Leaps Trader Commentary
Energy prices are grinding their way through October as we traverse that period where there is no gasoline demand and no demand for gas. Power plants are offline for refueling and maintenance. Refineries are offline for maintenance and the switch over to winter products. Supplies of all crude products are building for the demand to come as weather turns cold and the holiday shopping spree puts more cars on the road and more gas in the tank. It is October in the energy markets and we just have to live through it.
This year has produced more volatility than normal with prices August reaching $78.40 and addicting OPEC to the higher dollars better than uncut heroin. The sudden fall from those lofty heights and dollars by the ton has produced greenback withdrawal among OPEC suppliers. They are in such a disarray that they can't even agree among themselves on how to structure a production cut. It is bad enough that their $28-$30 band for oil just a couple years ago has disappeared from view and now they are going through withdrawal at $60.
According to the latest news OPEC should announce a one million bbl per day cut on Monday and their intention to support $55 for the OPEC basket of 12 grades of crude. The US contract for light sweet crude typically trades for about $5 more making support $60 and right where oil closed on Friday. I would get used to seeing that number over the next three weeks as traders try to test OPEC's resolve and test $55 with volatility sprints back to $65. It should be an exciting time in the pits and I am glad I don't have to trade there.
The main problem is OPEC's credibility. These countries depend so much on the income from oil that every dollar in decline hurts them. Those that can have been pumping every possible barrel in an effort to capture as much cash as possible while the price was high and falling. Contrary to conventional reasoning they pumped at full production as the price imploded in an effort to capture every last buck while that out of control pumping actually hastened the decline in prices. Now this same band of brothers with zero trust for each other are going to be saddled with a lower quota and expected to honor it. There is little hope this will work and that is why OPEC resolve will be tested. Until supply actually tightens the price of oil will be very volatile.
Natural gas storage is at near peak capacity around 3.4 tcf with current supplies at 3.32 tcf. Gas prices have risen because Chesapeake and Questar have taken 170 million cubic feet per day offline until November. There is also a six-year high in nuclear plants offline for refueling for the next two weeks. This requires more gas to make up the shortfall in electricity generation. Despite these events we still expect gas storage to set new record highs next week and for the next three weeks without an early blizzard to produce demand.
The bottom line is that nothing has changed in the energy sector over the last week other than a new low for oil at $57.70 on Wednesday. Energy stocks have been up and down without a trend and will remain so until late October or early November.
The Peak Oil scenario has not changed and despite what you hear on TV the current glut is only temporary and will go away. I printed some charts based on the IEA numbers in this weekends Option Investor commentary. The charts illustrate that despite the current glut and the spike in global production brought on by record oil prices we are still producing below levels seen in early 2005. The charts were put together to illustrate that the last 18 months have seen rather flat production that could be the beginning of a peak plateau.
In the context of Peak Oil a peak plateau means the point where oil production and oil consumption meet raising prices to record levels. Those record prices reduce demand to slightly below maximum production where that level is maintained in balance for some time until production declines again force prices higher. In simple English $3.50 gasoline slows demand at the point where the peak becomes a plateau rather than a spike. Demand and production are level and kept in balance by higher prices. This theory has been discussed for years as the first signs of the end and the charts in this weekend's commentary could be the first signs. The peak plateau would be negated if actual production rose over the highs seen in early 2005 but with a -8% depletion rate on existing fields that possibility is very low. It will however take a couple years to prove the theory. Peak Oil is not something we can say when it happens, "this is the peak." Peak Oil will not be known until sometime after it happens. When we can look back at the production charts and see solid evidence of a permanent decline that will be when experts can say, "that was the permanent peak in global oil production." By that time it will be too late to matter and oil prices will be heading for the stratosphere.
The volatility helped us get into three more positions this week and that is about all we can carry. We came within a few cents of several others but the rebound in gas prices may have taken them out of range. All in all it was a volatile week and that volatility is sure to continue.
Earnings for energy stocks are not until the last week in October. We could see that volatility increase as we near that period. I have included all the earnings dates currently available. Make sure you have put insurance ahead of those dates if the first few reporters show less than expected results. Traders may not want to own energy over the announcements until after the first couple of reports. Once they have a feel for the sector we could get a trend.
An acquaintance stopped by the house this week and finding out that I studied oil asked my opinion on an oil company she and her friends had invested their retirement in to the tune of $2.5 million. I had never heard of it and could not find any reference to it on the Internet. You know where this is going. I found out that she had responded to a solicitation by an "investment company" and after meeting with the principals of this thriving oil company she joined the group and wrote the check. The principal officer of this "private" oil company was also the webmaster and chief pilot. This investment company also had the group invest in a hotel in Cancun that was subsequently demolished by the hurricanes or so the story goes. I seriously doubt she will ever see her money again. I believe there are tens of thousands of potential retirees around the country who are in this same predicament only the names and events are slightly different. I strongly suggest if you know of people like this you counsel them to reconsider these private investments. Sure there are some good ones but they are few and far between and best left to those who can afford to lose their entire investment. You don't have to give these people investment advice other than avoid somebody making decisions for them. If they only buy the XLE or an excellent mutual fund like the Vangard Energy (VGENX) or Fidelity Select Energy (FSENX) they will be a lot better off and sleep much better at night. For many of these individuals there will be no retirement and they have no clue the only one making any money is the advisor.
December Natural Gas Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
DVN - $62.44 - Devon Energy
Devon gapped down on Tuesday with the implosion in oil and hit our entry trigger at $60. There is no news but you may remember Devon is a partner on that new oil discovery in the Gulf reported to be between 3-15 billion bbls. Of course they have to figure out how to develop it first. Either way Devon is a strong producer and that new find will become an asset on their balance sheet. Look for them to rally early once October is over.
Earnings schedule: Nov 1st
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.
Position: 2009 $70 LEAP Call VVH-AN @ $9.00 10/03
RIG - $69.32 - Transocean Inc
RIG dropped -8 this week to the Wednesday lows and our entry trigger at $68. We have strong support at $65 and a -30% decline off the highs. I expect RIG to recover and set new highs as more drilling gets underway in the Gulf. Check out their rig report just released this week: http://tinyurl.com/ho3mt
Earnings schedule: Nov 2nd
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.
October rig report from Transocean: http://tinyurl.com/ho3mt
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.
Breakdown target: $68 hit 10/03
Position: 2009 $80 LEAP Call VOI-AP @ $12.90 10/03
TSO - $58.39 - Tesoro Corporation
TSO declined to $55 on Wednesday triggering our entry with oil at $57.70. The rebound took it right back to current resistance at $59. Now that the big decline in oil is over we are not likely to get the crushing drops that could break support at $54. If we do it will also trigger a protective stop.
Earnings schedule: N/A
Tesoro Corporation (Tesoro) is an independent refiner and marketer of petroleum products with two major operating segments: Refining and Retail. Through its refining segment, the Company manufactures products, primarily gasoline and gasoline blendstocks, jet fuel, diesel fuel and heavy fuel oils for sale to a variety of commercial customers principally in the mid-continental and western United States. It operates six refineries in the United States with a combined rated crude oil capacity of 558,000 barrels per day (bpd). During the year ended December 31, 2004, approximately 50% of the Company's total refining throughput was heavy crude oil. Its retail segment distributes motor fuels through a network of branded gas stations, primarily trading under the Tesoro and Mirastar brands. The Company markets its products to wholesale and retail customers, as well as commercial end users.
Breakdown target $55 hit 10/04
Position: 2009 $70 LEAP Call ZGC-AN @ $7.70 10/04
APC - $42.13 Anadarko Petroleum
APC saw a sharp dip to support at $40 and a rebound to recover nearly all of the loss. APC said it was selling $10B of assets to help cover the costs incurred with the Kerr McGee and Western Gas Resources acquisitions this year. They also completed a sale of $5.5 billion in bonds. APC said the lower prices for oil were not hurting bids on the properties it is planning to sell. They also said the drop in oil prices had depressed service costs allowing for cheaper long term agreements with service companies.
No change in play.
Maintain profit stop on insurance put at $35.
Earnings schedule: Nov 7th
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
Insurance put: 9/25
DHI - $23.61 - DR Horton
No change and numerous people are starting to say good things about housing. Initial support at $23. No change in play.
Earnings schedule: N/A
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:
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.
Position: 2009 $25 LEAP Call VEI-AE @ $5.10
Entry $23.50 (9/24)
CEO $81.12 Cnooc Ltd
-$2 loss but support at $80 is holding. Given the crush to $57.70 on oil prices I consider this a good week and no change in play.
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.
Earnings schedule: N/A
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.
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 $68.22 Suncor Energy
We gave back the +$4 gain from the prior week but support at $64 was tested again and held. Suncore lost some production due to maintenance in September but is back on schedule. No change in the play!
Earnings schedule: Oct 26th
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 $59.59 Schlumberger
SLB gave back a couple bucks from the strong +$5 week before. SLB is holding
well over support at $55 and no change in play. S&P said on Wednesday that SLB
was well positioned
to outperform its peers and would benefit from a growing
stream of capital expenditures. S&P gave it a 5* Strong Buy rating.
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 $28.53 Nabors Industries
Nabors lost a buck for the week but may have finally found a bottom around $28. No change in play.
Link to recent presentation: http://tinyurl.com/o5jmy
Earnings schedule: Oct 25th
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
UPL $47.55 Ultra Petroleum
UPL performed very well for the week regaining ground lost on the drop in oil prices. It appears UPL is going to weather the gas storm and use $45 as a base for the next move. I am very happy about the UPL position. UPL said last week that their profit margins at $4 gas were +30%, $6 gas 50% and $8 gas 100%. They have a 16-year inventory of wells to be drilled.
Ultra presented at the OGIS Investment Conference on Oct-4th.
No stop on the Jan $40 insurance put
Earnings schedule: Oct 31st
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 $62.19 Sunoco
SUN regained all the intra week losses after a retest of support at $58. Very strong rebound. SUN declared a dividend of 25 cents on Thursday. No change in play.
Earnings schedule: Nov 1st
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 $41.37 Plains Exploration
PXP gave up some ground last week but remains above the 100/200 day averages. Just waiting for oil to rebound. No change in play.
Maintain $35 profit stop on Jan $40 insurance put.
Plains presented at the OGIS Investment Conference on Oct-4th
Earnings schedule: Nov 2nd
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 $31.63 Forest Oil
FST is still holding above support at $30. No change in play! I am a firm believer in Forest and feel that once over $35 it will become explosive.
Earnings schedule: N/A
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 $41.41 - XTO Energy
XTO is still holding above support at $38-$39 and waiting for October to end. No news, no change in play. Feb $35 put is our insurance. No stop.
XTO presented at the OGIS conference on Oct 4th.
Earnings schedule: N/A
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 @ $1.40
VLO $50.65 Valero Energy
Valero is still holding above support at $46-$48. Valero said last week that earnings for the quarter would be a record levels although they would be less than previously expected due to the refining margin squeeze from the recent drop in oil. No change in play.
No stop on insurance put.
Earnings schedule: Oct 31st
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 - $81.48 - Petroleo Brasileiro
Petrobras held the majority of its gains for the prior week as we approach the resumption of negotiations in the Bolivia nationalization debate. PBR announced a new offshore deepwater discovery off the coast of Brazil. Support is holding and the outlook is positive. No change in play.
Continue to hold the Jan-$70 insurance put with no stop.
Earnings schedule: Nov 10th
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 - $66.02 - Diamond Offshore
Diamond imploded last week from $72 to a low of $62 before a rebound began. I raised the stop on the October $70 put last week to $68 after a bullish week for DO. That was an unfortunate decision since we could have reaped a windfall on the drop. However, the stop at $68 was still sufficient to receive $4.80 for our $1.65 put. We should be so lucky as to make +3.15 on every bad decision. This lowered our cost in the $14.20 LEAP to $11.05. $63 is now support and we are going to take some of our profit on the last put to buy a new insurance put in December.
