Option Investor

Weekly Newsletter, Sunday, 10/22/2006

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. New Plays
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

-1.2 MBPD = -660K Cut

That is the way the Department of Energy sees the OPEC production cut. Of the -1.2 mbpd OPEC claims it will cut starting on Nov-1st only about -660,000 of that will translate into additional real cuts. Some countries have already cut production and others can't even make the old quota so lowering it does not do much good. There is also the 30-45 day shipping time from OPEC ports so any real price improvement from the cut will be long after Thanksgiving. We should see price gains from rising winter demand before the gains due to the cut. The breakdown of the OPEC cuts by country are listed in the table below. The price of oil shot up to $60.50 in overnight trading on the final announcement but it was short lived and plunged back to close at $56.82 on Friday. That was also the last day of trading for the November contract so those traders hoping for a lasting post OPEC spike were racing to the exits in panic. The December contract closed at $59.42 and will become the current contract on Monday.

Table of OPEC Production Cuts

Chart of December Crude - Daily

This will be a very different newsletter than the ones you received in the past. I continue to get requests for additional trades as well as for trades in other sectors. The energy focused newsletter will remain but I am going to increase positions in non-energy sectors. In order to do this I am changing the format of the newsletter. Instead of listing the same old updated charts for 20 positions each week I am only going to show charts for new positions or for those, which have changed significantly. Everyone has a charting program and their own style of chart they prefer. This will save me a substantial amount of time and allow me to broaden the net significantly. It will also cut down significantly on the size of the newsletter.

As energy investors we should be ecstatic. We waited patiently with oil making new highs for the lows we knew would come in late September and early October. We targeted entry positions to correspond with $65 oil and added to those positions at $60. So far everything is working perfectly with nearly all our positions profitable despite oil closing at $56.82 on Friday. We laid out our plans well in advance and then executed those plans. Now, while those positions are maturing over the coming months we will try and take advantage of other opportunities.

I am going to spend my efforts writing about things that impact the energy sector and about new plays rather than rehashing the old positions every week. Let me know how you like the new format at jim@optioninvestor.com. This is energy earnings week and there are plenty on tap. The biggest companies, Exxon, Chevron and Conoco will report and together they make up 9% of the S&P. Current plays with earnings next week include XTO, NBR, SU and DO. The majority of the rest report on November 1st and 2nd.

Jim Brown

Energy Earnings Calendar


Changes in Portfolio

New Energy Plays

New Non-Energy Plays Dropped Plays

New Watch List Plays Triggered


Portfolio Listing & Top Picks

New Plays

Most Recent Plays

Energy Plays

BTU - Peabody Energy

One energy opportunity I am going to discuss today is coal and specifically Peabody Energy. We have played it several times in the past but falling gas prices killed the coal sector beginning in May. That sector is beginning to rebound based in part on rising gas prices and the advent of winter. Coal demand is about to rise dramatically.

TXU Corp, a major Texas utility, has proposed a $10 billion plan to build 11 new coal fired plants. They claim by using current technology and repeating the designs at each location they can build them faster and cheaper than anyone else. TXU is not alone. There are 154 new coal fired plants currently on the drawing boards across the U.S. according to the National Energy Technology Laboratory. Illinois is the only other state with 10 plants are in the planning stages leaving 133 spread out across the country.

High gas prices and a very bearish outlook on future gas prices is driving utility companies back to coal even with all its emission problems. Gas production in the U.S. has peaked and Canadian production, our current gap filler, has also peaked and is already in decline. This projects a grim picture for cheap gas prices with $15 gas almost a sure thing over the next couple years.

Coal we have in abundance with enough reserves to last 200-250 years at the present rate of consumption. Even doubling or tripling the consumption leaves us many decades of cheap power. A coal-fired plant requires up to 5 years of lead-time due to the extensive permitting process. Many are already under construction and experts claim even more will be added to those 154 already identified.

Some proponents have suggested going the coal gasification route, turning coal into gas and removing the pollutants before it is burned, as a better way around the pollution problem. Building a gasification plant is +20% to +25% more expensive than a regular pulverized coal generation plant. American Electric Power, Xcel Energy and Duke Energy are already reviewing plans to implement this technology.

