Option Investor
Newsletter

Weekly Newsletter, Saturday, 11/11/2006

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Leaps Trader Commentary

Oil Traders Can't Stand Prosperity

After a sudden sprint to $61.35 on Thursday the price of oil imploded again on Friday falling 1.75 to $59.50. The sudden prosperity evaporated as traders took profits into the close. It is all about the news and the news on Friday was a forecast of slowing demand by the IEA. Despite the IEA being the most unreliable predictor of oil demand their routine announcements add further volatility to the market through headline risk.

It is all about the headlines and Friday's headline that "global oil demand had slowed." That conjures up visions of tankers lining up outside offloading points with millions of barrels of oil and no place to put it. That is far from the case. The IEA said demand for 2006 had only grown +1.10% vs +1.12%. That equates to a drop in demand from 84,500,000 bpd to 84,483,100 bpd. This represents a whopping -16,900 bpd drop in the demand estimate. Was that worth a drop of -1.75 in the price of oil on Friday. I seriously doubt it but it proves that it is all about the headline not the facts.

The IEA also reduced their demand growth estimates for 2007 from a daily demand of 86,000,000 bpd to 85,900,000, a drop of -100,000 bpd. What was lost in the headline shock was the translation that even with the -100K drop in estimates it still represented a jump in demand of 1,500,000 bpd. That is the equivalent of adding the complete output of another Libya, the 7th largest OPEC exporter, to the daily production demand. That is just slightly below the daily output of Kuwait. The bottom line was no material change in the forecast but a carefully worded press release succeeded in capturing the global headlines by the IEA once again.

In other news demand from China in September fell to growth of only +6%. That was also trumpeted as a major change but it is all based again on the context of the statement. So far in 2006 China oil demand growth is roughly +7-8% for the year. Earlier this year it was growing at a +9% rate. September saw growth dip as China raised the prices on gasoline and diesel for the second time this year. This pushed growth to the lowest level for the year as consumers absorbed the rate increases. Usage is expected to rebound just like demand in the US did once the sticker shock of $3 gasoline passed. The demand dip is only temporary and growth for the entire year is expected to be in the +7-8% range as is the expected growth for 2007. When putting this in perspective it growth of 8% that much worse than the 9% growth at the start of 2006? Not in my book.

Also overlooked was the IEA claim that oil demand in Q4 would rise +2.4 mbpd over Q3. That jump of +2.4 million bbls will quickly erase the current surplus and put the markets back in balance. The October decline was simply a seasonal decline accelerated by some demand destruction from late summer due to higher gasoline prices. Readers of this newsletter will remember that we were expecting the decline as far back as mid August. It is only those who are unfamiliar with the oil sector and seasonal trends that get excited and shaken out of their positions when these headline occur.

There are signs that a global contraction in economic activity did slow growth in oil demand and should this economic contraction continue we would have slower oil demand growth until that contraction passed. Remember, that is slower growth not a reduction in demand. Keep that fact in focus as you review future headlines.

The earnings for the energy sector are over and there were quite a few surprises to the upside. The expectations for lower earnings due to the reduction in oil prices did not come true and the sector performed beautifully. The drillers were the standouts with strong earnings and strong guidance. Those who felt the drilling sector would show the effects of a pause in exploration were wrong and drillers like RIG, NBR and DO posted strong earnings with rising backlogs and rising day rates. The expected cooling in the sector did not appear.

I am not adding any new plays this week. We have a full boat of energy plays and we need to wait for either a strong dump in oil prices or an upward trend to appear before adding new targets. I also could not find any non energy plays I was willing to put my money in given the current lackluster state of the market. If I am not willing to buy them I certainly can't recommend them. The Dow is wandering sideways and has lost its leadership role. The Nasdaq is trying to assume its normal end of year role as leader and is finally trading over the prior 2375 resistance range. I would take a chance on a tech LEAP but I could not find any that were stable enough to place a bet. Hewlett Packard was the only tech that attracted my attention but I added it to the watch list rather than making it a firm play. If the Nasdaq does take over as market leader then we will catch HPQ on the breakout. I refuse to add plays just to add plays. We are better off waiting for the market to stabilize than entering a new position on hope alone.


Chart of December Crude - Daily

December Gas Futures Chart - 30 min

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None this week.
 


Play Updates

Existing 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. Each play has a link back to either its last full commentary or its initial description.

************************

HES - $45.00 + 2.15 - Hess Corporation (Formerly (AHC))

No news but a nice gain as a new trend develops. No complaints, no change in play.

To see the initial commentary on this position click here

Position:
11/05/06 2009 $50 LEAP Call VHS-AJ @ $6.80

No insurance due to cheap LEAP, strong support and positive trend.

************************

BHP - $42.29 -.34 - BHP Billiton

BHP eased slightly on the pause in gold prices. No news and no change in play.

To see the initial commentary on this position click here

Insurance Put:
Buy Feb $40 Put BHP-NH currently $1.50

Position:
10/29/06 2009 $40 LEAP Call ZPK-AH @ $11.10

**********************

BTU - $41.46 -.59 - Peabody Energy

BTU fell slightly after Foundation Coal warned on Tuesday they would miss earnings due to higher costs and lower production. It has nothing to do with BTU but they were painted with the same broad brush. No change in play.

