Table of Contents
Leaps Trader Commentary
The sprint to a new record price for a current month contract took us to $78.40 on Friday but it was a short-lived event. The reason for the spike was geopolitical concerns surrounding Israel, Lebanon, Syria and Iran. I know it sounds strange that Iran and Syria would be involved since Syria's border with Israel is very tiny and Iran is two countries away. Both those countries support Hezbollah and Hamas and both want Israel to be destroyed. It is because of their support for those factions that Israel and Lebanon are currently fighting. Hezbollah is a major faction inside Lebanon with bases, offices, prominent leaders, etc. They exist for only one reason and that is to provoke Israel. They exist on donations from Syria and Iran. Hired thugs would be an apt term. Hezbollah, meaning "Party of God", was formed in 1982 to fight the Israeli occupation of southern Lebanon. Along with the Amal movement, Hezbollah has developed into the main political party representing the Shia community, currently Lebanon's largest religious bloc. It was founded with the aid of Iran and Iran continues to fund it. The civilian wing of Hezbollah runs hospitals, news services and educational facilities and participates in the Lebanese Parliament. Since Hezbollah initiates attacks against civilians in Israel and worldwide and supports such attacks by others the EU, U.S. and many other governments have designated them as a terrorist organization. In March of 2005 the European parliament voted overwhelmingly to adopt a resolution stating "Parliament considers that clear evidence exists of terrorist activities on the part of Hezbollah and that the EU Council should take all necessary steps to curtail them." Wikipedia.org has a complete list of Hezbollah activities, organizations and links to other terrorist groups. It is very informative.
Why the current conflict matters to oil prices is even less clear. Israel and Lebanon have almost no oil and do not export any. If you add in Syria the total exports of all three countries is well below 200,000 bpd and production from Syria is declining at about -25% per year. They are not a factor in the oil equation. However, Iran has promised to come to Hezbollah's aid and Iran is the number two oil exporter in OPEC and the most unstable. Iran can't participate in the attack militarily or risk getting hammered by Israel supporters led by the US. With their nuclear ambitions in jeopardy and under review by the UN Security Council it would not be in their best interest to start waging war with Israel. They can however wield their oil card to try and bring pressure on Israel by the more civilized world powers. If Iran threatened to cut off its oil exports the price would jump to $100 or more within days and severely impact global economics. They have threatened to do it if they are forced to stop their uranium enrichment and could easily do it to support their anti Israeli Hezbollah military arm. It would be a non-violent act and entirely possible. In most circles it is thought that Iran and Syria were behind the kidnapping of the two soldiers. Israel was already tearing up Gaza looking for the first soldier when Hezbollah suddenly crosses the border and abducts two more? Kill them yes but abduct them? It had Iran's planning written all over it according to most analysts. Iran wanted to take the focus off itself and put on Israel instead. Knowing America would side with Israel it would damage American credibility in the Middle East at a time when it was trying to develop support against Iran. Traders fearing an oil embargo by Iran bid prices higher on Friday triggering significant short covering.
Saudi Arabia joined the war of words on Friday by harshly criticizing Hezbollah for escalating the situation saying "uncalculated adventures" could precipitate a new Middle East crisis. With Saudi taking sides against Iran and Syria it is diffusing some of the impact. There are fears now that Israel will push Hezbollah back away from its borders and innocent Lebanese civilians are paying for Hezbollah's adventure with their lives. The infrastructure in Lebanon is being systematically destroyed and the best tourist season in decades has been eliminated. Hezbollah has always claimed their involvement in Lebanon was important as a security force against Israel. Lebanon could now look at them and wonder rightly if the cost is too high. The fledging government in Lebanon has been under pressure to reduce the Hezbollah presence given their terrorist ways. The billions in damage is far more than Lebanon can afford and this could eventually be a catalyst for Hezbollah to be evicted from Lebanon. I know this is far from being directly energy related but in the greater scheme of things it comes back to Iran. If Hezbollah is seen to be losing the battle Iran will be more likely to come to their aid rather than watch from afar as they are wiped out. Iran has already warned that any Israeli attack on Syria, Hezbollah's closest supporter and just miles away from the current battle, would be an attack on all of Islam. He said Israel would face a fierce response suggesting others beside Iran would come to Syria's aid. It would not take much for Syria to provoke Israel into trading fire and for Syria to then claim it was attacked. Once Iran takes action of any kind the entire situation will escalate to the next level and more players will appear and the potential for a disruption in oil exports will increase significantly.
Nigeria also added to the price spike with multiple explosions at production facilities and a further loss of production. Italy's Eni, the operator at the location said production would resume soon but the damage to production fears was already rippling around the world.
Stronger than expected gasoline demand last week and a sharp drop of -6 mb of crude inventories also helped fuel the spike. The drop in crude was due more to the ship channel closing the prior week than excessive demand. It also lowered refinery utilization by more than -2% while the cleanup was in progress. Everything should be back in full production next week.
Natural gas futures rebounded even more strongly than oil prices with the August contract spiking from last week's $5.47 low to a high of $6.46 on Friday. This +18% spike came on a strong jump in demand due to very hot weather returning to the south. Temperatures will have to be triple digits from coast to coast for the rest of the summer to produce any sizeable draw in natural gas inventories. Injection into storage over the last week was a net addition of +89 billion cubic feet bringing storage levels to 2,704 bcf. We only need a net addition of +37 bcf for the next 18 weeks to match the highest storage on record of 3,327 bcf going into winter.
America's gas drillers are punching holes as fast as they can setup drilling rigs. My son works on an Ensign rig in the Jonah field in Wyoming. They are paying top pay with raises almost monthly and strong incentives and they can't keep workers. There is so much demand workers change jobs almost monthly for even more money. My son had no experience when he started 8 months ago and now he is second highest in seniority on his rig making about $68K a year working two weeks a month. I would have killed to make that kind of money when I was 27. This illustrates how much demand there is for gas rigs and why there is a glut of gas at present.
The glut is only temporary and due in most part to the warmest winter on record in most of the US. Gas levels were never depleted and a mild spring continued that low demand. Unless temperatures move over 100 and stick for the next six weeks we will have a new record for gas in storage going into winter. That is where the rubber will meet the road. Having two record winters back to back is nearly unheard of and odds are good the climate will shift to an icebox winter and normal gas consumption will return. The December contract for gas rallied back over $9.80 on speculation the trend was about to turn in favor of consumption.
You may have noted that although oil prices were at record levels very few energy stocks were moving higher. It does not take a rocket scientist to see that crude inventories are nearly +10% over the five-year average and we are in no danger of running out of oil over the next month. Demand will begin to slow beginning this week and fall off a cliff on September 5th. The markets are already pricing this into stock prices although oil prices are still impacted by geopolitical concerns. Most energy stocks are still valued on less than $50 oil but established demand cycles are hard to shake. Seasonal demand is going to slow and that means lower prices ahead as we head into August. The wild card here is the hurricane season and of course Iran. Iran is already priced into the market unless they do something stupid. Hurricanes are not since we have not yet had any. Once the first one is spotted prices of crude, natural gas and service company stocks and drillers will begin to rise. No hurricanes, no August gains.
This is why I have not been adding any new energy plays. There are several I wish I had added since they have broken from the pack and pushed higher but overall it is better to wait for the dip and pick our entries.
The International Energy Agency, adviser to 26 nations, said demand will rise faster in 2007 than previously expected. They are currently estimating global demand will increase by 1.57 mbpd in 2007. This compares to the +1.6 mbpd growth the EIA projected for 2006 and the +1.4 mbpd growth expected in 2007. Averaging them still suggests growth will climb by nearly +1.5mbpd in 2007. The IEA went farther and suggested that demand growth would continue to rise by +2% per year into 2011 to 93.7mbpd. Currently we will consume something just north of 86.5 mbpd in 2006 after averaging the seasonal demand patterns. My math must be questionable because I calculate +2% demand growth to be 95.5 mbpd at the end of 2011 but 93.6 mbpd at the start of 2011. They must be using Jan-1-2011 as their calculation date since they say "IN" 2011 rather than at the "end" of 2011.
Since there is only about 600,000 bpd of excess production today, all heavy crude, I constantly wonder where this 7.2 mbpd of new production will come from over the next four years. We already know production from Venezuela and Mexico is falling. Saudi is spending $100 billion to raise production by 1.0 mbpd by 2010. Where is the rest? Iraq hopes to add another 1.0 mbpd by 2009 but do we really count on it until it is on the boat? The IEA says non-OPEC supply will increase next year by +1.7 mbpd compared to an increase of only 1.1 mbpd in 2006 and zero increase in 2005. According to the IEA after 2007 OPEC will have to supply all the additional increases. Unfortunately I don't see any other OPEC countries spending $100 billion to increase production. There is some frantic gas drilling in progress but very few oilrigs. Why? It is because they already know there is very little oil left to find! Most have already resigned themselves to improving their gas extraction rather than waste money punching dry holes searching for oil. The IEA and the EIA are good at issuing monthly and yearly projections of demand growth but are far from adept at suggesting exactly where that oil will appear. I have never heard either one discuss depletion. You know, that -4% annual decline in existing production from old fields. Using the IEA/EIA models existing fields must continue producing forever. I wonder if anyone actually uses their data or do the governments pay them to keep producing pretty numbers to avoid the public from knowing the real truth? That truth will eventually come back to bite them and us but at least we will be prepared for it.
Since there will be less play commentary over the next several weeks as we await the August decline I am going to devote more space to the general commentary and outlook for the future. Once we get a serious dip in prices we will start adding position targets again. I know this is boring for those itching to add some new positions but I only want to add profitable ones and those will be on the next correction in oil prices. Until then we wait and watch.
The sharp drop in the market subtracted from our recent gains on some positions. Despite the rise in oil and gas prices the profits from the June gains were an inviting target for sellers. In times of market stress, recent gainers are often big sellers as holders try to extract those gains before they turn into losses. This is not a trading newsletter so we will see some evaporation from time to time. Some stocks like Walter gave back -$5 while others like BHI gained +$5. We pay our money and take our chances.
December Crude Oil Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
OIX - $633.89 - Oil Index Portfolio Hedge
No Change in play. I was encouraged that record oil prices did not push the OIX any higher. It has stagnated at 635 for two weeks and that suggests the ride back down could be very quick once it starts. Hopefully there are no hurricanes in our immediate future.
Current recommendation: Buy under $615
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.
Sept $550 Put OIX-UJ @ $12.00, no stop.
WLT - $51.00 - Walter Industries ** Stop Loss $49.50 **
No change in play. Walter gave up the ground it so valiantly gained in the prior week despite a rise in gas prices. Market weakness is readily apparent in recent gainers as quick profits are extracted even quicker. We came within 10 cents of being stopped out. No earnings date has been set.
Current recommendation: Hold
Earnings schedule: Late July, no date released
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.
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.
2008 $60 LEAP Call YZG-AL @ $7.30
Entry $48.39 (6/26)
BHI - $83.58 - Baker Hughes Intl ** No stop **
No change in play. BHI regained lost ground and is again knocking at the $84 resistance door. Earnings are still two weeks away so no real risk yet.
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
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
6/08 (closed 6/13)
Entry $85.24 (6/6)
SLB - $68.07 - Schlumberger Ltd ** Stop Loss $62.00 **
Outstanding week for SLB with better than a $5 gain and a new two month high. SLB was one of the better performing stocks for the week. No complaints here. Earnings are next Friday.
Current recommendation: Hold
Earnings schedule: July 21st, 6:AM, conference call 9:AM
Schlumberger Limited (Schlumberger) is an oilfield services company, supplying technology, project management and information solutions. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. WesternGeco, 70% owned by Schlumberger and 30% owned by Baker Hughes, is an advanced surface seismic company.
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.
Position: Jan $70 Call VWY-AN (SLB-AN)
Insurance put: Entry 6/12
Insurance put: (Closed 6/8)
Entry $66.25 (6/04)
ACI - $36.56 - Arch Coal Inc ** Call Stopped $36.50 **
We were stopped out on the Friday morning dip for a breakeven. As per my recommendation last Sunday I am reentering the play with a 2008 $50 LEAP. Earnings are next Friday and I expect very positive results.
Current Recommendation: Buy under $38 using YEP-AJ
Earnings schedule: July 21st AM
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.
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.
New position: (July-14th)
Position closed: Jan $55 Call ACI-AK @ $4.50
put: (closed 6/8)
FTI - $69.55 - FMC Technologies ** Stop Loss $66 **
FTI recovered most of its losses and is headed back for a retest of the highs. Earnings are in two weeks and our July insurance put is going to expire worthless. I raised the stop but hopefully it won't be needed.
Earnings schedule: July 25th after the close.
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.
RBC Capital Markets issued a report on FTI in early July 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.
Breakout trigger $63.50 Hit 5/23
Insurance put: (closed 6/8)
Entry $63.50 (5/23)
TIE - $26.75 - Titanium Metals
That was really ugly. Tie lost -$8 or roughly -25% in less than a week. Two titanium stocks were downgraded by an analyst at Longbow Research from buy to neutral citing supply chain issues and rising inventory levels. Boeing and Airbus have both said production schedules were running behind but both planes were overweight. This will require more titanium but may require some retooling and delays in implementation. RTI and ATI were the stocks downgraded but TIE was hammered for nearly a $10 loss. The gap down on Thursday took us out of out insurance put for a $1.40 profit at $28 but the drop continued another -$5 to just over $23. The long call lost -70% of its value in the drop and is trading at 80 cents. I refuse to sell it for that since the damage is already done. $25 is decent support and we know from past experience TIE can move quickly higher once the trend starts. We will hold it until the August earnings and then make a decision about an exit. There is not enough premium on out of the money calls to justify adding risk by selling a call.
