Table of Contents
Leaps Trader Commentary
Halfway though October and support at $58 is still holding. I would say it was a very weak hold but no complaints from my side. Energy stocks are rising in anticipation of normal winter demand and possible OPEC production cuts. The price of oil may be firming but many stocks are taking off. On Friday the major winners were MRO +2.84, SU +2.68, NXY +1.85, DO +1.63 and TSO +1.63. For some this was on top of strong gains earlier in the week and in a week when oil prices fell -$1.12. No complaints here!
The only complaint I have is that I am going to be forced to take half the entries off the watch list because they have risen so far over the last week that they are now out of range. We missed ATI by $2 at $58 two weeks ago and it is now $74 and I am not going to chase it. We already have a nice portfolio and earnings are just ahead. We will be fine as long as nobody stinks up the sector. Quite a few of our positions turned green again and by mid November we should be well into the money baring some OPEC meltdown.
The latest news on OPEC is that they have reached a consensus to cut one million bbls per day but the start date has been dropped back to Dec-1st instead of nov-1st. Qatar has offered a meeting spot for late October for all the OPEC heads to get together and solidify the move. There is some discussion about skipping the meeting due to Ramadan. I believe they are just trying to talk the price of oil higher as they wait for the normal winter demand to appear. They can continue to collect $58 per bbl while they posture to the press.
There were several outages this week with 280,000 bpd going offline in Norway for as much as two weeks. 200,000 bpd went offline in Canada due to a problem with an Imperial Oil pipeline. Alaska is still having problems due to weather and pipeline flows are hit and miss. These outages are all temporary but impact the overall inventory levels quicker than an OPEC cut.
Gas storage is creeping even closer to maximum stated capacity of 3,604 bcf with another +62 bcf injection last week. Storage levels now stand at 3,389 bcf. The western producing region actually went over capacity by +9 bcf last week indicating that they are not going to be accepting any more large volumes of gas.
I mentioned last week that Encana and Conoco announced they were going to spend $26 billion in a joint venture to extract more bitumen from Alberta oil sands. There are great hopes for Canada to grow its production of synthetic crude from 1-mbpd to 4-mbpd by 2015. Unfortunately reality is getting in the way. It takes .7 boe of natural gas for every bbl of oil produced. Water is also a problem as it takes 2 bbls of water for every bbls of oil. The problem is falling gas supplies in Canada. The oil sands projects are using so much gas they can't fulfill their export requirements to the US under NAFTA. Gas exports are declining and there is no additional gas to raise future production rates of synthetic crude. They are building several LNG terminals to import gas but if the current trends continue they will end up shipping some of that gas to the US. It is a complex problem and very few analysts are seeing the entire picture.
The oil shale deposits in Colorado and Wyoming are popping up in the news almost daily. The claimed 3 trillion bbls of oil locked into that shale makes for a good headline but little else. I get emails each week from readers who have been spammed with some investment newsletter promising untold riches from the oil shale projects ahead. Bull! One supposed option proposed by Shell is to heat the ground with electricity to the temperature of 700 degrees thereby melting the oil and causing it to flow to a nearby well. This is total crap! They claim to get the rock to that temperature would take continuous heating by extremely large amounts of electricity for 2-3 years. Shell would get a tax credit for building a string of power plants over tens of thousands of square miles only to send that electricity hundreds of feet into the earth. How much power would it take to heat a square acre of rock to 700 degrees? An enormous amount! What are they going to use to generate all that electricity? Not gas, there is already a shortage of that even though you can't tell by the current surplus in storage. Not coal although there are plenty of coal supplies in Wyoming. Building a string of power plants throughout Colorado and Wyoming that would burn coal and conform to the current and future environmental rules would cost untold tens of billions of dollars. Certainly not nuclear because uranium is also in short supply and plants take a minimum of ten years to permit and build and only if you can find a community that wants them in their backyard. All these options require huge amounts of water and since I live in Colorado I can assure you there is no water to spare. The rights to any excess water were sold off decades ago to Kansas and California and I guarantee you they are not going to give them back. My water bill in Colorado is nearly as expensive as my electric bill. Yes, there is oil in oil shale but it will stay there for the rest of my life and probably the rest of yours. Eventually somebody will discover a way to extract it but contrary to the newsletter hype you may have received that method has not yet been invented.
Until that oil shale extraction miracle arrives we need to stay the course and continue putting our faith and investments into long-term conventional reserves being developed by quality, brand name, companies. Investing in companies nobody ever heard of should best be left to venture capitalists with money to burn. Personally I need every dollar I have and would rather not see any go up in the smoke of wishful thinking.
