.90. Take the money and run. You are not likely to see any further rise in premium. You are losing money by not participating in the gains in some other position.

12. I find the Leaps Trader interesting, well-written and generally profitable! However, I object to your practice of ceasing to make recommendations whenever you make adjustments that "lower your cost" to a minimal level. I don't make all the same trades you do and view any profits on protective puts as separate transactions - my tax basis in the original call option is certainly unchanged. While I think it is fair to report your cumulative status on a position where you have been successful with such adjustments, I think you should continue to advise on making further adjustments wherever it seems advisable to do so. That's the advice I feel I am buying when I subscribe. Please understand that I make this suggestion from the perspective of a pleased subscriber who is seeking your continued advice about how best to handle all current recommendations.

In many instances it is not advisable to assume more risk by entering a new cost reduction position. In our Valero position for instance we actually increased our cost to $4.50 from $1.60 when the extra position moved against us. As a newsletter catering to various levels of investor experience it does not make sense to incur additional risk when there is no material reward. I agree your "separate accounting" does not apply to this situation since each trade stands on its own. As an experienced investor you probably know when it makes sense and when it doesn't and can make those decisions on your own. Some of our readers are inexperienced with those types of decisions and depend on us for guidance. I will try to suggest plays in the future but I may not take them in the newsletter. Call it reader discretion.


August Crude Futures - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 


Changes in Portfolio

New Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None
 


Play Updates

Existing Plays

OIX - $626.09 - Oil Index Portfolio Hedge

No Change in play. After the roll over in oil prices began on Friday I did bite the bullet personally and average down at $5.50 on the current strike. I still believe the new Iraq light oil coming to market, decreasing gasoline demand after last week, falling natural gas prices and lack of hurricanes could eventually trigger a sharp sell off in oil. But, others are still expecting $80 to $82.50 before summer is over. Time will tell.

Current recommendation: Buy under $615

Play description:

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. 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 our entry price of $12.00 or $1200 that represents $3800 profit per contract. That would hedge several of our current positions very easily.

Index Components:

Position:

Sept $550 Put OIX-UJ @ $12.00, no stop.

WLT - $55.00 - Walter Industries ** Stop Loss $49.50 **

No change in play. Walter held its ground all week and gave up very little due to the drop in natural gas. A move over $56 would be very bullish in the current environment. Walter coal is not used for electricity but it may be painted by the same broad brush as the rest. Be patient as the summer progresses.

Current recommendation: Hold

Earnings schedule: Late July, no date released

Prior commentary:

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 in June 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:

2008 $60 LEAP Call YZG-AL @ $7.30

Entry $48.39 (6/26)

BHI - $78.75 - Baker Hughes Intl ** No stop **

No change in play. BHI crumbled for no apparent reason beginning on Wednesday morning. It led the sell off in energy stocks and BHI is not even related to the price of oil. Something fishy is going on here but the 100-day average at $75 has held on every test since November. Buy the dips until support breaks.

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.

Current recommendation: Hold, Buy at $76

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 - $62.75 - Schlumberger Ltd ** Stop Loss $61.00 **

SLB gave up ground but not until oil prices cracked on Friday. SLB announced on Wednesday that it bought TerraTek, a reservoir Geology firm, for an undisclosed amount. SLB said the acquisition would enhance its understanding of rock mechanics and analysis of unconventional reservoirs. Friday's close was right on 100-day support and I am hoping this level holds. We will exit if our stop is hit at $61.

Statoil awarded contracts to SLB and HAL on June-30th worth more than $1.12 billion. Halliburton was the biggest winner but SLB garnered its share.

Current recommendation: Hold

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
Cost update: Insurance put closed 6/27, +1.20 = $5.35

Insurance put: Entry 6/12
July $55 Put SLB-SK @ $1.85, stopped 6/27 @ .65, -1.20

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 - $41.24 - Arch Coal Inc ** Stop Loss $36.50 **

The fall in natural gas prices took its toll in Arch and prices are declining towards congestive support again. I am changing the stop loss to $36.50 given our very cheap position. We have five months to play but our strike is well above the current price due to the May decline. Since we stand to lose very little with a cost of only $1.05 I am willing to roll the dice. Earnings are going to be huge if analysts are right. This could restart the coal train higher. If stopped we will reenter with a LEAP instead of a call.

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

Current Recommendation: Hold, Buy at $38 using YEP-AJ

Earnings schedule: July 21st AM

Prior Commentary:

The CEO said in an interview on June 28th that a lot of legacy contracts were expiring soon and that had great implications for their bottom line. Arch saw profits jump 10-fold in the first quarter as new contracts took effect. He said coal would be so short that users would want to secure future contracts to guarantee supply. Coal prices have risen sharply since 2004 doubling in most US basins and tripling in some. Because Arch sells its coal under long-term contracts it has yet to see these prices. Customers of Arch had been locked in at 2003 prices. He said over the next three years the vast majority of their contracts would expire. He said Arch would be selective on which they would renew at current prices. With a strong balance sheet they can take a different view of sales. He said it was the best environment seen in over 20 years for coal. The US currently has 310 gigawatts of electric power and 50% is fired by coal. The US is adding 90 gigawatts with 20 GW being completed by 2010. This will consume another 65 million tons of coal or an increase of roughly 6.5% over current production not counting increases in other areas.

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 - $67.84 - FMC Technologies ** Stop Loss $63 **

After a +$14 run it was time for a pause. The decline on Friday mirrored the decline in oil prices and left us plenty of room above our stop. Earnings are July 25th and should be strong. I am recommending a hold until after earnings. The rally has been strong and we could see some profit taking ahead of earnings.

RBC Capital Markets issued a report on FTI last week saying it should be a core holding through 2010. They suggested FTI would be insulated from the price of oil due to the strong deepwater drilling program over the next 3-5 years. RBC raised estimates between 8% to 16% over consensus.

The July $55 insurance put is nearly worthless but we will continue to hold it as disaster insurance.

Current Recommendation: Hold until earnings pass

Earnings schedule: July 25th after the close.

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.

FTI announced on June-20th a $130 million contract from Chevron for undersea pipeline equipment and production systems.

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 - $31.31 - Titanium Metals

Not a good week for TIE with a -$3 drop from its highs. There is simply no traction and TIE is stuck in its current congestion range. We have a $30 July put so there is little risk for the next two weeks. After the July expiration we will need to make a decision to continue.

Current Recommendation: Hold

Maintain a profit stop: Long July $30 Put @ $28.00

Earnings Schedule: Early August, no date set

Prior commentary:

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.

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


Entry $38.22 (5/28)

BHP - $42.93 - BHP Billiton Limited ** No Stop **

BHP is holding at the highs and bucking resistance at $44. No complaints here. Higher steel prices (+19%) should help profits for the coming year. Record oil prices do not hurt either since BHP also produces oil and gas. BHP did experience some weakness after a bearish report from Phelps Dodge suggested prices could fall for copper, nickel and zinc over the next two years. Since Phelps is buying nickel miners Inco(N) and Falcobridge (FAL) it would favor them to talk down metals prices ahead of the deals.

Current recommendation: Hold, Buy @ $40

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

Earnings schedule: Aug 23rd

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).

BHP is the second largest global producer of copper, 3rd largest producer of nickel, 4th in uranium, 5th in aluminum and zinc. BHP is also the number one sea borne supplier of coking coal and manganese. BHP also produces oil and gas.

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 - $44.62 - McDermott ** Stop loss $41 **

MDR has turned into a snail but the long-term trend is still higher. The 3:2 split impact from June 1st appears to be fading but resistance is stubborn at $46.50. Instead of buying a new insurance put I am changing the directions to exit with a stop at $41. No reason to continue holding if MDR won't move higher on record oil prices.

Current recommendation: Hold

Earnings schedule: Early August, no date set

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 - $107.90 - Petrochina ** No Stop **

PetroChina continues to fight resistance at $111 but there was no real weakness until oil cracked Friday afternoon. Once over $111 I think $120 will not be far away. If oil prices do move higher over the next two weeks we should be back in the black on PTR. It has been a long round trip but we will be rewarded. The real question is how we play the next decline in oil prices. Puts are expensive so selling calls will probably be the vehicle. Warren Buffet is a strong investor in PetroChina.

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.

Current recommendation: Hold

Earnings schedule: Late August, no date set

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 has been pounding the table on PTR 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 $30.47 - Goldcorp ** No Stop **

Goldcorp continues to fight resistance at $31.50 with gold prices stuck between $620-635 for the week. The falling dollar will eventually push gold higher and Goldcorp will follow along. Political instability in Iran and North Korea could help push gold higher. Potential inflation in the US would also do the trick. Goldcorp's own press release last week stated, "Goldcorp is the world's lowest-cost and fastest growing multi-million ounce gold producer with operations throughout the Americas and Australia. The Company does not hedge its gold production." CEO Ian Telfer said, "World gold supplies are under pressure and mine production around the world is declining."

Current recommendation: Hold, Buy over $32

Maintain a profit stop on July $27.50 put GG-SY @ GG @ $25.

Earnings schedule: August 10th, PM

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.

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.

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 @ $25

Entry $36.00 (5/01)

CSX - $67.33 - CSX Corp ** No Stop **

After a banner week racing into quarter end CSX blew a tire in July and fell back to earth. The uptrend is still intact but record oil prices put a crimp in the transportation sector. They will recover since higher gas/diesel prices will push more shippers to use the railroads rather than trucks. Railroads have a lower cost per mile and a lock on their customer base. 99% of railroad customers are served by only one railroad. CSX has one of the most profitable customer bases on the continent. Earnings are close and should be strong. Shipments of construction materials are down along with the housing sector but shipments of coal and ethanol are way up along with beef exports. Railroads have adopted a page from the trucker's playbook with fuel surcharges taking care of rising fuel prices.

The insurance put is out of range but we will leave the profit stop on it just in case the market rolls over.

Current recommendation: Buy above $64

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

Earnings schedule: July 18th after the close


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 $52.

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 - $56.98 - Peabody Energy ** No Stop **

BTU announced the acquisition of Australia's Excel Coal for $1.4 billion. The market liked the deal and BTU rose on the announcement. Excel is expected to boost its production from 5.6 million tons in 2005 to 15 million tons in 2007. BTU already produces about 60 million tons per quarter so at 2007 levels Excel will amount to about 6% of the 255 million ton total. The key to the equation is the distance from Australia to the high-demand markets like India and China as well as the volume of metallurgical coal Excel produces. If BTU is on the acquisition path James River (JRCC) and Foundation (FCL) have been rumored as targets as well as Massey Energy (MEE) and Consol Energy (CNX). Those would require a much stronger investment and face some regulatory hurdles.

We have been unbelievably unlucky on our insurance puts on BTU. Every one was filled near the highs for the day, low for BTU, and was followed promptly by a strong jump in BTU rendering our put worthless. I am hesitant to buy another one and I plan on selling an in the money calls when gas prices roll over. That collapse could last more than a month so we should be safe. I just want to get past the earnings before making any new moves.

Current recommendation: Hold ahead of earnings

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
Cost increased 6/30 by +2.15 to $14.65

Insurance Put: (closed 6/30)
July $45 Put BTU-SI @ $2.40, 6/13, exit 6/30 @ .25, -2.15

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 - $40.25 - Cameco ** No stop **

CCJ continued to hold its ground above $40 but I am surprised there has not been a stronger move higher. There is far less uranium than gold and uranium prices continue to move higher. Only uranium producers are stuck in neutral. Eventually some spark will set the sector in motion again and we have plenty of time.

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

Current recommendation: Hold

Earnings Schedule: July 27th

Original Play Description:

We were triggered on the breakout at $72.50 on Monday and again on the $67 breakdown target on Wednesday. Each trigger was for a 1/2 position giving us a full position with an average cost of $9.80 each. That turned out to be the closing price on Friday so if you missed either opportunity you did not miss anything. We are going to add another full position after CCJ splits on Feb-23rd.

This is my best single play in the list. Cameco just announced record earnings and raised their forecast for 2006 and beyond. They projected a +40% rise in revenue and a rise in margin from 23% to 28% for 2006. At the same time they announced a 2:1 split for Feb-23rd on the NYSE. They also raised the dividend to 32 cents from 24 cents payable on April 13th.

They also announced they were buying Zircatec for $108 million. Zircatec is a maker of nuclear fuel bundles for Canadian designed heavy water reactors. They said the acquisition would moderately boost 2006 earnings assuming no material changes in operations.

The combination of events including the purchase of Zircatec caused the stock to plunge from its all time high of $82.15 on Feb-1st to close at $69.97 on Friday Feb-3rd. That level remained support for the entire week through Feb-10th.

Company Info:

Cameco Corporation is engaged in exploring, developing, mining and milling uranium ore to produce uranium concentrates. The Company is also a commercial converter of uranium concentrates (U3O8) to UF6 (uranium hexafluoride), as well as a supplier of services to convert uranium concentrates to UO2 (uranium dioxide). Cameco, through its subsidiaries, has a 31.6% limited partnership interest in Bruce Power Limited Partnership, which operates six nuclear reactors in Ontario, Canada. Cameco also owns 53% of Centerra Gold Inc. (TSX: CG), a growth-oriented gold mining and exploration company engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.

Pre-split entries:
Breakout target $72.50 hit
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $10.60 (2/06)

Breakdown target $67.00 hit
Position: 2007 $80 LEAP ZBK-AP 1/2 position @ $9.00 (2/08)

Pre-split average cost: $9.80
Post split position: (4) 2007 $40 LEAP ZBK-AH @ $4.90
Cost reduction: -.75 on 3/21, cost now $4.15

Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
Added after the 2:1 split on 2/24

Put insurance: (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 - $72.61 - Halliburton ** No Stop **

HAL is still struggling under resistance at $75 and there appears to be nothing new regarding the KBR spin off. Earnings are July-21st and we could get some additional data then. The 2:1 stock split will finally occur next Friday after several delays and misquotes on the date over the last several months. Maybe Halliburton at $35 will be more appealing to the masses.

Current recommendation: Hold ahead of earnings

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

Earnings schedule: July 21st before the open

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

PAR on HAL is $100 after the KBR spin off.

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.

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.

Halliburton was awarded a two-year contract with Statoil worth $193 million for cementing, drilling and completion fluid. Statoil said they were the largest contracts of their type awarded in 2006. In addition to the initial term there are three two-year extensions, which should bring the final value to somewhere in the $1 billion range allowing for adjustments.

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 - $65.34 Valero ** No Stop **

VLO found resistance at $67 with multiple tests all week. The decline in oil prices on Friday pushed VLO to the low for the week. People don't realize that Valero is printing money by refining the lower grades of oil at an average price of $54 a bbl and selling it at retail at its 4,700 service stations. This amounts to something around $20 profit per bbl at the current prices. It boggles my mind that VLO still trades at a PE of 10.

Current recommendation: Buy at $64

Earnings Schedule: August 1st

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.

Valero posted a company update on their website in late June. As part of the presentation they project higher earnings than the First Call consensus. Gasoline margins ytd in 2006 are up significantly over 2005. They expect strong year over year comparisons for Q2. According to Valero the US supply of on-road diesel is shrinking and Valero's margins are expanding. Valero estimates crude supplies will have to grow by +1.3 mbpd annually through 2010 just to stay even with demand. They see increased demand for light sweet crude and limited supply. Because Valero refines mostly sour crude their margins are significantly higher than other refiners.

The complete presentation can be viewed here:
<A href="http://media.corporate-ir.net/media_files/NYS/VLO/presentations/Roadshow_June.pdf" target="new">Presentation</a>

Merrill upped VLO to a buy on June 29th.

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

It Won't Be Long Now

With oil prices hitting historic intraday highs, which correspond nicely with contract highs it should not be long before new highs are set and the selling begins. Most analysts are targeting $80-$82.50 as the summer high and that could happen over the next two weeks. Once set and profit taking begins it could be a rapid decline.

The wildcard here is the hurricanes and the next soft deadline for Iran of July 15th. I have more faith in the hurricanes than I do in Iran agreeing to any kind of settlement. This means the outlook remains rocky despite growing quantities of oil in inventory. Everyone is betting on a supply problem while refineries are swimming in crude with more heading in our direction.

My only hope is that the spike to $80, if it happens, will be orderly and with several days of hang time before the decline begins. There is a price where speculators will exit and I believe $80 is the number. We do not want to take any new energy positions before September and we will sell some covered calls once $80 is hit. Once hit we will begin exiting some positions and protecting others.

We are going on a summer position diet with a target of 7-8 positions total before late July in anticipation of an August dip in oil prices. 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

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Current Watch List

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