Option Investor
Newsletter

Weekly Newsletter, Saturday, 12/16/2006

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

OPEC Is Our Friend, Really!

The American consume would never call OPEC their friend but as energy investors they may turn out to be our not so silent partner. We both have the same goal in mind. We want oil prices to continue higher so our investments pay a higher return. Along the way we will pay more for gasoline but I would happily trade an extra $10 a tank for an extra $1000 profit per position.

OPEC met last week and agreed to potentially cut an additional 500,000 bbls per day beginning February 1st. The deciding factor will be the price of oil on Feb 1st. If the price of the OPEC basket of crude is $60 or over they will probably not make the cut. The OPEC basket of crude typically trades at a $5 discount to the light sweet crude prices referenced by our futures contracts. This means they are looking for a LSC price around $65 as being reasonable. Whether this cut actually occurs is anybody's guess but the announcement had the desired impact on prices pushing oil higher to close right at $63.50.

When OPEC decided to cut 1.2 million bbls per day as of November 1st they decided at the meeting exactly how much production each member country would cut to meet their goals. At last week's meeting there was so much disagreement they did not make any quota allocations preferring instead to wait until the cut was actually needed. Since the allocations they made for the November 1st production cut never occurred it makes it even less likely that any cut will occur in February. Even those countries who were the most vocal in calling for the November cut, Venezuela and Nigeria, failed to cut any production. OPEC is notorious for failing to follow through on their quotas and this time around it will probably be no different.

PetroLogistics, the leading tanker tracker and OPEC production analysis company, said November production fell only -100,000 bpd and nowhere close to the -1.2 mbpd OPEC had said it would cut. According to PetroLogistics the December shipments are also holding at the same -100,000 bpd level. PetroLogistics is forecasting the December supply to be 29.3 mbpd according to the preliminary data. The official OPEC production quota after the November 1st cut is 27.3 mbpd. Obviously there is some serious cheating in progress.

You may be wondering why the OPEC announcement last week is so beneficial to us if they are not obeying their own rules. The major point that should not be lost on anyone is that OPEC has shifted from a posture of maintaining a supply of oil at an economically stable price to a more aggressive posture of maximizing their profits. Formerly OPEC wanted to maintain the supply of oil and prices at a level where it was not economically disruptive but still cheap enough to discourage large scale exploration by non OPEC countries. As long as OPEC could maintain that balance they were happy knowing they would eventually become the only global vendor when other supplies began to decline. Basically they knew higher prices would be coming in the future and they were content to wait rather than be faced with competition from other sources. Essentially they were waiting until the time was right to play their trump card.

The difference today is the non OPEC supply is getting tighter as depletion rates are rising and offsetting new discoveries. Demand is also rising as countries like China and India explode into the 21st century. OPEC feels the time is right to play their trump card and begin raising prices to a more market centered rate. They are confident that there is no source of global supply available to compete with them and they are risking nothing now by taking a more aggressive posture. This is the day they have been waiting for since 1950. Actually they probably jumped the gun by a year or so but it will not make any difference in the long run.

With the spike in oil prices over the last two years they have seen that $60 oil has failed to depress the global economy to any great extent and was actually a relief after the spike to the $78.50 high. Now $60 appears to be the floor OPEC is willing to defend. Even better for us it appears they are prepared to slowly push prices higher once winter demand absorbs the current excess supply of oil in the market place.

OPEC members are not stupid even if they are greedy. They will ignore their own quotas only as long as they can get away with it. If the price does begin to fall they now have the official vehicle in place to deal with it. If they actually cut production back to their target of 26.8 mbpd as of February 1st the amount of surplus oil in the market place would be consumed very quickly. According to analysts the current surplus in global inventories is somewhere in the 70 million bbl range. This is down -40 million bbls from the level seen only two months ago. With global consumption of approximately 85 mbpd it is less than one day of excess supply. That is not the total of oil in the system just the excess. For instance the US has 335 million bbls in inventory at refiners and storage facilities not counting the strategic petroleum reserve. That represents just over 15 days of inventory at current consumption levels. That stretches to 24 days if you take into account current North American production including imports from Canada and Mexico. Still 24 days is not a long time considering the volatility in the Middle East. Even with the excess inventory we are always vulnerable to any oil shock anywhere around the world.