A research note from
Goldman Sachs should provide plenty of comfort. You have
heard of Goldman Sachs? Goldman Sachs energy analyst Arjun Murti, in a note to
clients, said that a "perfect storm" of seasonal and technical factors was to
blame for much of the recent drop in energy stocks. Murti sees a rebound energy
shares during the fourth quarter. "Fundamentally, we believe global oil demand
will exceed non-OPEC supply in 2007, driving our bullish crude oil view, and
that natural gas inventories
can return to the middle of the range (with normal
winter weather) driving a recovery in U.S. natural gas pricing."
December Natural Gas Futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
None this week.
DVN - $64.74 - Devon Energy
Devon moved up nicely for the week due in part to an upgrade to a BUY at Goldman Sachs. The bounce took us farther away from our potential insurance put entry and that is fine with me.
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.
Breakdown target: $60 Hit 10/03
Position: 2009 $70 LEAP Call VVH-AN @ $9.00 10/03
RIG - $70.23 - Transocean Inc
RIG held its ground but failed to rebound from the -8 loss the prior week that let us into the play. No additional news and no change in play.
Check out their rig report just released Oct-2nd: 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 - $63.42 - Tesoro Corporation
TSO rebounded +$5 for the week for an excellent recovery. Bear Stearns upgraded TSO to a "peer perform" from "under perform." The need for an insurance put is far less at $64 than $56. No complaints and no change in play.
Earnings schedule: Nov 2nd
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 - $43.82 Anadarko Petroleum
APC gained about +1.50 for the week as it continues to digest the Kerr McGee acquisition. Fitch upgraded KM debt last week after APC agreed to guarantee it.
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
CEO $82.96 Cnooc Ltd
Nearly a +$3 gain after announcing the startup of a new production platform. I consider this another 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: March 2007
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 $72.42 Suncor Energy
More than a +$4 gain despite a -1.12 drop in oil for the week. 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 $58.73 Schlumberger
Not an outstanding week for SLB but it did hold its ground. Oil service companies have trailed the sector in recovery but earnings are coming. SLB has already guided higher.
Earnings schedule: Oct 20th
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.
target: $57 - 1/2 position @ $8.60 (9/11)
Position: 2009 $70 LEAP Call VWY-AN @ $8.30
Insurance Put: 9/18
NBR $30.64 Nabors Industries
Nabors actually found some signs of life after they were mentioned as a possible takeover candidate on Tuesday. NBR rallied +$3 from its lows but gave back nearly a buck on Friday. 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
Breakdown target: $30 - triggered 9/12
UPL $48.75 Ultra Petroleum
UPL continues to hold its gains as we wait for November gas demand to begin. Resistance is $49 and support $46.
UPL said recently 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 $65.65 Sunoco
SUN continued its rebound with another +$3.50 gain now +$8 over its October lows. Sunoco announced on Friday it had received the ok to upgrade its Toledo Ohio refinery by +50,000 bpd. 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 $41.99 Plains Exploration
PXP inched slightly higher and remains above the 100/200 day averages. PXP investors may be waiting to see if PXP makes another bid for Stone Energy (SGY). PXP was outbid by EPL but then EPL backed out of the $1.4 billion deal. 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 $32.31 Forest Oil
FST closed at a new 5-week high on Friday although the gain for the week was less than a buck. Continued small victories will eventually break that resistance at $35. No change in play.
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 $42.81 - XTO Energy
XTO crept slightly higher and closed at a new five week high. Motley Fool called XTO one of its 20 best stocks. Fortune ranked it #39 on its fastest growing list. No other 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 $53.59 Valero Energy
Valero gained +$3 for the week and closed at a new 5-week high. Valero said they were considering an upgrade of their St Charles, LA refinery from 220,000 bpd to 380,000 bpd and had filed permits with the state. 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.
Position: 2009 $60 LEAP Call VHB-AL @ $7.70
Entered 9/24 $48.19
PBR - $85.93 - Petroleo Brasileiro
Petrobras gained +4.50 for the week and closed at a new 5-week high. Petrobras said two new rigs with a total capacity of 160,000 bpd were ready to go on stream before year-end. One of them is well ahead of schedule. The 100,000 bpd ship=based rig will be installed on the Espadarte field by December. The FPSO named P-34 with a capacity of 60,000 bpd will start operating in the Jubarte field in November. Petrobras also said the Manati natural gas field would start producing in November at 3 million cubic meters per day and double by May 2007. Support is holding and the outlook remains 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 - $67.82 - Diamond Offshore
Diamond rebounded slightly for the week and closed at a two week high. That may sound like a small step but at this point I am grateful. No news but earnings are just ahead. Continue to hold the Dec-$60 put with no stop.
