Leaps Trader Commentary
Last week we saw the October contract drop to $60 on expiration pressures but the November contract rebounded as those traders rolled over into November. That was little help and the November contract gave up its gains and plunged back to $60 on Friday.
As we have been discussing over the last several weeks the surplus of oil, lack of hurricanes and weakening geopolitical concerns provided the perfect opportunity for an end of summer drop. We planned for it and timed our entries to coincide with a drop to $65 on the October contact. We planned to add additional positions if oil dipped to $60. It appears we got both wishes and if current conditions continue we could see oil under $60 next week. That should be just the dip we need to fill on a couple more entries.
As I described in the Option Investor weekend commentary this is the week for mind games. Fund managers not wanting to show losers in their end of quarter portfolios will continue to sell those losers through next Friday. At the same time they will buy or add to positions on those stocks that have proven to be recent winners. This makes them appear smarter than they are and attracts new investors or at least keeps the current investors. Managers will not want to show investors they held on to losing energy positions while oil dropped -$20 and the biggest correction in two years. This puts energy stocks on the sell list next week. Fortunately this is simply a mind game that fund managers play against the uninformed. Once October rolls around they can dump the winners and collect their profits and rotate right back into energy at the lows for the year and wait for the historical winter rally.
This means we have another week of pain ahead of us but the patient should begin to get better once October arrives.
The exception to this scenario could be gas stocks. Natural gas hit a new two-year low on Friday at $4.59 and there is still more pain ahead. Gas in storage hit 3,177 BCF and a record high for this time of year. With maximum proven capacity somewhere in the 3,500-3,600 BCF range and weekly insertions into storage averaging about 90 BCF we are going to hit that max cap very quickly. There is already price competition as pipeline and storage operators take the cheapest gas into remaining storage to maximize their eventual profits. This will get worse over the next couple weeks unless the current cold front is here to stay. The snow storms in the Rockies and plains this weekend will produce a draw on supplies and that could provide a safety valve for prices. I would not bet on it.
In reviewing about 50 gas companies over the last couple weeks almost all of them, especially the major producers, have hedged their remaining 2006 and most of their 2007 production at floor prices from $8 to $12. This means they have little if any risk and still retain some upside if prices return to the prior levels. All it would take to completely reverse the current situation would be a strong countrywide cold front that lasted 2-3 weeks. Once those record gas supplies begin to deplete we would be right back in the race to refill storage before the next cold spell. The US does not have sufficient production and pipeline capacity to supply gas as it is needed during the winter. We have to rely on the 3+ TCF in storage when winter starts as a cushion against strong demand. In 2003 we came within only a couple days of running out of gas and having pressures in the pipelines fall to dangerous levels requiring shutting down the pipelines.
I am not planning on entering any new gas positions until we get into October and/or gas falls under $4. There are so many contracts for gas at much higher prices that $4 should be a threshold level where support should hold. In checking the November contract currently at $5.88 there is strong support at $4.50 and again at $3.75. The December contract is currently $7.40 and has strong support at $6.50 and again at $4.75. The January contract currently at $7.81 also has strong support at $6.50. The February contract is currently $7.93 with strong support at $6.75 and $5.00. The reason for the current October contract being so cheap is simple. There are record amounts of gas in storage and there have been no hurricanes, record late summer heat waves or early cold fronts to use that gas and those contracts expire next week. If you are still long those futures your fate is sealed.
I sent an email last Sunday explaining that the VLO position was posted in error. The trigger point had been changed to $47.50 but I neglected to change my personal order. When my order triggered I logged it and wrote it up. I was going to remove it from the portfolio but with Friday's close at $48.19 that is close enough to $47.50 for me. I changed the description to reflect the prices at Friday's close.
The November contract spike on Thursday turned quite a few of the new positions back into the green but it was short lived. I am not the least bit worried considering our two-year time horizon.