The excess inventory came about as the result of three factors. First the winter of 2005 was the warmest on record in modern times in the northern hemisphere. Demand for heating oil and natural gas were minimal allowing supplies to remain at high levels without normal winter depletion. Those supply levels were kept at high levels ahead of the 2006 hurricane season, which was predicted by forecasters to be worse than 2005. Refineries and storage facilities continued to stockpile oil in preparation for a repeat of problems seen in 2005. We suffered months of lost production, some permanently lost and the loss of hundreds of oil facilities in the Gulf. Inventory levels rose in anticipation of another gulf disaster. As you know that disaster never arrived and we were blessed with almost zero impact from the few hurricanes that skirted our shores. The third event was a result of the first two. Prices rose to record levels prompting gasoline prices to move well over $3 in the US and even higher elsewhere in the world. Demand destruction set in and consumers altered their driving habits to consume less gasoline. There was a temporary move to more efficient vehicles and gas-guzzling SUVs actually fell out of favor for many months. This demand destruction was thought to have caused a temporary dip in demand of approximately 1 mbpd worldwide. That left us with high supplies from lack of winter demand. Even higher supplies from a nonexistent hurricane season and a temporary drop in demand for those supplies. The combination of those factors were coincidental and temporary.

OPEC knows if they reduce the excess inventory before winter is over they will be ready for the next chapter in the price of oil. That chapter will be the 2007 hurricane season. We were lucky in 2006 but as we all know every year brings with it new risk. That risk is actually growing as global warming increases the severity of weather patterns with the potential for even stronger and more frequent storms. By depleting inventories ahead of the summer driving season OPEC can create a situation where any hurricane event will produce a repeat of the price spike seen in 2005. The price will rise in the mind of the consumer because of the storms NOT because of OPEC. They can sit back and watch prices move to a higher level confident they can then raise their price supports to a higher level once the storm season abates. They have time and geology on their side. They know they have the majority of the remaining oil and they know non OPEC sources are rapidly depleting. They know they will eventually be getting $100, $125 or even $150 per bbl. All they have to do is bide their time and let nature and consumers do the work for them. As energy investors OPEC is our friend. Like in grade school it was always beneficial to have the biggest kid in class as your friend. OPEC will be the biggest bully on the planet and in terms of remaining reserves they are growing stronger as each day passes as non OPEC sources are depleted. Every time you hear about an OPEC decision on the news just say to yourself, OPEC is my investment partner. They are providing for my secure retirement and an education for my kids.

Encana (ECA) needed protection last week but there was none to be found. Encana fell -4.5% on Friday after releasing production guidance that was lower than their guidance of just five weeks ago. Encana, like other energy companies operating in Canada is seeing a sharp spike in exploration and production costs due to a shortage of equipment and personnel. Several companies have either shutdown or postponed exploration in Canada until the situation moderates. Encana announced a budget of $5.9 billion for 2007 to grow natural gas and oil sands production, a -6% decrease from 2006. The company will fund the budget entirely from internal cash flow and have $1.7 billion in free cash flow remaining. Natural gas production is expected to grow by +9% but oil production is expected to decline by -5% due to accelerating depletion of existing fields. On the plus side they are scheduled to finalize an agreement on Jan-2nd with Conoco Phillips to create an integrated heavy oil business, which will generate immediate additional cash flow for Encana. Encana's average daily production from the partnership is expected to grow about +44% in 2007 to an additional +31,000 bpd. They expect additional pre tax cash flow in the range of $550-$650 million net to Encana in 2007 from the partnership. Encana had planned to repurchase 10% of outstanding shares in 2006 and they have completed 9.4% to date, 81 million shares, and expect to complete the buyback before year end. In 2007 they plan on purchasing another 3-5% or 24-40 million shares out of free cash flow. They are also planning on DOUBLING the dividend to 80 cents per share in 2007. Encana has hedged 1.5 Bcfpd of their 1.75 Bcfpd of 2007 production at $8.49 per Mcf with put options on the rest at $6 per Mcf. Personally I think Encana is doing exactly what they should do and that is increase profitability while targeting their budget dollars where it will do the most good rather than just throw money at everything all at once. What many people don't understand is that those reserves in the ground will become more valuable as each day passes. Encana can afford to wait until the economics make sense to produce them. Why pay high prices today to extract them for $8 per Mcf when they can wait a year or two and get $12 or higher for the same gas?

The sharp sell off came from a downgrade to a SELL by Citigroup citing concerns over the company's portfolio and the reduction in guidance. The selling accelerated by a triple digit loss, -156, in the Canadian markets with energy, materials, metals and financials all taking severe hits. Petro Canada (PCZ) dropped -5% or -$2.11. I am not recommending Encana as a play this weekend because we don't know how long this weakness will last. Chesapeake was hit with the same kind of selling the prior week and continued lower on the fall in natural gas prices this week. Encana, currently $50 is too expensive for the at-the-money $50 LEAP and too far away from the $60 LEAP. It has strong support in the $44-$46 range and I would rather wait to see if we can buy it cheaper.

Encana Chart - Daily

Our Chesapeake play from last week did not get off to a good start but our China plays are doing very well. PetroChina, Sinopec and our Asian ETF the FXI all hit hew historic highs for the week. Definitely no complaints. Unfortunately I do have a complaint about LNG and BTU as they led the loser's list. Remember, we are long term investors not short term traders and we have to take the bad weeks with the good.

January crude futures expire for trading on Tuesday and with Friday's close at $63.50 and strong resistance I would not be surprised to see some strong volatility before Tuesday's close. It all depends on who is holding the most positions in the expiring contract, the longs or the shorts. Longs will be forced to sell and shorts forced to buy so whoever has the biggest position will determine the direction of the price.

The last Commitment of Traders (COT) report for Dec-12th showed commercial traders were long 1,874,312 contracts and short 1,866,618 for a net long position of 7,694 contracts. That does not tell us much since those positions are spread out across all dates. Speculators were long 176,713 contracts and short 140,334 for a net long position of 36,379 contracts. That was a change from the prior week with a drop of -1197 for the longs and +13,659 for the shorts. Again, this does not tell us exactly what is remaining open in the January contract but speculators typically deal in the front month contract. Even with the sharp increase in the short interest it still left that sizeable imbalance to the long side of those 36,379 contracts. If those positions still exist it would suggest a downward bias as they are closed. Just remember, this data is a week old and was prior to the OPEC meeting. It could easily be completely reversed by now.

I am constantly asked for profit targets on existing plays. Even more so now that some are up so strongly. Unfortunately I can't give you a target on a LEAP with two years to go. With oil support at $60 and most predictions for $75 to as much as $85 in 2007 and even higher for 2008 I don't know why anyone would want to be exiting a profitable play. Now we have OPEC acting aggressively in our favor to keep prices high. I do expect exiting some plays in September depending on the hurricane season is playing out. We will reenter with longer leaps at the end of October once the normal end of summer demand dip is over. Remember, we waited for months in 2006 for the October dip to arrive to establish these positions. Don't be in a hurry to exit just because your profits are stacking up. There are more to come. We will be selling some calls in late January and early February to reduce our costs ahead of the normal March demand decline.

Jim Brown


January Crude Oil - Daily


February Crude Chart - 30 Min


December Gas Futures Chart - Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays
CSX Stopped Out

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.

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

THE $38.96 +0.59 - TODCO

Todco continues to consolidate under resistance at $41. No change in play

To see the initial commentary on this position click here

Breakdown target $39 hit 12/7/06

Position: 2009 $45 LEAP ZYU-AI @ $8.40

Insurance Put: None

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

CHK $31.15 -0.93 - Chesapeake Energy

CHK slipped slightly lower on the drop in gas prices and the disaster at Encana. Strong support at $30. No change in play.

To see the initial commentary on this position click here

Position: 2009 $35 LEAP VEC-AG currently $5.30

Insurance put: none

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

LNG - $28.22 -2.48 - Cheniere Energy ** Stop Loss $27.00 **

Somebody is taking profits in LNG and we came very close to being stopped at $27 on Friday morning. There is no news and we are keeping the stop at $27.

To see the initial commentary on this position click here

Breakout target $31 triggered 11/30/06

Position 2009 $30 LEAP ONP-AF @ $8.50

Put insurance: None

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

SNP - $85.56 +4.98 Sinopec

Absolutely amazing! Sinopec rallied back from the small dip on profit taking in the prior week to add nearly +$5 and close at a new historic high on Friday. I sure hope everyone bought a bunch of contracts when it was recommended. The position has more than doubled in three weeks. No change in play and let's hope there are no changes in performance.

To see the initial commentary on this position click here

Entry $74.44 11/28/06

Position: July $80 Call SNP-GP @ $5.40

No insurance

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

FXI $101.00 +4.15 - FTSE/Xinhua China 25 Index Fund

Another nice rebound in FXI to a new historic high. No news.

The iShares FTSE/Xinhua China 25 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE/Xinhua China 25 Index.

Component list

This iShare focuses on the largest companies in China (58% of it positions) and Hong Kong (42%). These are the most liquid companies in these markets. With Asia growing by leaps and bounds the FXI generated a +40% return in 2005 without using options. We hope to do better using LEAPs.

Breakout target: $94.50 hit 11/22/06 on gap open to $95.80

Position: 2009 $100 LEAP Call VHF-AT @ $13.50

No insurance

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

MRO $95.50 +1.77 - Marathon Oil

After being downgraded by one analyst the prior week Marathon was upgraded or reiterated by several this week. Morgan Stanley said the major oils, including MRO, were undervalued by 8-10% at $60 oil and even more if oil continued to rise. MRO pulled back from a new historic high on Friday on post OPEC profit taking. No change in play.

To see the initial commentary on this position click here

Position 2009 $100 LEAP Call VXM-AT @ $12.60

Insurance put: None

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

HES - $52.25 +.34 - Hess Corporation (Formerly (AHC))

HES set a new four-month high on Thursday and gave back only 26 cents on Friday. It appears HES is consolidating for another sprint higher. No complaints and 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 - $40.38 -0.25 - BHP Billiton

BHP continues to hold just above support at $40 while the Phelps Dodge acquisition remains in focus. No change in play.

To see the initial commentary on this position click here

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

Insurance Put:
11/12/06 Feb $40 Put BHP-NH @ $1.50

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

BTU - $43.84 -3.82 - Peabody Energy

BTU slipped after selling $2.4 billion in convertible notes to fund its acquisition of Excel Coal in October. JP Morgan upgraded BTU to neutral from underweight after the company presold the bulk of its expected 2007 production for favorable prices. BTU is also delaying some announced enhancements to production to reduce supply and support prices. 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 - $70.68 -1.39 - Devon Energy

Devon held its ground above support at $70 as it consolidates from the ratings changes in the prior week. No change in play.

To see the last full commentary on this position click here

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

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

Insurance put:
Buy Apr-2007 $60 Put DVN-PL only if DVN trades at $69 again.

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

RIG - $83.46 +3.46 - Transocean Inc

RIG continued higher after Morgan Keegan upgraded RIG, DO and GSF to an outperform. Friday was a new five month high. No change in play.

Their rig report released Dec-1st

To see the last full commentary on this position click here

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

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

Insurance put:
Buy Jan $65 PUT RIG-ML only if RIG trades at $71.

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

TSO - $71.63 +.95 - Tesoro Corporation

Continued consolidation above support at $70. No news and no change in play.

To see the last full commentary on this position click here

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

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

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

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

APC - $45.50 -3.47 - Anadarko Petroleum

APC took a hit on a downgrade from Goldman Sachs based on concerns about its ability to produce once the current divestiture plan is completed. APC announced plans to raise approx $6 billion by selling non core assets. The proceeds will be used to pay for the acquisition of Kerr McGee back in October. Those assets, which do not fit the current game plan are being liquidated. No complaints here.

Other analysts took a more positive view of Anadarko shares over the longer term. Merrill Lynch analyst John Herrlin Jr. upgraded Anadarko to "Buy" from "Neutral" on Monday, in part because of forecasts for higher oil prices. Rehan Rashid, an analyst with Friedman Billings Ramsey, rates the stock "Outperform," and Citigroup analyst Gil Yang and UBS analyst William A. Featherston rate it a "Buy."

No change in play.

To see the last full commentary on this position click here

No change in play.

Earnings: Nov 7th, +$1.75 vs +$1.12

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 $89.85 +1.21 - Cnooc Ltd

CEO appears about ready to breakout of current resistance at $90 and head for new highs. On Tuesday CEO announced a new 8-year deal with Devon to explore the deep water in two ares of the Western South China Sea. Devon will cover exploration costs for a 49% share in the wells. No change in play.

To see the last full commentary on this position click here

No insurance put

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

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

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

SU $80.90 +1.65 - Suncor Energy

Suncor hit a new 3-month high on Thursday and gave back very little on the post OPEC profit taking. No news and no change in play.

To see the last full commentary on this position click here

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

LEAP Position: 9/11/06
Position: 2009 $80 LEAP Call OYX-AP @ $14.30
Cost update: +2.10 to $16.40 for expiration Dec put

Insurance put: 9/18
Position: Dec $60 Put SU-XL @ $2.10, expired

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

SLB $67.55 +1.03 Schlumberger

SLB recovered from a two-week slide and retested resistance at $69 on Friday. No change in play.

To see the last full commentary on this position click here

Earnings: Jan 19th

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 $32.44 -.68 - Nabors Industries

Nabors is wandering and an upgrade to outperform by RBC Capital Markets failed to impress. No news and no change in play.

Link to recent presentation

To see the last full commentary on this position click here

Earnings: 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 $50.47 -1.58 - Ultra Petroleum

Falling gas prices continue to pressure UPL even though their production is almost entirely hedged at much higher levels. There is a new webcast from the AMEX conference last week. 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.

AMEX Oil & Gas Conference Dec 5th
OGIS Investment Conference on Oct-4th
Enercom Oil and Gas presentation

To see the last full commentary on this position click here

Earnings: 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 $68.26 +1.33 - Sunoco

SUN returned to pressure resistance at $69 after releasing guidance for 2007. Their capital budget will be $1 billion for refinery upgrades and expected net income to be around $850 million. No change in play.

To see the last full commentary on this position click here

Earnings: Nov 1st, $2.76 vs $2.39

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 $49.18 +1.58 - Plains Exploration

PXP set another new historic high on Thursday before sliding slightly on profit taking as the week ended. No news and no change in play.

OGIS Investment Conference on Oct-4th

To see the last full commentary on this position click here

Earnings: Nov 9th, +91 cents vs +37 cents

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, $35 stop

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

FST $35.50 +.35 - Forest Oil

Forest is still fighting the $35 resistance but the trend is still positive. No news and no change in play.

Enercom conference presentation

To see the last full commentary on this position click here

Earnings: 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 $49.88 +0.77 - XTO Energy

XTO tested its all time high again on Thursday. Limited profit taking on Friday but the high ground held. No change in play.

OGIS conference presentation on Oct 4th
Enercom presentation

To see the last full commentary on this position click here

Earnings: 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 $55.12 +.21 - Valero Energy

Support at $55 continues to hold after a very strong gain. No news and no change in play.

To see the last full commentary on this position click here

Earnings: 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 - $97.64 -0.58 - Petroleo Brasileiro

After more than a $4 gain the prior week I will gladly accept a 58 cent drop. PBR continues to hold at a 7-month high. No change in the play.

To see the last full commentary on this position click here

Earnings: 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 - $81.10 +.51 - Diamond Offshore

DO set a new five-month high again on Friday. Morgan Keegan upgraded to an outperform. No change in play.

To see the last full commentary on this position click here

Earnings: 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
Cost increase: Dec $60 put expired -2.40, cost now $13.45

Insurance Put:
10/08 Dec $60 Put DO-XL @ $2.40, expired

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

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

CSX - $35.43 -1.35 - CSX Corp ** Stopped $35 **

CSX triggered our stop at $35 after getting hit with an analyst downgrade from Bear Stearns to peer perform from outperform. With oil rising and transports falling it was time to exit anyway. At least it was a breakeven.

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
11/17 Cost update - expired Nov $30 put +1.40 = $6.30
12/13 Exit @ $6.50 when stop was hit.

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

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

ATPG - $45.15 -0.65 - ATP Oil and Gas Corp

No change in play. Consolidation of the $10 move continuing.

To see the last full commentary on this position click here

OGIS Investment Conference on Oct 5th

Earnings schedule: N/A

LEAP Position:
8/20/06 Position: 2009 $40 LEAP Call VCL-AH @ $11.70
12/17/06 Cost update expired Dec 35 put -1.50 = $13.20

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

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

PTR - $134.13 +4.36 - Petrochina

Still holding the high ground PTR set a new historic high on Friday despite the post OPEC profit taking. I still believe this stock could be well over $150 before our 2008 LEAP comes due. No complaints and no change in play.

