Table of Contents
Leaps Trader Commentary
Oil spent a week trading flat between $73.50 and $75 while waiting for the next geopolitical shoe to drop. That drop came on Friday as the UN and several nations friendly to Israel called on them to end the fighting and for a peacekeeping force to take their place. This calmed fears that the conflict would escalate and oil dropped -1.15 on the news to a four-week low on the September contract.
Energy stocks were already trading on both sides of the ledger with some moving higher and some moving lower. Traders were using selective vision in their stock choices based on guidance from the various earnings reports. Exxon, a tortoise of a stock with six-billion shares outstanding, gained nearly +$10 over the last eight weeks as investors fled to the safety of large earnings. Exxon posted a profit of $10 billion for the quarter and claimed for the first time in recent memory that they were selling all their production and hinted at tight supplies. Under their prior CEO the price of oil was always blamed on the market because there was "plenty of oil" and no Hubbert's Peak in sight. Evidently the new regime has not caught on to the finger pointing elsewhere to take the focus off the record profits. Exxon did manage to increase their production by +6%, which is an amazing accomplishment given their broad scale.
Chevron disappointed with lower than expected earnings after analysts over compensated for the addition of Unocal production to their revenue and earnings. Oil companies are reaping massive profits with an average selling price for the quarter around $66 for a bbl of oil. With oil hovering between $73-$75 last week it would look like there were more good times ahead. Several analysts disagree. JP Morgan expects prices to remain over $70 in Q3 due to hurricane risk but falling to $65 in Q4. Oppenheimer sees a continued $67 average for the rest of 2006 and rising to $71-$72 in 2007. For prices to average $67 for the rest of 2006 that suggests we could see numbers around $60 before the year is out. Of course this estimate was also predicated on nothing happening on the geopolitical arena or weather in the Gulf.
Based strictly on the charts there is very strong support at $70 with a decent speed bump at $72 where the 100-day average is resting. The refinery problems over the last two weeks raised the crack spreads to more than $20 again and producing huge profits for the refiners, especially Valero. That will not last once the summer driving season ends. I created a nice bar chart for the Option Investor wrap this weekend and I am repeating it below for reference. Gasoline demand has yet to ease significantly since the July 4th peak but it is only a matter or time. Once inventories begin to rise again the price of oil will drop sharply, weather permitting.
Natural gas was the winner for the week with a spike from the $5.63 low on the 18th to a high of $7.38 on Thursday. The rise in gas was due to the very hot weather across the country. Utilities experienced record electrical demand and gas supplies saw their first decline of the summer of -7.0bcf. This compares to the net additions we have been seeing of +60 to +70bcf. With some supplies still offline in the Gulf and the potential for hurricanes to at least temporarily shut in some more it appears there could be additional upside for gas prices. Just two weeks ago the outlook was grim with supplies +28% over the 5-year average. That was down from the June-1st level where supplies were +52% over the 5-year average but still very plentiful. If the hot weather continues the trend in the graph below will continue as well. This image represents how much larger gas supplies are compared to the five-year average. The percentage was higher late in the spring because the warmest winter on record failed to produce any demand. Gas supplies rose sharply to peak in mid-April. As summer progresses the percentage over the 5-year average actually fell steadily despite the very strong insertions into storage. Just a couple weeks ago analysts were talking about the potential for record storage levels going into the coming winter. Now that talk has reverted back to worries about supplies if August temperatures follow the pattern for the last couple weeks.
Earnings are nearly over for the energy sector. Energy companies tend to congregate in the past week and everyone report together. Only a few stragglers remain who have random reporting dates. The analysts were mostly positive about the energy sector and guidance with oil still comfortably over $70. Energy companies are still valued based on oil under $50, sometimes well under $50. That leaves plenty of room to grow but not until after we get the end of summer decline in oil prices. There is a neutral zone where demand declines and refineries begin the switch back to heating oil. This is where I hope to pick up some bargains before the winter price rise begins. My only hope is that we don't see any hurricanes before we get our entries. Otherwise we could get a crisis spike that prevents the regular dip from occurring.