Earnings schedule: Oct 27th.
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 - $33.72 - CSX Corp
CSX continued its climb on low oil prices and anticipation of a strong Q4. We are well covered by the $30 put with the stock price at $30. No change in play.
Maintain a $25 profit stop on the Nov-$30 insurance put.
Earnings schedule: Oct 17th
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.
Former Treasury Secretary John Snow was CEO of CSX before he joined the Bush team. He was elected to the board of Marathon Oil in late September.
Position: 2009 $35 LEAP Call OBC-AG @ $4.90
ATPG - $36.28 - ATP Oil and Gas Corp ** No Stop **
ATP is holding above support at $35 and we have a $35 put. The breakeven for the week was definitely not a problem. No change in play.
ATPG Webcast from the OGIS Investment Conference on Oct 5th.
Insurance put: Add a profit stop on the put at $30.
Earnings schedule: N/A
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 - $41.41 - McDermott ** Stopped @ $38 **
That was really close. Hit our exit stop at $38 on Wednesday. The put cost $1.40 and was $7.00 when the stop was hit. The 2008 $50 LEAP with a cost of $8.33 was $5.20. The combination of the two positions produced a minor profit of +2.47 on the busted play.
McDermott has one of the strongest charts in the energy sector. Up until early September they were still trading at new highs. I want to reenter MDR with a 2009 LEAP on a dip to $38.
Current recommendation: Buy under $40
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)
Entry $44.02 (5/18)
PTR - $105.72 - Petrochina ** No Stop **
PTR is still holding above support at $104. Maintain the stop and let it ride. China's biggest oil company with 14,000 service stations. Unless you think China is going to stop growing this should be in your portfolio.
Maintain a profit stop on the Dec insurance put at $90
Earnings: 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 - $35.27 - Cameco ** No stop **
CCJ took another monster hit this week on absolutely no news. The stock dropped from $35.50 to $32 but then rebounded back to $36 the next day. This drop was the same day as the oil implosion and I assume it was simply painted with the same brush as the oil sector. There is no reason for CCJ to fall below support at $32. Uranium goes up daily and has not fallen in price since 2001. There is not enough to go around and CCJ owns more than 20% of the worlds supply. I would still be a buyer under $35.
Current recommendation: Buy under $35
Earnings schedule: Nov 1st
Prior commentary: 10/01
CCJ took another hit this week when it sold its 10% interest in a diamond mine for a $29 million profit. Cameco sold the non core asset interest in the mine to focus on its primary business of uranium mining. News of the sale knocked CCJ back to support at $35. CCJ also issued a press release to correct speculation in the marketplace that they would not be able to deliver all the uranium they had sold. They claim they have sufficient reserves to cover all current orders. They have been active in the market buying extra mined uranium and additional reserves. The spot price of uranium has risen to $53 a pound. They recently bought one million pounds on the spot market at less than $51 and sold it for more than $53. This type of trading activity prompted speculation that CCJ was running short. $35 was my recommended buy price and traders got that chance this week.
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
Bottom of the Barrel
After seeing three more watch list entries make it into the actual portfolio this week we are scraping the bottom of the barrel for new plays. This is probably good since we already have a full slate of positions.
I considered dropping Conoco from the list several times due to the problems with Russia as evidenced by the current Sakhalin-2 fiasco. Russia signed a deal with Shell and others to develop a massive $20 billion oil and gas project. The terms of the deal were for the partners to recover their costs before they had to pay Russia any royalties. Now that the project is almost finished Russia revoked their EPA permit saying they spoiled the environment. In reality it is simply another ploy like the Yukos scandal to extract a better deal now that the development is nearly finished.