However those 154+ plants are built it will translate into significant new demands for coal. Several coal to liquids plants are also in the works to convert coal to fuel that can be burned as gasoline or diesel. One money plant run by Satoil (STO) in Africa converts 120,000 tons of coal per day into 160,000 bbls of liquid fuel. There are various price points for this technology depending on the process and the scale but the average seems to be around $40 per bbl as breakeven. Since I doubt we will see those prices ever again these plants should begin to proliferate thus adding to the demand for coal.

Peabody reported earnings on Thursday of 53 cents per share, up from 42 cents in the year ago period. Analysts were expecting a 44 cents profit. Sales were up on higher volumes and on rising prices in all of the company's producing regions. Peabody said prices rose on average +6% in the US and +7% in Australia. BTU spiked from $40.85 to $44 on the news and I thought we had missed the boat. Fortunately Arch Coal warned on Friday that transportation problems would force it to lower production in 2007. Getting coal to buyers is a major problem and even more a problem for the smaller producers. This is why railroads like our current play CSX are doing so well. They do not currently have enough capacity to ship all the coal needed and are adding cars and track as quickly as possible. With 154 new plants in the works this will only become more of a profit center for the railroads and more of a problem for the smaller producers. Peabody, as the biggest in North America can contract for more capacity and can afford to pay more than the rest. The railroads want BTU for a customer because size does matter in the shipping business. Peabody still faces transportation constraints and said it was slowing growth plans for its Powder River Basin production by -7 million tons in 2007. They will still produce record volumes but the rail capacity will not be up to full speed until late 2007 or early 2008. Peabody also said it was deferring the startup of its planned School Creek mine to 2009 or beyond. Analysts liked this news saying the planned additional 45 million tons of production could drive prices lower. By waiting until later to bring this production online it would force power plants to stock up on coal in fear of a shortage of supply.

The Peabody President said the country was finally working its way out of the effects of the mild winter and they anticipate a tighter supply-demand picture going forward assuming weather patterns return to normal. He said coal stockpiles at U.S. power plants had fallen by -10 million tons during the quarter.

Peabody also said its growth will be accelerated by the $1.5 billion purchase of Australia's Excel Coal Ltd. The purchase will triple Peabody production in Australia from 9 million tons per year to 29 million. This coal is delivered to the fast growing Asian markets. Peabody purchased more than 500 million tons and three working mines from Excel. Much of this coal has already been committed under long-term contracts to Asia.

Based on the current trend, the number of new plants under construction and 150+ on the drawing board the future looks bright for Peabody. I believe this is a company we should be invested in for the foreseeable future.

Buy Jan-2009 $50 LEAP Call ZZT-AJ currently $8.70

No insurance put at this time with $35.

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Non-Energy Plays

The earnings cycle should always give us an opportunity to step outside of the energy sector and pickup a couple bargains when they appear. Earnings surprises sometimes take on a life of their own and the magnitude of the reaction can be completely off the scale. Today we have a couple of entries that fit that scenario.

CAT - Caterpillar

The first play outside the energy sector this week is CAT. Caterpillar was hammered for a -$10 loss on Friday after warning that sales could slow in 2007 if the economy continues to soften. They also said they were hit by slowing sales in the housing sector and by a buildup of inventory at customer locations in the diesel engine business ahead of the new rules for low emission diesel.

CAT said its business was still booming especially the overseas segments. CAT posted earnings of +$1.14 for Q3, up from 94 cents, when the street was expecting profits of $1.35. CAT only lowered its full year outlook for profits of $5.05 to $5.30 from prior estimates of $5.25 to $5.50. Profit growth is still expected to be in excess of +10%. These are still stellar profits investors fled the stock.

CAT said if the economy does slow they expect sales of their expensive yellow metal to slow with it. The risk comes from dealers who may be less inclined to carry a lot of expensive inventory if sales are slowing. CAT said they only expected 2007 to be a slower growth phase for the current cycle and not the start of an extended downturn. CAT said if the Fed cut rates early in 2007 they could beat their current forecasts but they denied they were being purposefully negative in their outlook to drive down expectations. They claimed instead they were just being prudent. CAT said oil exploration, mining, infrastructure development were areas of strength around the globe.

I believe CAT was being purposefully gloomy. They have been punished before for small misses and they took the "economic slowdown" opportunity as a way to lower expectations just in case.

I believe CAT is a buy here as long as you have a long-term view. At Friday's close of $59 there is about $2 of risk and plenty of upside. The $59 low is about two days away from being the low from the year with a high of $82. If the economy does succeed in achieving a soft landing I believe CAT will be well rewarded.

With earnings already behind us there is little risk of another surprise.

BUY JAN-2009 $70 LEAP Call VKT-AN currently $7.20

No insurance due to strong support at $57.

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TEX - Terex Corp

Terex is a diversified global manufacturer of construction, road-building and mining equipment, shipping, transportation and refining industries. The Company operates in five business segments: Terex Construction, Terex Cranes, Terex Aerial Work Platforms, Terex Materials Processing & Mining, and Terex Road Building and Utility Products. Earnings in the June quarter jumped +94% to $198 million. Revenues came from improved performance from the Terex Cranes, Terex Aerial Work Platforms and Terex Materials Processing & Mining segments due to strong demand.

TEX has been growing by leaps and bounds with several acquisitions and greater acceptance of its cranes and aerial work platforms. Demand is currently stronger than TEX can supply with construction booming around the globe especially in Asia.

The analyst community can't say enough good things about Terex and they seem to touch all the booming construction areas. With a market value of roughly $5 billion and sales of nearly $8 billion and a PE of only 12 it is tough not to take this company seriously even though it is only about 1/5th the size of Caterpillar.

Their biggest customer is United Rentals, which buys their cranes, lift booms, and various other products. Profits are expected to rise by +10% annually over the next five years. Sales last quarter increased +18% profits +66%. In July they targeted sales growth for the full year at +17% to +22% and raised their earnings targets to $3.55 to $3.75 per share from $3.20 to $3.40. Return on invested capital is near +30%. Those are my kind of earnings increases.

In April Terex bought 50% of a crane maker in China in an effort to reduce costs for its future products. TEX spiked last week on news that Oshkosh Truck was acquiring JLG Industries for $3 billion. Citigroup said that although the deal had nothing to do with Terex it bode well for the industry that Oshkosh was willing to pay that kind of money at this time in the economic cycle for aerial assets. Terex Genie business is JLG's main competitor and the two dominate the market. Genie accounts for 50% of Terex earnings.

After more than doubling in price last year TEX has spent six months consolidating between $40 and $50 after a 2:1 split. TEX broke out over $50 a week ago but the Caterpillar warning knocked it back to earth after a promising sprint.

The key here is that TEX has nothing to do with the Caterpillar story. It has no exposure to housing and business is booming. It was simply caught in the CAT downdraft and that gives us an opportunity to enter the position cheap.

BUY Jan-2009 $60 LEAP VXQ-AL currently $10.90

Insurance Put:
Buy Jan-$45 PUT TEX-MI only is TEX trades at $48.

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Play Updates

Existing Plays

Energy Plays

The current format of the Play Updates has changed. Only the pertinent data that has changed from the prior week will be shown in an effort to concentrate more on new commentary on new plays rather than restating existing positions.

To see the last full commentary on each current position click here: http://tinyurl.com/yest3l


DVN - $67.39 +$2.65 - Devon Energy

Something is up with Devon. More than 50,000 calls were purchased over the last week pushing open interest in call options to near 100,000. This contrasts to less than 10,000 OI two weeks ago. Puts total only 34,000 so it is definitely bullish ahead of their November 1st earnings. Oil and gas explorer Devon Energy Corp. said Monday it signed a long-term contract worth at least $690 million for a semi-submersible drilling rig capable of drilling up to 37,500 feet in up to 10,000 feet of water. This is a four-year contract with a six-year option. This is the second rig Devon has contracted and it will be put to work in the Gulf.

Insurance put:
Buy Jan-2007 $55 Put DVN-MK only if DVN trades at $60 again.

Earnings schedule: Nov 1st

LEAP Position: 10/03/06
Position: 2009 $70 LEAP Call VVH-AN @ $9.00


RIG - $70.28 +0.05 - Transocean Inc

No additional news and no change in play.

Their rig report released Oct-2nd: http://tinyurl.com/ho3mt

Insurance put:
Buy Jan $60 PUT RIG-ML only if RIG trades at $65.

Earnings schedule: Nov 2nd

LEAP Position: 10/03/06
Position: 2009 $80 LEAP Call VOI-AP @ $12.90


TSO - $64.57 +$1.15 - Tesoro Corporation

TSO said its refinery in Kapolei, Hawaii had resumed gas, diesel and jet fuel production after losing power during the earthquake. No other news and no change in play.

Insurance put:
Buy Feb $50 PUT TSO-NJ only if TSO trades at $54

Earnings schedule: Nov 2nd

LEAP Position: 10/04/06
Position: 2009 $70 LEAP Call ZGC-AN @ $7.70


APC - $45.65 +1.85 Anadarko Petroleum

APC commenced production from a new field in Bohai Bay, China. They expect to have 10 wells online and producing 15,000 bpd by the end of October with production expected to ramp up to 22,000 bpd from 22 wells by mid-2007. Anadarko has a 29.18% interest, CNOOC (CEO) 51%, Newfield (NFX) 12% and Ultra Petroleum (UPL) 7.82%. Anadarko has more than 2.45 billion bbls of proved reserves.

No change in play.

Earnings schedule: Nov 7th

LEAP Position: 9/20
Position: 2009 $50 LEAP Call OCP-AJ @ $6.90

Insurance put: 9/25
Position: Jan $40 PUT APC-MH @ $2.35, profit stop @ $35.00


CEO $83.36 +$0.42 Cnooc Ltd

Flat for the week after a sharp spike higher on the 13th. CEO announced the start of production in Bohai Bay, China with a 51% interest in the field. Initial production of 11,000 bpd ramping to 22,000 bpd in mid-2007.

No insurance put

Earnings schedule: March 2007

Position: March $90 Call CEO-CS @ $2.40 (no leaps)


SU $75.16 +2.74 Suncor Energy

Suncor continued its winning ways on no news. Earnings next Thursday.

Earnings schedule: Oct 26th

LEAP Position: 9/11/06
Position: 2009 $80 LEAP Call OYX-AP @ $14.30

Insurance put: 9/18
Position: Dec $60 Put SU-XL @ $2.10, no stop


SLB $60.10 +1.37 Schlumberger

SLB announced earnings on Oct-20th of 81 cents compared to analyst's estimates of 77 cents. The stock rallied to just over $63 but slipped on comments that drilling services could decline if gas prices failed to hold the current levels. SLB warned that current high gas inventories could slow drilling if gas demand did not return to normal winter weather. They said it has not yet impacted their activity but were only cautioning about future possibilities. They expected service activity to grow elsewhere as exploration and production companies fought the decline curve to bring in new reserves. I repeat, they said they had seen no weakness to date but were simply providing a cautionary statement.

Earnings schedule: Oct 20th: 81 cents vs est of 77.

LEAP Position: 1/2 9/11 @ $8.60, 1/2 9/12 @ $8.00
Position: 2009 $70 LEAP Call VWY-AN @ $8.30

Insurance Put: 9/18
Position: Jan $50 Put SLB-MJ @ $2.00, no stop


NBR $30.64 +$0.00 Nabors Industries

Dead calm. Earnings on Wednesday.

Link to recent presentation: http://tinyurl.com/o5jmy

Earnings schedule: Oct 25th

LEAP Position: 9/12/06
Position: 2009 $40 LEAP Call VRB-AH @ $4.50

No insurance


UPL $52.70 +3.95 Ultra Petroleum

UPL continues to extend its gains now that gas prices are rising again. Ultra announced the Bohai Bay, China project as well with 1,200 bpd net to Ultra initially rising to 1,700 net to Ultra by mid-2007. UPL bought back 2.1 million shares in Q3 and announced completion of 21 new wells in Wyoming since Sept 8th with 35 more completions expected by year-end. Each well as an initial production rate of 10.5 million cubic feet per day.

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.

OGIS Investment Conference on Oct-4th. http://tinyurl.com/y6xsq3
Enercom Oil and Gas presentation: http://tinyurl.com/kn5cb

Earnings schedule: Oct 31st

LEAP Position: 9/12/06
Position: 2009 $60 LEAP Call OZH-AL @ $10.60

Insurance Put:
9/18 Position: JAN $40 Put UPL-MH @ $2.85, no stop


SUN $65.58 -$0.07 Sunoco

SUN continued to hold its gains from the prior week. No news and no change in play.

Earnings schedule: Nov 1st

LEAP Position: 9/12/06
Position: 2009 $70 LEAP Call VUN-AN @ $13.50

Insurance Put:
Position: Jan $55 Put SUN-MK @ $2.40, no stop


PXP $42.39 +0.40 Plains Exploration

PXP continued to creep slowly higher. No change in play.

Maintain $35 profit stop on Jan $40 insurance put.

OGIS Investment Conference on Oct-4th: http://tinyurl.com/y7vn2w

Earnings schedule: Nov 2nd

LEAP Position: 9/12/06
Position: 2009 $50 LEAP Call ZXL-AJ @ 7.50

Insurance Put:
9/25 Jan $40 Put PXP-MH @ $1.90


FST $32.33 +$0.02 Forest Oil

FST is holding the big gains from the last two weeks. No news. No change in play.

Enercom conference presentation: http://tinyurl.com/ggzmv

No insurance due to cheap LEAP

Earnings schedule: N/A

LEAP Position: 9/12/06
Position: 2009 $40 LEAP Call OJG-AH @ 4.50

No insurance


XTO $44.41 +$1.21 - XTO Energy

XTO moved over $44 and held its gains with absolutely no movement the rest of the week. No other news, no change in play.

OGIS conference presentation on Oct 4th: http://tinyurl.com/v6ram
Enercom presentation: http://tinyurl.com/qorbr

Earnings schedule: Oct 24th

LEAP Position: 9/12/06
Position: 2009 $50 LEAP Call OUO-AJ @ $6.50

Insurance Put: Feb $35 Put XTO-NG @ $1.40, no stop


VLO $52.06 -$1.53 Valero Energy

Valero gave back half its gains for the prior week. Valero will probably not begin to rally until current stockpiles of distillates begin to dwindle. Crude oil inventories soared +5.1 mb last week but distillates fell -4.5 mb and gasoline fell -5.2 mb. U.S. refinery utilization fell -3% for the week as refiners continue to take advantage of the surplus to schedule down time. There were also unscheduled outages at several refineries for various reasons. No change in play.

Earnings schedule: Oct 31st

LEAP Position: 9/24/06
Position: 2009 $60 LEAP Call VHB-AL @ $7.70

Insurance Put:
Position: 9/25 Jan $45 Put VLO-MI @ $2.25, no stop


PBR - $85.56 -$0.37 - Petroleo Brasileiro

Petrobras held +$4 of its gains for the prior week. No complaints there. PBR is still facing an Oct-28th deadline for agreement to the nationalism of their assets in Bolivia. So far they are resisting. This is the only negative to the PBR play.

Earnings schedule: Nov 10th

LEAP Position: 9/08/06
Position: 2009 $100 LEAP Call VDW-AT @ $14.90

Insurance put:
9/11 January $70 PBR-MN @ $1.80, no stop


DO - $67.34 -$0.48 - Diamond Offshore

No movement, no news. Earnings on Thursday.

Earnings schedule: Oct 27th.

LEAP Position: 8/29/06
Position: 2009 $80 LEAP Call VCT-AP @ 14.20
Cost reduction: Oct $70 Put profit -3.15, cost now $11.05

Insurance Put:
Position: 10/08 Dec $60 Put DO-XL @ $2.40, no stop

Position closed:
10/03 October $70 put DO-VN @ $1.65, exit @ $4.80, +3.15


CSX - $35.98 +$1.17 - CSX Corp

CSX beat the street with a +50% jump in earnings over Q3-2005 and predicted a similar gain in the future. CSX is raising prices up to +6% and they expect to repeat it in 2007. We are well covered by the $30 put with the stock price at $30. No change in play.

Earnings schedule: Oct 17th, 54 cents

LEAP Position: 9/03/06
Position: 2009 $35 LEAP Call OBC-AG @ $4.90

Insurance put:
9/11 November $30 Put CSX-WF @ $1.40, stop $25


ATPG - $41.01 +$1.40 - ATP Oil and Gas Corp ** No Stop **

ATP continued to extend its gains off the October lows. No news. No change in play.

OGIS Investment Conference on Oct 5th. http://tinyurl.com/y5jod2

Earnings schedule: N/A

LEAP Position: 8/20/06
Position: 2009 $40 LEAP Call VCL-AH @ $11.70

Insurance put:
9/06 Position Dec $35 PUT HKU-XG @ $1.50, stop at $30


PTR - $109.83 +$1.26 - Petrochina

PTR held its massive gains from last week and actually tacked on a few more. News from China said Petrochina's oil and gas production rose +8% in Q3 to 260.7 million bbls. Prices received for this oil rose +30% to $61.50 per BOE. Gas production jumped +25%.

Current recommendation: Buy under $105

Earnings: August 24th, $10.1 billion, +29%

LEAP Position: 5/14/06
Position: 2008 $120 LEAP Call LJC-AD @ $16.20
Cost adjustment: Close short Dec $115 call +1.30 = $17.50
Cost adjustment: Close long July $90 puts +3.00 = $20.50
Cost adjustment: Close long Sept $110 put -2.60 = $17.90

Insurance put: (9/11)
Position: December $100 Put PTR-XT @ $2.20, stop $90

Insurance put: (8/13)
Position closed:
Sept $110 Put PTR-UB @ $2.40, stop @ $106 @ $5.00, +2.60

Insurance combo: Closed
Short: Dec $115 Call PTR-LC @ $3.20, 6/13, exit $4.50, -1.30
Long: (2) July $90 Puts PTR-SR @ $3.70, 6/13, exit $0.70, -3.00

Insurance puts: (Closed 6/7)
Closed: June $105 PUT PTR-RA, @ $4.20 (5/22), exit 6/7 @ $4.30


CCJ - $38.11 +$0.72 - Cameco ** No stop **

CCJ continued to creep higher as a flurry of articles made the rounds about the shortage of uranium. 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

LEAP Position: 2/25/2006
Position: 2008 $40 LEAP LTA-AH @ $9.00

No insurance put

Non-Energy Plays

DHI - $23.23 -$0.55 - DR Horton

After spiking up last week it was straight back to support this week. CTX has earnings this week so look for sector feedback. Initial support at $23, strong support at $20. No change in play.

Earnings schedule: Nov 14th

LEAP Position: 9/24/06
Position: 2009 $25 LEAP Call VEI-AE @ $5.10

Leaps Trader Watch List

Dropped Entries
BTU - Peabody Energy - Moved to active play

New Watch List Entries

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.

Breakdown Target: $28.50 *** Change ***

Buy 2009 $30 LEAP Call VEC-AF


ECA - Encana

EnCana Corporation is a natural gas producer in North America. It is a holder of natural gas and oil resource lands onshore North America. The Company is also engaged in select exploration and production activities internationally. EnCana operates under two main divisions: Upstream and Midstream & Marketing. The Upstream division manages EnCana's exploration for, and development and production of, natural gas, crude oil and natural gas liquids (NGLs) and other related activities. EnCana's Midstream & Marketing division encompasses the Corporation's market optimization activities and remaining midstream assets. EnCana is in the process of divesting the majority of its remaining midstream assets, including its natural gas storage business and the Entrega Pipeline.

Strong support at $40 should be our first target with a backup at $35 for a second position. Encana is attempting to sell some midstream assets and that could impact the stock price significantly when it happens.

Breakdown target: $42.50

Buy 2009 $50 LEAP Call ZBM-AJ


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: $76

Buy 2009 $90 LEAP Call VXM-AR


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

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

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)


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