To see the last full commentary on this position click here

Current recommendation: Buy under $110

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
Cost adjustment: Expired Dec $100 put -2.20 = $20.00

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

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

PCU $57.58 +1.75 - Southern Copper

Another nice gain and no change in trend despite nearing a historic high. No change in play.

To see the initial commentary on this position click here

Breakdown triggered at $51 on 11/14/06

Position: JUNE $55 Call PCU-FK @ $3.80
(no leaps)

Insurance Put:
PCU-XW Dec $47.50 put only if PCU trades at $49.50

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

CAT - $61.82 -1.58 - Caterpillar ** Stop loss $58 **

The warning from several toolmakers weighed on CAT even though they are not directly related. If CAT does not regain a positive trend soon I may grow tired of waiting. No change in play.

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: none

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

TEX - $61.35 +1.43 - Terex Corp

TEX was knocked lower by the tool warnings on Friday but was added to the S&P-500 after the close sending the stock to a new high in after hours trading. 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-$50 PUT TEX-MI only is TEX trades at $54.

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

DHI - $27.12 +.45 - DR Horton

DHI continues to hold near its new six-month high. We will get new home sales data next week so it could be volatile. No complaints and no change in play.

To see the last full commentary on this position click here

Earnings: Nov 14th, 88 cents vs analysts est of 69 cents

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

Insurance put: None
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
ECA
Encana

Current Watch List

ECA - Encana

12/17 commentary:

Encana (ECA) needed protection last week but there was none to be found. Encana fell -4.5% on Friday after releasing production guidance that was lower than their guidance of just five weeks ago. Encana, like other energy companies operating in Canada is seeing a sharp spike in exploration and production costs due to a shortage of equipment and personnel. Several companies have either shutdown or postponed exploration in Canada until the situation moderates. Encana announced a budget of $5.9 billion for 2007 to grow natural gas and oil sands production, a -6% decrease from 2006. The company will fund the budget entirely from internal cash flow and have $1.7 billion in free cash flow remaining. Natural gas production is expected to grow by +9% but oil production is expected to decline by -5% due to accelerating depletion of existing fields. On the plus side they are scheduled to finalize an agreement on Jan-2nd with Conoco Phillips to create an integrated heavy oil business, which will generate immediate additional cash flow for Encana. Encana's average daily production from the partnership is expected to grow about +44% in 2007 to an additional +31,000 bpd. They expect additional pre tax cash flow in the range of $550-$650 million net to Encana in 2007 from the partnership. Encana had planned to repurchase 10% of outstanding shares in 2006 and they have completed 9.4% to date, 81 million shares, and expect to complete the buyback before year end. In 2007 they plan on purchasing another 3-5% or 24-40 million shares out of free cash flow. They are also planning on DOUBLING the dividend to 80 cents per share in 2007. Encana has hedged 1.5 Bcfpd of their 1.75 Bcfpd of 2007 production at $8.49 per Mcf with put options on the rest at $6 per Mcf. Personally I think Encana is doing exactly what they should do and that is increase profitability while targeting their budget dollars where it will do the most good rather than just throw money at everything all at once. What many people don't understand is that those reserves in the ground will become more valuable as each day passes. Encana can afford to wait until the economics make sense to produce them. Why pay high prices today to extract them for $8 per Mcf when they can wait a year or two and get $12 or higher for the same gas?

The sharp sell off came from a downgrade to a SELL by Citigroup citing concerns over the company's portfolio and the reduction in guidance. The selling accelerated by a triple digit loss, -156, in the Canadian markets with energy, materials, metals and financials all taking severe hits. Petro Canada (PCZ) dropped -5% or -$2.11. I am not recommending Encana as a play this weekend because we don't know how long this weakness will last. Chesapeake was hit with the same kind of selling the prior week and continued lower on the fall in natural gas prices this week. Encana, currently $50 is too expensive for the at-the-money $50 LEAP and too far away from the $60 LEAP. It has strong support in the $44-$46 range and I would rather wait to see if we can buy it cheaper.

Company info:

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.

Breakdown target: $45

Buy 2009 $50 LEAP Call ZBM-AJ
 


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