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 - $34.81 - CSX Corp
CSX continued to make new highs with Friday's close a new three month high. The transports are rocking and CSX is leading. Huge demand from grain and coal shipments continues to grow profits. 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 - $38.61 - ATP Oil and Gas Corp ** No Stop **
ATP sprinted to a new 4-week high at Friday's close and finally out of the congestion range we saw in early October. ATPG is nearly +$5 off the October lows. No change in play.
ATPG Webcast from the OGIS Investment Conference on Oct 5th.
Insurance put: Continue to hold the put with a stop 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)
PTR - $108.58 - Petrochina ** No Stop **
PTR gained nearly $5 for the week and rebounded back above the 100-day at $108. China's +24% import growth in September should provide a clue to the future for Petrochina. 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
Current recommendation: Buy under $105
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
Entry 5/14 $116.20
CCJ - $37.41 - Cameco ** No stop **
CCJ finally found a bid with better than a $2 gain for the week and a 2-week high close on Friday. Friedman Billings initiated coverage of CCJ with an "outperform." 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.
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
DHI announced a +66% increase in the dividend on Oct-12th. Not bad when the other builders are whining about profits. Initial support at $23, strong support at $20. No change in play.
Earnings schedule: Nov 14th
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.
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)
Leaps Trader Watch List
Frustrated But Confident
After seeing several of our targets race out of reach it is frustrating but that also gives us confidence that our existing positions are gaining in value. Would you rather have more positions or profits from the ones we already own? I think the answer is simple. I will take profits every time.
I am removing several targets simply because I doubt or maybe hope that they will never return to our target range. If they did return it would mean problems for the larger portfolio. I will continue to add positions only if I think they have a very good chance of becoming quickly profitable and a reasonable chance of being triggered.
It is tough to find any non-energy targets today because most of the other sectors with good leap candidates have already moved out of range given the strong rally over the last couple of months. I am hoping for some earnings surprises that could give us an entry point in a good stock on an oversold dip.
I considered Las Vegas Sands (LVS) as a candidate but the recent spike has pushed LEAP premiums into the stratosphere. I will keep it on my personal watch list. Ditto for companies like RIMM and POT. Southern Copper (PCU) split 2:1 on Oct-2nd then blasted off for new six-month highs. I added it as a candidate hoping for a resistance failure at $50 to give another chance.
I think Goldman Sachs holds the current record for highest priced LEAPS after its vertical performance since mid-September.
If you look closely at the market you will see that metals, commodities, wood, building materials and energy are all showing increasing investor interest. I believe that once techs and blue chips roll over those stocks will be leaders once again.
Future watch list additions may come from sectors other than energy and only when real value appears. That may take a while given the current new index highs.
Current Watch List
CHK - Chesapeake Energy
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.
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
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: $76 *** Change ***
Buy 2009 $90 LEAP Call VXM-AR *** Change ***
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 $38 *** Change ***
Buy 2009 $40 LEAP Call VHS-AJ
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 $39 *** Change ***
Buy 2009 $50 LEAP OYZ-AJ
PCU - Southern Copper
Southern Copper Corporation is an integrated producer of copper, molybdenum, zinc and silver. All of the Company's mining, smelting and refining facilities are located in Peru and in Mexico, and it conducts exploration activities in those countries and Chile. With the acquisition of Minera Mexico in April 2005, the Company focuses on three segments: Peruvian operations, which include the Toquepala and Cuajone mine complexes, and the smelting and refining plants, industrial railroad and port facilities, which service both facilities; Mexican open-pit operations, which combined two units of Minera Mexico, Mexcobre and Mexcananea that includes La Caridad and Cananea mine complexes, and smelting and refining plants and support facilities servicing both complexes, and Mexican underground operations known as IMMSA unit, which includes five underground mines that produce zinc, lead, copper, silver and gold, a coal and coke mine.
Breakdown trigger: $48
Buy March $50 Call PCU-CJ (no leaps)
BTU - Peabody Energy
Peabody Energy Corporation (Peabody) is a private-sector coal company. During the year ended December 31, 2005, the Company sold 239.9 million tons of coal. It sells coal to over 350 electricity generating and industrial plants in 15 countries. At December 31, 2005, the Company had 9.8 billion tons of proven and probable coal reserves. The Company owns, through its subsidiaries, majority interests in 32 coal operations located throughout all the United States coal producing regions and in Australia. In addition, Peabody owns minority interests in two mines through joint venture arrangements. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. In the West, it owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the East, it owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. The Company owns five mines in Queensland, Australia. Most of the Australian production is low-sulfur, metallurgical coal.
Breakdown trigger: $38
Buy 2009 $50 LEAP Call ZZT-AJ
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