A reader asked this week why I jumped to 2009 LEAPS instead of 2008 for the new positions. Normally we would cycle into and out of the positions once a year. Because of my expectations for oil to return to $60-$65 from its highs near $80 I decided to spring for the extra $3-$4 per option for the extra year of time. I would rather not be jumping out since I feel we may be getting in at the low for this cycle and possibly the low from now on. We never know when the next geopolitical crisis, war, natural disaster, terror attack, etc will appear and possibly alter the future of energy permanently. If Iran tries to produce a nuclear weapon and ends up blowing themselves up instead it could cause some serious changes in the Middle East makeup. If the current cooling of tensions regarding Iran's nuclear ambitions comes to a head after our November elections we could see Bush go hard line once again. Hugo Chavez could go off the deep end and refuse to sell oil to America. With his $1 billion of arms he is buying from Russia and China he could become a threat that would have to be handled on this side of the pond. Our Gulf oil production is very unprotected from attack by anybody with a boat or plane and it is a wonder the terrorists have not figured this out yet. The Alaska pipeline could easily be severed and kept out of operation for years if the terrorists were smart. We are very vulnerable due to our addiction to oil and the world is a crazy place. I did not even get into the Peak Oil scenario that is looming just over the horizon. That could quickly come into play if the production of a major producer was crippled. If we can get good long-term entries at strong support levels we should be very glad to pay the small increase in the premium.
We were only triggered on one new entry this week and that was Anadarko. We may be triggered on LTR on Monday once the Federal judge rules on the certification of class action status in the tobacco lawsuit. Judge Jack Weinstein will issue the ruling at 10:AM on Monday. This could send the stock soaring or plunging depending on the ruling. I considered taking the entry today as of Monday's open but with the potential for a catastrophic ruling I decided against it. Loews is not just a tobacco company. They own 85% of Boardwalk Pipeline Partners (BWP) and 54% of Diamond Offshore (DO) along with the Loews hotel chain and several other companies.
I think it is a testament to the strength of our positions when nearly half either gained, broken even or lost only a few cents for the week. For instance SU, SLB, CEO, UPL and PXP all gained ground or broken even for the week and it was a BAD week. Others lost only slightly, FST -.40, ATPG -0.60, PTR -1.50 ($110 stock), XTO -1.35 and it is a gas stock! Keep the faith until the September energy dump is over.
I did get several requests for "other than energy stocks" to be added to the portfolio. I also received several asking to stay strictly energy. It was about 50:50 and I decided the best direction would be to suggest plays outside the energy sector only if they represented a significant opportunity. Those who are not interested in them can simply pass. I promise to keep the extraneous entries small and only when I believe it is a sure thing. (grin) I am adding a homebuilder this weekend with a long-term LEAP. We have two housing reports next week that could provide a catalyst and interest rates are crashing. This could be the right time.
December Crude Oil Futures Chart - Daily
December Natural Gas Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
APC - $41.78 Anadarko Petroleum
After shooting to just over $50 on the news of the big discovery in the Gulf APC has returned to support at $42. I believe this is a good entry and once funds start returning to energy in October they will want to own Anadarko at these levels. Just in case funds don't rush back into energy I am adding an insurance put.
Buy Jan $40 PUT APC-MH currently $2.35, set profit stop @ $35.00
Anadarko Petroleum Corporation (Anadarko) is an oil and gas exploration and production company. Major areas of operations are located in the United States, primarily in Texas, Louisiana, the mid-continent region and the western states, Alaska and in the deep waters of the Gulf of Mexico, as well as in Canada and Algeria. Anadarko also has production in Venezuela and Qatar. It actively markets natural gas, oil and natural gas liquids (NGLs) and owns and operates gas-gathering systems in its core producing areas. In addition, the Company engages in the hard minerals business through non-operated joint ventures and royalty arrangements in several coal, trona (natural soda ash) and industrial mineral mines located on lands within and adjacent to its Land Grant holdings. The Land Grant is an eight-million-acre strip running through portions of Colorado, Wyoming and Utah where the Company owns most of its fee mineral rights.
Breakdown target: $42.50 triggered 9/20
Position 2009 $50 LEAP Call OCP-AJ @ $6.90
DHI - $23.50 - DR Horton
Choosing a homebuilder was really tough. There are plenty to choose from and all price ranges. PE ratios ranged from 5 to 20 and all points in between. Some did not have LEAPS and some LEAPS were grossly expensive. Just picking a builder on the basis of PE is silly but it should always be a factor. Lower priced companies tend to be favored by funds and institutions. Possible choices I researched were RYL, TOL, CTX, KBH, PHM, DHI, BZH, HOV, LEN, MDC, MTH, BHS and the housing sector index, HGX, the homebuilder ETF, ITB, the Homebuilder SPDR XHB and the DJ R/E iShare IYR. Of those that had LEAPS only TOL, KBH and DHI fit my initial criteria. Toll Brothers at $27 with a PE of 20 had a reasonable $30 LEAP at $7.10 but strong resistance in the $35-$40 range. I own TOL LEAPS personally but that was before I found out that insiders had been dumping shares with Robert Toll unloading 585,000 in the last couple of months. Nobody had bought any shares since 1999. That soured me on recommending TOL despite their large land base.
I thought KBH at a PE of 15 had LEAPS that were expensive and although support at $40 is holding it could easily crack to $30. Since they just warned on Thursday and said they have an options problem I passed on them as well.
DHI at a PE of 5 had cheap LEAPS and was rebounding from strong support at $20. The company operates in 27 states and primarily entry level homes. This market will always be with us due to the formation of new families, immigrants and general population growth. Recent comments from the CEO avoided the doom and gloom of some other builder's comments. DHI has some of the highest margins (15-20%) in the industry and therefore should be able to weather the storm better. DHI calls themselves the largest builder in the US selling 58,000 homes a year.
DHI presented at the Bank of America Investment Conference on Sept-20th. Here is
their webcast link: http://tinyurl.com/oyggu
I am not adding an insurance put because of the strong support at $20 and the very positive outlook on the webcast above. They only experienced a drop in orders of -4% in Q3 when other builders were dropping -30%.
D.R. Horton, Inc. (D.R. Horton) is a homebuilding company in the United States. The Company constructs and sells single-family homes through its operating divisions in 25 states and 74 metropolitan markets of the United States, under the name of D.R. Horton, America's Builder. The Company's homes range in size from 1,000 to 5,000 square feet. Through its financial services operations, D.R. Horton provides mortgage banking and title agency services to homebuyers in its homebuilding markets. DHI Mortgage, the Company's wholly owned subsidiary, provides mortgage financing services to purchasers of homes the Company builds and sells. D.R. Horton's subsidiary title companies serve as title insurance agents by providing title insurance policies, examination and closing services to purchasers of homes the Company builds and sells.
Buy 2009 $25 LEAP Call VEI-AE currently $5.10
Entry $23.50 (9/24)
CEO $81.96 Cnooc Ltd
No loss for the week and no change in play.
CNOOC is rapidly acquiring new reserves and moving to develop them quickly. Interim results for 2006 showed a +47% jump in revenues with oil production rising +7.4% to 81.7 BOE. As a subsidiary of a national oil company they have the right to acquire a 51% interest in any discovery in China's offshore waters. Essentially if Jim Brown Oil Company acquired a lease from China to drill offshore and I found oil, Cnooc Ltd has the right to acquire 51% of my discovery. As investors in Cnooc I feel like we are betting with the house. Any discovery by anybody in the area becomes our discovery as well.
I am not adding an insurance put due to the cheap option price of our call. If you want to add one personally the Dec $70 put is 75 cents with strong support at $73.50.
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 does not have LEAPS.
Breakdown target: $80 triggered 9/11
Position: March $90 Call CEO-CS @ $2.40
SU $67.28 Suncor Energy
No loss for the week and no change in the play!
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.
Breakdown target: $70 (triggered 9/11)
Position: 2009 $80 LEAP Call OYX-AP @ $14.30
Insurance put: 9/18
SLB $57.09 Schlumberger
No loss for the week and no change in play!
Buy Jan $50 Put SLB-MJ currently $2.00, no stop
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 $60 and again at $55. SLB said business was booming in its July earnings release and yet it still sold off. I targeted $57 for an initial position based on the July dip. June's support at $55 held filling $55 as our secondary target.
Breakdown target: $57 - 1/2 position @ $8.60 (9/11)
Position: 2009 $70 LEAP Call VWY-AN @ $8.30
Insurance Put: 9/18
NBR $28.93 Nabors Industries
Nabors dropped -$1 for the week and broke support at $30. It appears we should have added a put but that is past tense now. They announced some acquisitions and the formation of a $1 billion partnership with First Reserve Corp. Nothing negative and they still have more than 1400 rigs with rising rates. Why they are so out of favor is a mystery to me.
Link to recent presentation: http://tinyurl.com/o5jmy
Nabors Industries Ltd. (Nabors) is a land drilling contractor with almost 600 land drilling rigs. The Company conducts oil, gas and geothermal land drilling operations in the United States Lower 48 states, Alaska, Canada, South and Central America, the Middle East, the Far East and Africa. It is also one of the land well servicing and workover contractors in the United States and Canada. The Company owns approximately 565-land workover and well-servicing rigs in the United States, primarily in the Southwestern and Western United States, and approximately 215-land workover and well-servicing rigs in Canada. Nabors is a provider of offshore platform workover and drilling rigs, and owns 43 platform, 19 jack-up units and three barge rigs in the United States and multiple international markets.
Nabors said they are not seeing any weakness in rig pricing and have more than 100 new rigs on order. They said day rates were still climbing and the international and offshore business was strong enough to contract for terms long enough to recover 100% of the rig costs in most instances. With the strong emphasis on gas drilling rig backlogs for deep rigs were up to three years in some cases.
Link to recent presentation: http://tinyurl.com/o5jmy
Support is $30 post reorganization. I am willing to buy a cheap 2009 LEAP and forget it.
Breakdown target: $30 - triggered 9/12
UPL $44.88 Ultra Petroleum
No loss for the week and no change in play!
*** The symbol on the insurance put for last week was correct but the month was listed as Dec instead of Jan. Thank you Paul and Apollo for both pointing it out!
No stop on the Jan $40 insurance put
As far as I am concerned Ultra is the premier gas producer in the US. There may be larger companies but after listening to two annual presentations I don't believe anybody does it any better. They have a premier location in the Pindale Anticline and Jonah Field with more than 11,000 drilling locations already mapped out. There is pipeline to the field and they have 3-5 TCF of recoverable gas in the ground with more reserves highly probable.
Link to their recent conference presentation:
They have hedged nearly all their production but retained upside capability. They will be mostly immune from the current gas price implosion but they will be painted by the same broad brush as the rest of the gas crowd. For that reason we did take out an insurance policy.
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.
Link to their recent conference presentation:
Position: 2009 $60 LEAP Call OZH-AL @ $10.60
SUN $58.65 Sunoco
SUN lost -$3 for the week as refiners crumbled. We have a long put for insurance and strong support at $50. No change in play.
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.
Breakdown target: $62 Entered on 9/12 update
Position: 2009 $70 LEAP Call VUN-AN @ $13.50
PXP $42.89 Plains Exploration
PXP announced the sale of some Gulf leases for $700 million on Monday and gapped open from $40 to just over $44 on the news. Since it was such a strong gap open I am assuming nobody bought the insurance put I was recommending for Monday's open. I am changing the strike and we will try again on Monday.
Options are cheap so I am really reaching out on the insurance to Jan-2007. This should provide a really strong comfort factor.
Insurance Put: Buy Jan $40 Put PXP-MH currently $1.90
Plains Exploration & Production Company (PXP) is an independent oil and gas company primarily engaged in the activities of acquiring, developing, exploiting, exploring and producing oil and gas properties in the United States. The Company owns oil and gas properties in six states with principal operations: the Los Angeles (LA) and San Joaquin Basins onshore California; the Santa Maria Basin offshore California; the Gulf Coast Basin onshore and offshore Louisiana, including the Gulf of Mexico, and the Val Verde portion of the greater Permian Basin in Texas. In April 2005, PXP acquired California producing oil and gas properties from a private company. In September 2005, the Company acquired Point Arguello Unit, Rocky Point development project and related facilities, offshore California, from subsidiaries of Chevron U.S.A. Inc. In May 2005, the Company closed the sale to XTO Energy, Inc. of interests in producing properties located in East Texas and Oklahoma.
Entered on 9/12: 1/2 position
Position: 2009 $50 LEAP Call ZXL-AJ @ 7.50
FST $29.60 Forest Oil
Forest only gave up -40 cents for the week. No change in play!
This is one of my favorite companies after listening to their presentation at the recent energy conference. Everything they said made sense and the stock appears to be a bargain price. Forest recently sold their offshore assets and distributed the assets to shareholders knocking $20 off the price with the special dividend. They consolidated all their efforts on the North American continent in productive fields with minimal risk and large upside potential. Listen/read their presentation and I think you will agree.
Link to their conference presentation: http://tinyurl.com/ggzmv
No insurance due to cheap LEAP
Forest Oil Corporation (Forest) is an independent oil and gas company engaged in the acquisition, exploration, development, and production of natural gas and liquids primarily in North America. At December 31, 2005, Forest held interests in approximately 3,900 net oil and gas wells in the United States and Canada and sold 165.2 billion cubic feet of natural gas equivalent of oil and gas, or an average of 453 million cubic feet of natural gas equivalent per day during ther year ended December 31, 2005. Approximately 84% of the Company's total production was in the United States, and 16% was in Canada. In the United States, Forest's production of natural gas is generally sold in the areas where it is produced or at nearby pooling points. In Canada, the Company's natural gas production is sold by its subsidiary, Canadian Forest Oil Ltd., either through a joint venture with other producers, which is a long-term commitment, or under direct sales contracts or spot contracts.
Forest completed a major divestiture back in March of their offshore properties and made a major distribution to shareholders knocking -$20 off the stock price. Since early May the stock has been stuck in the $30-$35 range as investors digest their new onshore exploration focus. The change in direction appears to have confused many and the sharp drop in stock price probably confuses new investors. Their presentation at the energy conference made good sense to me and I think it was the right move. Here is the link to their conference presentation: http://tinyurl.com/ggzmv
Breakdown target: $30 entered on 9/12 update
Position: 2009 $40 LEAP Call OJG-AH @ 4.50
XTO $39.38 - XTO Energy
XTO only gave up -1.25 for the week and remains above strong support. No change in play. Feb $35 put is our insurance. No stop.
XTO was another presenter at the recent energy conference and I became a believer. They are heavily into natural gas so we can expect some further volatility as gas prices dip in late September.
Link to presentation: http://tinyurl.com/qorbr
XTO Energy Inc. is engaged in the acquisition, development, exploitation and exploration of producing oil and gas properties, and in the production, processing, marketing and transportation of oil and natural gas in the United States. The Company's proved reserves are principally located in the Eastern Region, including the East Texas Basin and northwestern Louisiana; North Texas Region, including the Barnett Shale; San Juan Region; Permian and South Texas Region; Mid-Continent and Rocky Mountain Region, and Middle Ground Shoal Field of Alaska's Cook Inlet. As of December 31, 2005, its estimated proved reserves were 6.09 trillion cubic feet (Tcf) of natural gas, 47.4 million barrels (Bbls) of natural gas liquids and 208.7 million Bbls of oil. During the year ended December 31, 2005, the Company's average daily production was 1,033,143 thousand cubic feet (Mcf) of gas, 10,445 Bbls of natural gas liquids and 39,051 Bbls of oil. In April 2005, it acquired Antero Resources Corporation.
XTO was a presenter at the recent energy conference and I was impressed with their outlook and direction. I believe their stock is under priced already but with the impending drop in gas prices as storage fills up I was hoping to buy them cheaper. Link to presentation: http://tinyurl.com/qorbr
Breakdown target: $40 - Entered in 9/12 update
Position: 2009 $50 LEAP Call OUO-AJ @ $6.50
Insurance Put: Feb $35 Put XTO-NG currently $1.40
VLO $48.18 Valero Energy
Valero was targeted at $50 for an entry and I changed the target two weeks ago to $47.50. I forgot to change my buy stop on my personal order. When it executed at $50 I made a note and wrote up the play without recognizing the error. I was going to remove it this weekend to wait for $47.50 but Friday's close at $48.18 was so close I am making the entry firm as of Monday's open. Once the September selling is over I am a firm believer VLO will rally in October. BUT, we will buy the put.
Insurance Put: Buy Jan $45 Put VLO-MI currently $2.25
Valero Energy Corporation (Valero) owns and operates 18 refineries located in the United States, Canada and Aruba that produce 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). The Company also produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products. Its business is organized into two segments: refining and retail. The refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The retail segment is segregated into two geographic regions: the U.S. System and the Northeast System. On September 1, 2005, Valero completed the merger of Premcor Inc. with and into Valero Energy Corporation.
Entered 9/24 $48.19
PBR - $76.52 - Petroleo Brasileiro
Petrobras declined further after announcing it was buying a 50% stake in a Pasadena refinery for $360 million. The refinery has a capacity of 100,000 bpd. Petrobras is looking for a way to increase production by another 100,000 bpd and to upgrade it to process heavier oils from South America and Saudi Arabia. PBR has 16 refineries processing 2.1 mbpd and it produces 2.0 mbpd of oil from its own wells. The conflict with Bolivia is on hold until Oct 9th.
Continue to hold the Jan-$70 insurance put with no stop.
Petrobras continued its decline from the prior week on its dispute with Bolivia but it appears they are winning. The Bolivian government suspended the measure that would have given Bolivia almost total control of the extraction and refining of Bolivian gas and oil. After a heated meeting with the Brazilian energy minister the Brazilian owned Petrobras was exempted from the controls at least temporarily. Petrobras refines 90% of the fuel used in Bolivia and is the biggest investor in Bolivia energy. Talks have been rescheduled for Oct 9th, eight days after the Brazilian elections. Petrobras has invested $1.5 billion in Bolivia since the mid 1990s and Bolivia is trying to nationalize their investment. The day after the suspension was announced the Bolivian Energy Minister quit in protest.
I believe this will work out where Brazil gets significant concessions but Petrobras will lose majority control in Bolivia thanks to the influence of Hugo Chavez on Evo Morales. Petrobras could walk away from the entire country and survive but they do receive significant cash flow from operations in Bolivia.
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.
Breakdown target: $85 hit 9/08
DO - $68.97 - Diamond Offshore
Diamond lost -$2 for the week on a downgrade of drillers from a small think tank. The downgrade was based on falling das prices and their suspected impact on future drilling rates. As recently as two weeks ago the drillers affirmed that rates were still rising so I think the downgrade was smoke and mirrors.
Maintain a $60 profit stop on the October $70 insurance put.
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.
Breakdown target triggered @ $70 (8/29)
CSX - $30.59 - CSX Corp
CSX gave back its gains from the prior week when expectations for the economy dropped suddenly on Thursday. We are well covered by the $30 put with the stock price at $30. No worry here.
Maintain a $25 profit stop on the Nov-$30 insurance put.
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.
Position: 2009 $35 LEAP Call OBC-AG @ $4.90
WLT - $45.49 - Walter Industries
Walter is still sliding as investors flee coal ahead of the quarter end and falling gas prices. Strong support awaits at $40 and we has a Dec $45 put.
Maintain a profit stop on the Dec $45 insurance put 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, 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.
Breakout target: $52 triggered 8/23
Entered $52 8/23
ATPG - $36.43 - ATP Oil and Gas Corp ** No Stop **
ATP is holding above support at $35 and we have a $35 put. The minor loss of -60 cents for the week was definitely not a problem given the dump in the sector.
Insurance put: No stop on the put.
ATP is getting plenty of airtime. Cramer had an on-air interview with the CFO of ATP. You can watch the video here after a brief commercial interlude. Definitely a compelling case to buy ATP. http://tinyurl.com/nm3rw
Entry $38.16 (8/20)
MDR - $39.71 - McDermott ** Stop loss $38 **
The forecast is not good for MDR. The bottom has fallen out and MDR is about to break support at $39. We currently have an October $45 put that should be worth about $7 if the stop is hit at $38 to take us out of the play. The LEAP is currently about $5.60 so that will take us out with a profit. Not the way I wanted to exit this play but a profit on a busted play is always nice.
Maintain a profit stop on the Oct-$45 put at $38.
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 2008 $75 LEAP Call YAE-AO @ $12.50
Position: June $60 Put MDR-RL @ $1.25 (5/22)
PTR - $105.73 - Petrochina ** No Stop **
PTR lost -$1.50 for the week and for a $100 stock in this energy market I have no complaints!
Maintain a profit stop on the Dec insurance put at $90
Earnings schedule: August 24th, $10.1 billion, +29%
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 put: (9/11)
Insurance put: (8/13)
Insurance combo: Closed
Insurance puts: (Closed 6/7)
Entry 5/14 $116.20
CCJ - $37.76 - Cameco ** No stop **
Even uranium stocks are getting killed by the flight from energy although nothing changed in the uranium supply scenario. No change in the play.
Current recommendation: Buy @ $35
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.
Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
No insurance put
Leaps Trader Watch List
With the full load we are currently carrying I am not adding any further entries this week. I did change the targets on a couple to better reflect their relative strength in the market.
Hopefully any end of September dumping will take us within range and allow us a few more entries.
Current Watch List
LTR - Loews Corp
Loews Corporation is a holding company. The lines of business the subsidiaries are engaged include commercial property and casualty insurance (CNA Financial Corporation (CNA), a 91% owned subsidiary); production and sale of cigarettes (Lorillard, Inc. (Lorillard), a wholly owned subsidiary); operation of interstate natural gas transmission pipeline systems (Boardwalk Pipeline Partners, LP (Boardwalk Pipeline), an 85%-owned subsidiary); operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (Diamond Offshore), a 54%-owned subsidiary); operation of hotels (Loews Hotels Holding Corporation (Loews Hotels), a wholly owned subsidiary), and distribution and sale of watches and clocks (Bulova Corporation (Bulova), a wholly owned subsidiary).
Breakdown target: $36.50 - Firm target
Buy 2009 $40 LEAP Call VRH-AH
Chesapeake Energy Corporation (Chesapeake) is an oil and natural gas exploration and production company. It is engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs, and the marketing of natural gas and oil for other working interest owners in properties it operates. As of December 31, 2005, the Company owned interests in approximately 30,600 producing oil and gas wells, which were producing approximately 1.5 billions of cubic feet equivalents (bcfe) per day. On November 14, 2005, Chesapeake acquired Columbia Energy Resources, LLC and its subsidiaries, including Columbia Natural Resources, LLC (CNR) and its natural gas reserves, acreage and mid-stream assets. In 2006, the Company acquired oil and natural gas assets from private companies located in the Barnett Shale, South Texas, Permian Basin, Mid-Continent and Ark-La-Tex regions. It also acquired an Oklahoma-based trucking company in 2006.
CHK appears to be headed for a retest of support at $27 but I am hoping for a drop all the way back to $25.
Breakdown Target: $27.50 *** Change ***
Buy 2009 $30 LEAP Call VEC-AF
ECA - Encana
EnCana Corporation is a natural gas producer in North America. It is a holder of natural gas and oil resource lands onshore North America. The Company is also engaged in select exploration and production activities internationally. EnCana operates under two main divisions: Upstream and Midstream & Marketing. The Upstream division manages EnCana's exploration for, and development and production of, natural gas, crude oil and natural gas liquids (NGLs) and other related activities. EnCana's Midstream & Marketing division encompasses the Corporation's market optimization activities and remaining midstream assets. EnCana is in the process of divesting the majority of its remaining midstream assets, including its natural gas storage business and the Entrega Pipeline.
Strong support at $40 should be our first target with a backup at $35 for a second position. Encana is attempting to sell some midstream assets and that could impact the stock price significantly when it happens.
Breakdown target: $40 *** Change ***
Buy 2009 $50 LEAP Call ZBM-AJ
DVN - Devon Energy
Devon Energy Corporation (Devon) is an independent energy company engaged primarily in oil and gas exploration, development and production, the acquisition of producing properties, the transportation of oil, gas and natural gas liquids (NGLs) and the processing of natural gas. Devon operates oil and gas properties in the United States, Canada and various regions located outside North America, including Azerbaijan, Brazil, China, Egypt, Russia and West Africa. In addition to Devon's oil and gas operations, it has marketing and midstream operations. These include the marketing of natural gas, crude oil and NGLs, and the construction and operation of pipelines, storage and treating facilities and gas processing plants. The Company sells its gas production to a range of customers, including pipelines, utilities, gas marketing firms, industrial users and local distribution companies.
Devon is a 25% partner in the new BP discovery in the Gulf. This is a huge windfall for Devon but it is also a long way off before any income is received. Hopefully the initial spike will fade and we can get it cheap.
Breakdown target: $55
Buy 2009 $70 LEAP Call VVH-AN
COP - Conoco Phillips
ConocoPhillips is an international, integrated energy company. The business is organized into six operating segments: Exploration and Production (E&P) segment primarily explores for, produces and markets crude oil, natural gas and natural gas liquids on a worldwide basis; Midstream segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States, Canada and Trinidad; Refining and Marketing (R&M) segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia; LUKOIL Investment segment consists of its equity investment in OAO LUKOIL, an international, integrated oil and gas company in Russia; Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis, and Emerging Businesses segment encompasses the development of new businesses beyond its traditional operations.
Conoco has returned to support at $58 but I am betting it will collapse once oil hits $60. COP is the most undervalued major according to Forbes with a PE of only 5.5. I believe $50 is a major support level that will be revisited soon. If so we are going to take a position despite the lack of a recent uptrend on their chart. COP had a lot working against it in 2006 and those factors have faded.
Breakdown target: $51
Buy 2009 $60 LEAP Call OJP-AL
CVX - Chevron Corp
Chevron Corp. (Chevron), formerly ChevronTexaco Corporation, manages its investments in subsidiaries and affiliates, and provides administrative, financial and management support to the United States and foreign subsidiaries that engage in integrated petroleum operations, chemicals operations, coal mining, power and energy services. Petroleum operations consist of exploring for, developing and producing crude oil and natural gas; refining crude oil into finished petroleum products; marketing crude oil, natural gas and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. Chemicals operations include the manufacture and marketing, by affiliates, of commodity petrochemicals for industrial uses, and the manufacture and marketing, by a consolidated subsidiary, of fuel and lubricating oil additives.
Like Conoco Chevron has failed to impress investors over the last year. There is strong support at $55 and I believe it will retest that level before the fall is over. Chevron did make a like discovery to the BP find in the Gulf but it was under reported and Chevron's boost promptly faded. If we can buy it right we will bet on future discoveries in the same area.
Breakdown target: $56 *** Change ***
Buy 2009 $60 LEAP Call VCH-AL
ATI - Allegheny Tech
Allegheny Technologies Incorporated (ATI) is a producer of specialty materials for global markets. The Company operates in three business segments. The High Performance Metals segment produces, converts and distributes a range of high-performance alloys, including nickel and cobalt-based alloys and super alloys, titanium and titanium-based alloys, exotic alloys, such as zirconium, hafnium, niobium, nickel-titanium and their related alloys. The Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys, in a variety of product forms, including plate, sheet, strip, engineered strip and Precision Rolled Strip products. The Engineered Products segment produces tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. On April 5, 2005, the Company acquired Garryson Limited, a producer of tungsten carbide burrs, rotary tooling, and specialty abrasive wheels and discs.
Yes, ATI is into high performance metals. They are also the only major manufacturer of very high strength pipe capable of being used in wells like the new Gulf discoveries by BP and Chevron. Drilling 30,000 feet under 7500 feet of water requires extreme performance pipe for every stage of the underwater application. This pipe segment is rapidly growing for ATI and will become a major profit center over the next two years. There is strong support at $55 but I would like to try and tag it at $50 if possible.
Breakdown target $57.50 *** Change ***
Buy 2009 $70 LEAP Call OYG-AN *** Change ***
RIG - Transocean Inc
Transocean Inc. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells. As of March 2, 2006, it owned/had partial ownership interests in, or operated 89 mobile offshore and barge drilling units. Its fleet included 32 High-Specification semisubmersibles and drillships (floaters), 23 Other Floaters, 25 Jackup Rigs and nine Other Rigs. The Company's primary business is to contract these drilling rigs, related equipment and work crews primarily on a day-rate basis to drill oil and gas wells. It specializes in sectors of the offshore drilling business with a focus on deepwater and harsh environment drilling services. The Company also provides additional services, including integrated services.
There are only two major companies that can drill in 7500 ft of water. DO and RIG. We already own DO and I would like to get a piece of RIG as well. RIG has already announced a long term contract to construct and operate a new drillship for BP and odds are good there will be more to follow once the other players want to start exploring their blocks. There is decent support at $65 but I am targeting a breakdown to $60 with stronger support at $55.
Breakdown target: $65 *** Change ***
Buy 2009 $70 LEAP Call VOI-AN
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