Conoco is not involved in the Sakhalin-2 project but they have been continually investing in Lukeoil with their stake now up to 19%. This is a huge risk for Conoco given the current state of Russian nationalism. However, as long as Putin keeps his part of the deal Conoco has access to the second largest reserves on the planet. Russia benefits from Conoco's experience and technology and Conoco gets to produce the oil. It is a win-win for both sides as long as the rules don't change.
Just as I was planning on dropping COP they announced this week a sweeping new agreement with Encana to produce and market Canadian oil. This agreement includes upgrading two of Conoco's US refineries to handle heavy Canadian oil and raise production from 60,000 to 550,000 bpd. The joint venture in Alberta will also add 500,000 bpd of production from the oil sands project. This is a very strong announcement that provides Conoco with a secure flow of oil from Canada and a sizeable jump in refining capacity. It was enough for me to leave them on the watch list. I always liked Conoco's aggressive posture but the Russian business has me worried and based on the stock price I think others are worried as well.
Future watch list additions may come from sectors other than energy and only when real value appears.
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
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: $42.50
Buy 2009 $50 LEAP Call ZBM-AJ
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
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 $58.00
Buy 2009 $70 LEAP Call OYG-AN
MRO - Marathon Oil
Marathon Oil Corporation (Marathon) is engaged in the exploration and production of crude oil and natural gas on a worldwide basis. The Company operates in three business segments: Exploration and Production (E&P), Refining, Marketing and Transportation (RM&T) and Integrated Gas (IG). The E&P segment explores for and produces crude oil and natural gas on a worldwide basis. The RM&T segment refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States. The IG segment markets and transports natural gas and products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol on a worldwide basis. On June 30, 2005, the Company acquired the remaining 38% ownership interest in Marathon Ashland Petroleum LLC (MAP). As a result of the acquisition, MAP became a wholly owned subsidiary of Marathon and was subsequently renamed as Marathon Petroleum Company LLC (MPC).
Breakdown target: $70
Buy 2009 $80 LEAP Call VXM-AP
HES - Hess Corporation (Formerly Amerada Hess (AHC))
Hess Corporation explores for, develops, produces, purchases, transports, and sells crude oil and natural gas. These exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Russia, Equatorial Guinea, Algeria, Gabon, Libya, Indonesia, Thailand, Azerbaijan, Malaysia and other countries. The Company also manufactures, purchases, trades and markets refined petroleum and other energy products. It owns 50% of a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations located on the East Coast of the United States. As of December 31, 2005, the Company had 692 million barrels of proved crude oil and natural gas liquids reserves.
Breakdown target $35
Buy 2009 $40 LEAP Call VHS-AJ
SWN - Southwestern Energy
Southwestern Energy Company is an integrated energy company primarily focused on natural gas with proven reserves of more than 825 BCF. Through its wholly owned subsidiaries, the Company is engaged in natural gas and oil exploration and production business. It operates principally in three segments: exploration and production, natural gas distribution and marketing. The Company's exploration and production activities are concentrated in Arkansas, Texas, Louisiana, New Mexico and Oklahoma. It's wholly owned subsidiary, Arkansas Western Gas Company, referred to as Arkansas Western, operates integrated natural gas distribution systems in northern Arkansas. The Company provides marketing services in each of its core areas of operation through its gas-marketing subsidiary, Southwestern Energy Services Company.
Breakdown target: $25
Buy 2008 $30 LEAP Call LVX-AF (no 2009 leaps)
MDR - McDermott Intl
McDermott International, Inc. (MII) is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. and its consolidated subsidiaries; McDermott Incorporated (MI) and its consolidated subsidiaries; Babcock & Wilcox Investment Company (BWICO), a subsidiary of MI; BWX Technologies, Inc., a subsidiary of BWICO, and its consolidated subsidiaries, and The Babcock & Wilcox Company, a subsidiary of BWICO, and its consolidated subsidiaries. Through these subsidiaries, MII operates as a global energy services company with three business segments.
Breakdown target $38
Buy 2009 $50 LEAP OYZ-AJ
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