I am not expecting any material gains over the next couple weeks without a hurricane. Energy should go dormant once earnings are forgotten. Be prepared to jump if the situation warrants as we maintain the hurricane watch.
December Crude Oil Futures Chart - Daily
December Natural Gas Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
None this week
No Change in play. The gains in Shell, OXY, MRO and Exxon powered the OIX to a new high. Now that the news is out we should see a loss of excitement soon. I would continue to enter the OIX hedge but probably use a higher strike than the initial Sept-550 put.
Current recommendation: Buy above $600
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.
That was highly volatile week with BHI rebounding from $75.40 on Monday to $82.40 on Thursday. After BHI reported earnings on Thursday that rose sharply but their cautious tone in reference to the rising supply of natural gas knocked them back to $78 again. They were very positive about the future but felt gas drilling in North America could slow if supplies were not drawn down soon. I am still positive about BHI and would buy them on weakness.
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. We will take the stop at $73 it touched.
Current recommendation: Hold, Buy under $76
Earnings: July 28th, EPS $4.14, $1.4 billion
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)
Arch finally started to recover after the beating it took the prior week. Earnings are behind us and warmer weather is drawing down natural gas supplies. Coal in general should begin to rebound. I added a stop just under current support. The next support level is just over $30.
Current Recommendation: Buy under $35
Earnings: July 21st, $69.6 million, $0.48 cents
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 Jan 2008 $50 LEAP Call YEP-AJ @ $4.20
Entry $48.36 (5/31)
TIE rebounded and gained +$4 for the week after posting earnings that rose +64% for the quarter. Profits were $54.3 million or 31 cents per share. With Simmons making huge buys it is sure to promote confidence of support at $25.
Billionaire Harold Simmons, Chairman of TIE, bought 275,000 shares last week at an average price of just over $26. He has bought $53.6 million in TIE stock over the last 18 months. His last purchase was May 18th for 200,000 shares at $34.88. He now owns 59.8% of TIE stock. If he is buying at $26 maybe we need to double down here.
Current Recommendation: Buy over $25
Earnings: July 24th, +64%, $54.3M, 0.31 cents
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.
December $45 Call TIE-LI @ $5.70
Cost reduction: July $30 Put, -1.40, cost = 4.30
Insurance put: (closed 7/13)
July $30 PUT TIE-SF, 6/8 @ $2.00, exit 7/13 @ $3.40, +1.40
Entry $38.22 (5/28)
No change in play. We have a stealth rally underway in mining stocks and BHP continues to move higher although slowly ahead of earnings in August.
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
Position: 2008 $50 LEAP Call LPH-AJ @ $7.50
Cost update: Closed June $40 Put 6/12, -1.10, cost = $6.40
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 managed to gain +3 for the week but remains mired in its congestion range. An earnings date was announced as August 7th so we should get some movement soon.
Current recommendation: Buy @ $40
Earnings schedule: August 7th
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
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
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)
No change in play. Outstanding performance with a +6 gain for the week. We are back to within $1 of our original entry point after a -$25 drop. Keep the faith!
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: August 24th according to Ameritrade
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
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
Even the best stock in the group will slip if the entire sector is under attack. The UPS and NSC earnings plus warnings of an economic slowdown has tanked the transport sector. I am adding a stop at $59 to take us out for a profit it the weakness continues. $60 should be support but I am not counting on it.
CSX Corp, posted earnings that beat the street by 51 cents and was +127% over the same quarter in 2005. They also announced a 2:1 stock split, a 10 cent post split dividend (+54%) and a $500 million buyback program over the next 12 months. They said business was so strong they expected to raise prices up by +6% this year and again in 2007. They did receive some insurance payments related to hurricane losses that inflated earnings slightly but were roughly equivalent to the profits they would have made without the hurricanes. The company said business was booming for as far out as they could see.
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: Hold
Maintain a profit stop on the Aug $55 Put CSX-TK @ CSX $52
Earnings schedule: July 18th
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
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)
Maybe the bleeding in BTU and the coal sector has stopped with the hot weather. The rise in gas prices helped put a floor under coal but we don't know if it is temporary. BTU has strong support at $44 and it appears to be holding.
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: Buy under $40
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
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)
No change in play. It appears earnings breathed life back into the stock and there is actually a five day uptrend in progress! CCJ reported a +45% jump in revenue and a +138% increase in earnings. That is not too shabby and confirms why we should still continue to hold CCJ. Very few companies are immune to inflation, recession, energy prices and even wars but CCJ would be my best bet to weather them all. They did warn slightly for Q3 due to seasonal patterns and mining challenges. Nobody complained. They guided revenue for the full year to rise +50% and for margins to improve to 30% from 23%. They also approved a 4-cent dividend for October. Whoa! Somebody restrain me! You might be able to buy a tank of gas with that dividend check. No problem, just return to your previous growth rate in the stock price and all is forgiven.
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: July 27th, +138%
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.
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 found some buyers after breaking the $30 mark only briefly. The news and selling appears to be behind us and HAL gained nearly +10% for the week. No change in play here but I for one am adding a few contracts at the current price. $32 is not that far from $40 and there is six months left. Anything can happen.
Current recommendation: Buy over $30
Earnings: July 21st, +44% or $0.55 cents
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.
2007 (2) $40 LEAP Call HAL-AH @ 5.63
Closed July $32.50 Puts, -1.55, new cost = $4.08
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: (5/22) Contracts doubled by 2:1 split (HAL-SS)
Position: July $65 Put HAL-SM @ $1.00, exit $2.55 7/21
Insurance Put: (7/23)
August $27.50 Put HAL-TR @ $.45
Entry $39.50 (2/06)
Thank you, thank you, thank you. VLO gained over $5 for the week and closed at a new three month high. Earnings are scheduled for Monday and they should be good. The wildcard is refinery outages and plans for their cash hoard.
Current recommendation: Hold
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 in PDF form: Presentation
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
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
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
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)
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.
Monday July 24th:
August $60 Put VLO-UL @ $1.20
Entry $52.30 (12/16)
With a few energy stocks moving higher we may need a serious cold front to provide us with an entry point in late August. That would be a gift given the hot weather pushing gas prices higher. No hurricanes in sight and that may be the real gift. Without production pressures crude will be even more susceptible to an August decline. For now we wait.
I am adding Petroleo Brasileiro (PBR) and Sunoco (SUN) to the list as potential targets on a future dip.
Of course we always have the hurricane wild card to deal us a potential blow. If a cat-5 storm blows through the oil fields like Katrina our best-laid plans could evaporate. That is a chance we take and we will try to manage the problem if it comes to pass.
|New Watch List Entries|
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 time.
UPL - Ultra Petroleum
Ultra Petroleum Corp. (Ultra) is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused primarily in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. As of December 31, 2005, Ultra owned interests in approximately 148,007 gross acres in Wyoming covering approximately 230 square miles. The Company owns working interests in approximately 330 gross productive wells in this area and is operator of 53% of the 330 gross wells. Its domestic operations are focused on developing and expanding a tight gas sand project located in the Green River Basin in southwest Wyoming. During the year ended December 31, 2005, the Company's Wyoming production was approximately 87.4% of total oil and natural gas production on a thousand cubic feet of natural gas equivalent (MCFE) basis and 98.5% of the Company's estimated net proved reserves were in Wyoming on an MCFE basis.
Ultra has been extremely volatile for the last six months with the price of natural gas falling more than -50%. Ultra has current support at $50 but I would like to target something even lower if gas supplies hit a new record late in the summer. $40 would be my initial target depending on the price of oil and gas in September.
SU - Suncor
Suncor Energy Inc. (Suncor), formerly Suncor Inc., is a Canadian integrated energy company that explores for, acquires, develops, produces and markets crude oil and natural gas, transports and refines crude oil and markets petroleum and petrochemical products. Periodically, the Company also markets third-party petroleum products. Suncor also carries on energy trading activities focused principally on buying and selling futures contracts and other derivative instruments, based on the commodities the Company produces. The Company has four principal operating business units: Oil Sands; Natural Gas; Energy Marketing and Refining, Canada, and Refining and Marketing. During the year ended December 31, 2005, the Company produced approximately 206,100 barrels of oil equivalent (BOE) per day, comprised of 174,500 barrels per day (bpd) of crude oil and natural gas liquids and 190 million cubic feet per day (mmcf/d) of natural gas.
Suncor has performed better than the sector over the last month and appears to be holding above $75. I would normally like to target the 200-day average in the $71 range but June's low of $68 is slightly below that average. That makes $60-65 a more likely target as a retest of that June low.
DO - Diamond Offshore
Diamond Offshore Drilling Inc. (Diamond Offshore) provides contract drilling services to the energy industry worldwide and is also engaged in deepwater drilling with a fleet of 44 offshore drilling rigs. The Company's fleet consists of 30 semisubmersibles, 13 jack-ups and one drillship. The Company's offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and jack-up markets. The Company provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.
Diamond Offshore appears to have fallen out of favor with investors and has been on a steady decline since hitting $86 in early July. It has decent support in the $55-$60 range but we need to see a rebound appear before taking a position.
SLB - Schlumberger
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.
SLB has decent support at $55 and again at $50. SLB said business was booming in its July earnings release and yet it still sold off. I would initially target $55 but would want to see some buyers appear before making an entry.
WLT - Walter Industries
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, 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.
We are looking at Walter primarily for its coal and gas operations but water products is also doing well. Dragging WLT lower was the BTU warning and worries over its housing division. Strong support is $40 but like the others we want to see some buyers appear before we make an entry.
PBR - Petroleo Brasileiro
Petroleo Brasileiro S.A. - Petrobras (Petrobras) is a mixed-capital enterprise of which a majority of voting capital must be owned by the Brazilian Government. The Company is engaged in a range of oil and gas activities, which include segments such as exploration and production, refining, transportation and marketing and distribution. The Company operates 95 platforms for production (72 fixed and 23 floating), 16 refineries, 30.318 kilometers of pipeline and 6,154 filling stations spread across the national territory. In addition, to its position in Brazil, Petrobras is present in 15 countries, such as Angola, Argentina, Bolivia, Chile, Colombia, Ecuador, the United States, Iran, Mexico, Nigeria, Paraguay, Peru, Tanzania, Uruguay and Venezuela. It also operates backup support of offices in New York, Tokyo, China and Singapore.
Petrobras has decent support at $85 and again at $80. I would like to see $80 again but we will monitor any drop for a hint of rebound. Try not to catch the knife.
SUN - Sunoco
Sunoco, Inc. (Sunoco), operates through its subsidiaries, as a petroleum refiner and marketer, and chemicals manufacturer with interests in logistics and cokemaking. The Company's petroleum refining and marketing operations include the manufacturing and marketing of a range of petroleum products, including fuels, lubricants and petrochemicals. Sunoco's chemical operations include the manufacturing, distribution and marketing of commodity and intermediate petrochemicals. The petroleum refining and marketing, and chemicals and logistics operations are conducted principally in the eastern half of the United States. Sunoco's cokemaking operations are conducted in Virginia, Indiana and Ohio. The Company operates in five business segments: Refining and Supply, Retail Marketing, Chemicals, Logistics and Coke.
SUN dipped to $63 last week before spiking back to more than $70 on acquisition news. Earnings are August 3rd. I would like to see them back at $60-$62 again but earnings will probably thwart that outlook.
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