To see the initial commentary on this position click here

Earnings: Oct 19th .53 cents, up +26%

Position:
10/22/06 Jan-2009 $50 LEAP Call ZZT-AJ @ $8.70

No insurance put at this time.

*******************

DVN - $70.09 +1.36 - Devon Energy

Devon continued to move higher on positive news from the Barnett Shale production area. Boardwalk Pipeline and Enterprise Partners announced plans to build a $1.1 billion 355 mile pipeline which will carry nearly 1 bcf of gas per day much of it from Devon wells. No complaints and no change in play.

To see the last full commentary on this position click here

Insurance put:
Buy Apr-2007 $60 Put DVN-PL only if DVN trades at $64 again.

Earnings schedule: Nov 1st, $1.66, beat by +14 cents

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

**********************

RIG - $75.67 +.57 - Transocean Inc

RIG hit a new three-month high on Thursday at $78.50. The positive earnings continue to provide strong support. RIG will present at the Bank America Energy Conference on Nov-16th. Investors can listen in at the company website, www.DeepWater.com. No change in play.

Their rig report released Oct-31st: http://tinyurl.com/vkwuv

To see the last full commentary on this position click here

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

Earnings schedule: Nov 2nd, 83 cents, 12 cent beat

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

**********************

TSO - $65.40 +$0.93 - Tesoro Corporation

TSO is trying hard to break resistance at $66 but can't seem to get that last push higher it needs to make the break. No news and no change in play.

To see the last full commentary on this position click here

Insurance put:
Buy Feb $55 PUT TSO-NK only if TSO trades at $59

Earnings schedule: Nov 2nd, $3.92, 66 cent beat

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

*******************

APC - $47.25 -0.20 Anadarko Petroleum

APC hit a new two-month high on Thursday at $49 but gave up ground due to profit taking on Friday's decline in oil. APC also said it was considering selling its Venezuelan assets given the asset grab underway by Hugo Chavez. Less than 1% of APC income comes from Venezuela and they are considering cutting the risk by dumping the properties. Other majors are considering the same tactic in reaction to continued attacks on assets through taxation and new equity rules. This would be a positive for me as it would remove a potential future negative event. No change in play.

To see the last full commentary on this position click here

No change in play.

Earnings schedule: Nov 7th

LEAP Position:
9/20/06 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 $87.42 +2.70 Cnooc Ltd

CEO spiked +$4 intra-week on news of a new gas discovery in the Bohai Bay field off China's coast. This news sent CEO over resistance at $85 to a new two month high. No change in play.

To see the last full commentary on this position click here

No insurance put

Earnings schedule: Oct-31st, $2.33B rev, +25%, no EPS given

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

*******************

SU $79.21 +2.10 Suncor Energy

Suncor spiked to a new 2 month high at $81.80 on Thursday but gave into profit taking on Friday. After the close on Friday Suncor announced an 8-cent dividend. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Oct 26th, $1.48 vs $0.57 year ago qtr

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 $63.30 -0.19 Schlumberger

SLB spiked to hit a new three-month high at 66.24 on Thursday but cratered on Friday profit taking back to $63 to remove all the gains for the week. There was no news and no change in play.

To see the last full commentary on this position click here

Earnings schedule: Oct 20th: 81 cents vs 44 in Y.A.Q.

LEAP Position:
1/2 9/11/06 @ $8.60
1/2 9/12/06 @ $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 $31.92 +$0.60 Nabors Industries

No news, no change in play.

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

To see the last full commentary on this position click here

Earnings schedule: Oct 25th, $1.02 vs 0.55 in YAQ

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

No insurance

*******************

UPL $51.20 -.64 Ultra Petroleum

UPL is still undergoing post earnings depression and is showing an identical chart to the December gas futures. It is flat lining with high volatility. UPL is tied to gas prices and those prices will move higher as colder weather arrives. No change in play.

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

To see the last full commentary on this position click here

Earnings schedule: Oct 31st, +33 cents

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 $65.33 -1.86 Sunoco

SUN continued to vacillate between $64-$67 on no news. No change in play.

To see the last full commentary on this position click here

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 $42.79 +0.59 Plains Exploration

PXP spiked +2.50 on earnings and the completion of $1.6 billion in asset sales. The asset sales allowed PXP to extinguish $250 million in debt and fund a $600 million CapEx budget for 2007. Unfortunately Friday's drop in oil prices saw profit takers erase most of those gains. No change in play.

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

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

To see the last full commentary on this position click here

Earnings schedule: Nov 9th

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 $33.33 -$0.06 Forest Oil

FST was the victim of severe volatility after they announced earnings, which after items rose ten times the same quarter in 2005. Forest is poised to see a substantial increase in production and I do expect resistance at $35 to be broken soon. No change in play.