Current Recommendation: Hold
Earnings Schedule: Early August, no date set
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.
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.
Insurance put: (closed 7/13)
BHP - $42.20 - BHP Billiton Limited ** No Stop **
BHP sprinted to a new two month high on Wednesday at $44.75 but fell back on the market weakness to close flat for the week. I am still recommending a buy at $40. I believe metals stocks are about to stage a comeback.
Current recommendation: Hold, Buy @ $40
Maintain a profit stop on the long $35 Put BHP-TG @ $31.
Earnings schedule: Aug 23rd
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
Entry $46.75 (5/15)
MDR - $43.78 - McDermott ** Stop loss $41 **
MDR is still treading water above support and refuses to roll over but forward progress is also tough. Earnings are still a long way off so honor the stop if hit.
Current recommendation: Hold
Earnings schedule: Early August, no date set
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
PTR - $110.85 - Petrochina ** No Stop **
Hurray for Petrochina! Despite the market weakness PTR closed at two-month highs on Friday. News that China grew +10.9% last quarter was a factor in PTR success. PTR owns 14,000 service stations in China and growth is great for consumption!
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
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.
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
Insurance combo: Closed
Entry 5/14 $116.20
GG $29.78 - Goldcorp ** No Stop **
Goldcorp continues to fight resistance at $31.50 despite gold prices rising to $665. The market weakness pulled stocks back from their highs and there is nothing we can do about that. GG did rise to resistance at $31.50 before Wednesday's market decline began. Plenty of time with a 2008 LEAP and I heard another analyst on Friday projecting $800 gold this year. Earnings should be very strong since GG does not hedge their gold.
Maintain a profit stop on July $27.50 put GG-SY @ GG @ $25.
Earnings schedule: August 10th, PM
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
Entry $36.00 (5/01)
CSX - $64.57 - CSX Corp ** No Stop **
Soaring oil prices too their toll on the transports and CSX was no exception losing -$3 for the week. Friday's close was squarely on the 100-day average and decent support in the past. Earnings are Tuesday.
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
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.
Insurance Put: (closed 6/08)
Entry $60.50 (4/03)
BTU - $54.33 - Peabody Energy ** No Stop **
No change in the play. BTU was hit with market weakness like everyone else and gave up -$3 from last week's levels. Earnings are next week so fireworks could start soon.
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
Peabody Energy Corporation (Peabody) is the largest private-sector coal company in the world. During the year ended December 31, 2004, the Company sold 227.2 million tons of coal. It sells coal to over 300 electricity generating and industrial plants in 16 countries. The Company owns, through its subsidiaries, majority interests in 32 coal operations located throughout all the United States coal producing regions and in Australia. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. In the West, it owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the East, it owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. The Company owns four mines in Queensland, Australia. Most of the Australian production is low-sulfur, metallurgical coal. In addition to the mining operations, the Company markets, brokers and trades coal.
Position: 2008 $55 LEAP Call LLW-AK @ $9.50
Insurance Put: (closed 6/30)
Insurance put: (closed 6/9)
April 8th covered call:
April 24th covered call:
Entry $48.00 (3/07)
CCJ - $40.00 - Cameco ** No stop **
No change in play. CCJ retreated to $40 on market weakness after making a new six week high at just over $42. Earnings in two weeks and profits could be strong. It could ignite another buying cycle.
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.
Cameco Corporation is engaged in exploring, developing, mining and milling uranium ore to produce uranium concentrates. The Company is also a commercial converter of uranium concentrates (U3O8) to UF6 (uranium hexafluoride), as well as a supplier of services to convert uranium concentrates to UO2 (uranium dioxide). Cameco, through its subsidiaries, has a 31.6% limited partnership interest in Bruce Power Limited Partnership, which operates six nuclear reactors in Ontario, Canada. Cameco also owns 53% of Centerra Gold Inc. (TSX: CG), a growth-oriented gold mining and exploration company engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.
Breakdown target $67.00 hit
Pre-split average cost: $9.80
Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
insurance: (expired 6/18)
Monday Mar-20TH cost reduction strategy:
HAL - $73.90 - Halliburton ** No Stop **
HAL managed to close positive for the week despite cancellation of a big government contract in Iraq. It was probably a relief and they typically don't make much after the smoke clears.
I am actually proud of HAL's performance last week given the news. There was a downgrade of several other service stocks to a sell and HAL held its ground despite the sector downgrade, contract loss and the market weakness. Maybe the tide has finally turned.
According to Yahoo and the CBOE HAL split 2:1 on schedule after the close. This has been the worst communicated split in history. The Halliburton site contains no information on it in any easy to track form.
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
PAR on HAL is $100 after the KBR spin off.
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.
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
Our adjusted cost in the 2007 $80 LEAPS is now $11.25
VLO - $64.84 Valero ** No Stop **
VLO gave up -50 cents for the week and that is a strong showing in my book. Crack spreads rose to 50 cents a gallon early in the week but declined to 38 cents by Friday. This is for light sweet crude or $21 a bbl profit (@ 50 cents) for refiners. VLO uses the cheaper heavy crude and typically does much better. Earnings should be very strong but we have to wait two more weeks.
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!
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:
Merrill upped VLO to a buy on June 29th.
Position: 2007 $60 LEAP Call VHB-AL @ $6.60
Monday Mar-20TH cost reduction strategy:
Entry $52.30 (12/16)
Leaps Trader Watch List
Creating a List
I am going to start populating a list of candidates for the expected end of summer demand drop. When the time comes everyone will already know who we are watching and why. I am also mentioning Husky Energy as a breakout play given its current performance and relation to CEO. Unfortunately it does not have options so everybody might want to consider it for an IRA play.
I am adding CEO this week to the future entry list. That is the CNOOC Limited or commonly known as China National Offshore Oil Company. Husky just discovered oil in 5000 ft of water 150 miles south of Hong Kong in the Liwan 3-1-1 field. This is the first discovery in that block, which covers 3900 square kilometers. The current discovery in that block was indicated by 2D seismic suggesting this particular oil deposit covered 61 square kilometers. Besides oil Husky thinks there of 4-6 trillion cubic feet of extractable gas. It would be one of the largest natural gas discoveries offshore China. This entire block is being compared to the Gulf of Mexico for China and that puts Husky and CNOOC in the right place at the right time.
CNOOC has the rights to 51% of the Husky find. This means CNOOC struck black gold at the same time Husky did and they have options. You will note in the play descriptions below that Husky is involved in many areas of energy exploration and production. Sure wish they had options. Until then we will have to console ourselves with CEO as a potential play.
Current Watch List
Husky Energy - Toronto Exchange (TSX:HSE)
Husky Energy Inc. is a Canadian integrated energy and energy-related company with operations in upstream, midstream and refined products. The upstream business includes the exploration for and development and production of crude oil, natural gas, natural gas liquids and sulfur located throughout the Western Canada Sedimentary Basin in the provinces of Alberta, Saskatchewan, British Columbia, offshore the Canadian East Coast, in the South and East China Seas, offshore Indonesia and other international areas. The midstream operations include the upgrading of heavy crude oil into premium synthetic crude oil, pipeline transportation, gas storage, cogeneration, and the marketing of crude oil, natural gas, natural gas liquids, sulfur and petroleum coke. Refined products comprises the refining, marketing and distribution of gasoline, diesel, asphalt, ethanol and ancillary services in Canada and the United States and a network of retail outlets from Ontario to British Columbia and the Yukon.
No options but suitable for an IRA.
CEO - CNOOC Limited
CNOOC Limited is a producer of offshore crude oil and natural gas and an independent oil and gas exploration and production company. It mainly engages in oil and natural gas exploration, development, production and sales. The Company has four major oil production areas offshore China, which are Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. It is an offshore oil producer in Indonesia. The Company also has certain upstream assets in regions, such as Africa and Australia. As of December 31, 2005, it owned net proved reserves of approximately 2.36 billion barrels-of-oil equivalent (BOE) and its annual average net production was 424,108 barrels-of-oil equivalent per day (BOEPD).
CEO has been rather volatile over the last year but the 50-week moving average currently at $75 has been decent support. The June drop in oil prices saw CEO trade as low as $70. I want to target the $70 level on any future dip.
CEO does not have LEAPS so I am going to email everyone the play particulars depending on when that $70 level is hit. Currently December is the longest option series available. I am hoping before $70 is hit a new series in 2007 will be added.
I repeat, we will buy the dip sometime in August. Details to follow at that
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