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

To see the last full commentary on this position click here

Earnings schedule: Nov-8th, +1.21 vs +0.05

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

No insurance due to cheap LEAP

*******************

XTO $46.28 +$0.42 - XTO Energy

XTO announced it has hedged 50% of its 2007 gas production or 338 BCF at $10.24. This is very positive as it gives them a guaranteed revenue base while allowing them to profit even more from the unhedged portion if gas prices rise further. The market did not applaud but XTO did hold its ground just under resistance at $48. No change in play.

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

To see the last full commentary on this position click here

Earnings schedule: Oct 24th, $0.99 vs $0.85 in YAQ

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 $52.76 -$.84 Valero Energy

Valero appears to be forming a base as refining margins are increasing. The Motley Fool called VLO the best blue chip for 2007 on Friday citing its dominance in the US market and its better margins from processing sour crude. Its PE of only 7 is well below its peers. Nothing new for us as I have been preaching the benefits of VLO for several years now. We have strong resistance at $55 but I think we will close the year a lot higher.

To see the last full commentary on this position click here

Earnings schedule: Oct 31st, +$2.42 vs $2.30

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 - $92.88 +$3.97 - Petroleo Brasileiro

PBR sprinted to a new three month high this week as Peru offered a sweetheart deal to Petrobras to offset the problems they had with Bolivia. Peru is signing a multi year deal with PBR and the Peruvian President Alan Garcia promised that details would not change in the future. He took a jab at the "leftist" countries in the region and offered Brazil access not only to Peruvian hydrocarbons but also hydroelectric sources. PBR also posted profits that rose +29%. I think PBR is going to move higher now that the Bolivia issue has been settled. No change in the play.

To see the last full commentary on this position click here

Earnings schedule: Nov 10th, +29%

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 - $75.26 +4.28 - Diamond Offshore

DO was our strongest performer last week with nearly a +$10 surge from the prior week's lows. Even after a -2.50 end of week swoon we were left with a nice gain for the week. There was no news other than strong earnings from other drillers. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Oct 27th. $1.19 vs $0.60 in YAQ

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 - $36.81 +$1.11 - CSX Corp

CSX continues to move higher after the sell off in late October. The stronger jobs numbers suggests the economy is not as weak as investors thought and shippers are reporting strong volumes. No other news, no change in play.

To see the last full commentary on this position click here

Earnings schedule: Oct 17th, 54 cents, +50%

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 - $44.24 +$1.43 - ATP Oil and Gas Corp

ATP continues to move higher on its strong earnings and appears poised to break resistance at $44 and head for a new high over $50. With a market cap of only $1.3B they could be a prime takeover candidate. No change in play.

To see the last full commentary on this position click here

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 - $115.44 +$3.18 - Petrochina

PTR is finally gaining some speed and hit six-month resistance at $117 on Thursday and only suffered limited profit taking. I think a breakout is just ahead and we could see $200 by the end of 2007. No change in play.

To see the last full commentary on this position click here

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


****************************
Non Energy Positions
****************************

CAT - $59.60 - 0.83 - Caterpillar ** Stop loss $58 **

CAT retested its disaster bottom at $59 on Friday and this should be the point where we find out if it will recover or roll over for good. We have plenty of time on the LEAP but I am going to put a stop on it rather than initiate the put position I had diagrammed before. Stop loss $58.

To see the initial commentary on this position click here

Position:
10/22/06 JAN-2009 $70 LEAP Call VKT-AN @ $7.20

Insurance Put: cancel prior put target


***********************

TEX - $52.59 +1.58 - Terex Corp

Terex has shown some significant volatility over the last two weeks but continues to hold well above support at $50. No change in play.

To see the initial commentary on this position click here

Earnings: Oct 25th, $0.98 vs $0.51 in YAQ

Position:
10/23/06 Jan-2009 $60 LEAP VXQ-AL @ $10.90

Insurance Put:
10/23/06 Jan-$45 PUT TEX-MI only is TEX trades at $48.

***********************

DHI - $22.45 -$0.32 - DR Horton

After a significant decline midweek DHI sprinted higher on Friday to close flat for the week. Eventually the housing market will find a bottom that sticks so no change in play.

To see the last full commentary on this position click here

Earnings schedule: Nov 14th

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

 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
HPQ
Hewlett-Packard

Current Watch List

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: $83

Buy 2009 $90 LEAP Call VXM-AR

*****************************

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 $43

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: $51

Buy JUNE $55 Call PCU-FK (no leaps)

************************

HPQ - Hewlett Packard

Hewlett-Packard Company (HP) is a provider of products, technologies, solutions and services to individual consumers, small and medium-sized businesses and large enterprises. Its offerings span enterprise storage and servers; multi-vendor services, including technology support and maintenance; consulting and integration, and managed services; personal computing and other access devices, and imaging and printing-related products and services. During the fiscal year ended October 31, 2005, HP's operations were organized into seven business segments: Enterprise Storage and Servers, HP Services, Software, the Personal Systems Group, the Imaging and Printing Group, HP Financial Services and Corporate Investments.

Breakout trigger: $41.25
Breakdown trigger: $38.50

Buy 2009 $45 LEAP Call VHP-AI currently $6.40
 


DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives