Option Investor
Newsletter

Weekly Newsletter, Saturday, 12/23/2006

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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

Profit Taking Hurts

Energy stocks took a hit over the last week but it had nothing to do with the price of oil. Oil continues to wander between $62-$64 on the now current February contract so there was no technical reason for the Oil Service Index to lose nearly -6% or the OIX to lose over -4%. It was simply a case of fund managers selling the winners before year end to capture profits and offset losses in other areas. It still hurts. Last week almost every position was profitable, some extremely profitable. I had planned on selling some calls or adding a few extra puts next weekend to protect against any downdraft in January. I did not expect this bout of selling ahead of the most bullish week of the year. Typically the next 7 days is worth another +1.5% to the indexes as traders employees spend their bonuses in the stock market and the influx of retirement funds swells the coffers of funds. Hopefully last weeks dip will make those stocks look even more appealing to the after Christmas shopping crowd.

There is really nothing new to report this week with the OPEC news behind us and the markets quiet ahead of the holidays. We have a lot of strong positions and OPEC is on our side. We should forget about the energy market for the next week and spend the time with our families instead. Unfortunately I know that won't happen because I can't tear myself away from the market for more than a few hours at a time. I hope you are not as addicted as I am.

Be sure to check for changes to any positions you currently own because I added some puts and some stops. I also added a recommendation line with buy/hold comments for readers wishing to enter or add to our current positions. Note: The recommendations survive the play. For instance we were stopped out of LNG but I would personally enter it again at $26.

I received a Christmas card last year from Enercom that I saved for a future commentary. You are in luck because this is it.

The Night Before Spudding

Twas the night before spudding, when all through the land
Not a rig was available, nor a good rig hand;
The engineers' hopes were falling, they were in despair,
In hopes that a drilling rig soon would be there.

The geologists were nestled all snug in their beds,
While visions of elephants danced in their heads;
The 3-D showed a four-way closure with a bright gas cap,
"We need to drill this one, with multiple pay zones on the map."

When out in the field there arose such a clatter,
The rockhounds sprung from their workstations
to see what was the matter.
Out to the yard they flew like a flash,
Then on to the AMI they all did dash.

The moon on the breast of new fallen snow
Gave luster like a huge gas find to objects below.
When, what to their wondering eyes should appear,
But a red sleigh filled with rigs pulled by eight reindeer.

With a grizzled old driller, so lively and quick,
They new in a moment it must be St. Nick.
More rapid than shear waves, his roustabouts they came,
And he cussed and shouted, and called them by name.

Now Dasher! Now Dancer! Now Prancer and Vixen!
On Comet! On Cupid! On Donder and Blitzen!
Get up to the rooftop, these guys need a rig.
Bring the frac sand, the drill pipe, and drill bits to dig!

And then, in a twinkling, heard up on the roof
The prancing and pawing of each reindeer hoof.
As Santa moved in, and was turning around,
Down the chimney a 4000 H.P. rig with all the bells and whistles came with a bound!

Santa sprang to his sleigh, to the team gave a holler,
And quick they flew, 'cause demob time cost to many dollar.
As they heard him exclaim, heading to the next drill site,
"Happy holidays to all, and to all, keep turning to the right!"


Definitions:

Spudding - To start the well drilling process by removing rock, dirt and other sedimentary material with the drill bit.

Elephant - Slang for a large, new, untapped field.

3-D - Seismic data from closely spaced receiver and shot lines such that there are typically no significant gaps in the subsurface coverage.

Four-way closure - A formation that requires only a top seal to trap the hydrocarbons. All the sides are sealed by dense rock. Typically a four-way represents a strong prospect.

Gas cap - The gas that accumulates in the upper portions of a reservoir where the pressure, temperature and fluid characteristics are conducive to gas. The pressurized gas cap provides recovery motion to the oil below to drive it to the surface once drilled.

Multi pay zones - different geologic layers where hydrocarbons are located. Some wells have only one pay zone typically measured in hundreds of feet or less at the bottom of a multi thousand foot well. To have multiple pay zones means multiple areas in the same hole where oil might be found.

Rock hounds - Petroleum geologists

AMI - Area of Mutual Interest

Shear Waves - A type of vertical seismic profile in which the source is a shear wave source rather than a compressional wave source. Shear waves travel through the earth at about half the speed of compressional waves and respond differently to fluid-filled rock and can provide different additional information about lithology and fluid content of hydrocarbon bearing reservoirs. (lithology - the macroscopic nature of the mineral content, grain size and texture of the rock)

Roustabout - Any unskilled manual laborer on the rig site.

Frac sand - A sand with grains that are hard, evenly sized and nearly spherical in shape which is shot into the surrounding rock by the fracture explosion. Ordinary sand which is irregular in shape will not work because it clumps together easily and blocks the escape of gas into the well bore. Frac sand is mined in the Great Lakes region where it was smoothed by waves over many millennia.

Demob - De-mobilization. Mob or mobilization refers to the army of specialized workers that need to come together at a specific time to assemble all the pieces and get it working. Demob or demobilization requires another army of workers to complete, tear down and distribute the components to a new sites.

Turning to the right - The drill always turns to the right, clockwise, as all the pipes are threaded to the right. Turning left or counter clockwise would cause all the connections on thousands of feet of pipe in the hole to disconnect.


Merry Christmas to all and to all a good night!


Jim Brown


February Crude Chart - Daily

January Gas Futures Chart - Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays
LNG Stopped out
CAT Bounce failed on weak economic outlook

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 $35.20 -3.76 - TODCO

Todco broke down on profit taking with the sector. Strong support at $33. An analyst at Raymond James and another at Weeden both picked Todco as one of their top 3 plays for 2007. No change in play

To see the initial commentary on this position click here

Current recommendation: Buy at $33

Breakdown target $39 hit 12/7/06

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

Insurance Put: None

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

CHK $29.80 -1.35 - Chesapeake Energy

CHK continued to drift lower as gas prices broke under $7. Strong support at $30 held on Thr/Fri but help better come quick. Major support at 29 is probably the stopping point. No change in play.

To see the initial commentary on this position click here

Current recommendation: Buy at $29

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

Insurance put: none

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

LNG - $28.95 +0.73 - Cheniere Energy ** Stopped @ $27.00 **

LNG continued its slide to our $27 stop on Monday. There was a sharp +2.55 spike higher on Friday on news they were going to IPO the Cheniere Energy Partners LP. They are offering 8% for about $250 million an would retain 8% as a limited partner and 84% as a subordinated interest. It was too late to help us as somebody was leaning on the stock pretty hard over the last three weeks. $26 was strong support so it will be interesting to see if the selling continues or the rebound changed their mind.

To see the initial commentary on this position click here

Current recommendation: Buy at $26

Breakout target $31 triggered 11/30/06

Position 2009 $30 LEAP ONP-AF @ $8.50, exit 6.60 -1.90

Put insurance: None

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

SNP - $86.16 +0.60 Sinopec *** Stop Loss $83 ***

SNP continues to hold the high ground and actually posted a small gain for the week. SNP said it had completed the upgrade to its Guangzhou refinery that would increase its capacity by a third and allow it to process low cost, high sulphur, heavy crude into premium transportation fuels. This will allow them to buy cheaper oil from Saudi Arabia and Iran.

Because this is a July call and not a LEAP and because we are up +130% I am placing a stop at $83 rather than trying to add insurance in the form of a covered call or expensive put.

To see the initial commentary on this position click here

Current recommendation: Buy at $81

Entry $74.44 11/28/06

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

No insurance

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

FXI $103.79 +2.79 - FTSE/Xinhua China 25 Index Fund

The FXI remains a strong performer and appears about ready to break its current resistance high at $104. Definitely no complaints here.

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.

Current recommendation: Buy at $95-$98 but don't bet on it
happening.

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 $90.77 -4.73 - Marathon Oil

Marathon continued its slide after being downgraded but the main cause of the dip is simply profit taking after their nearly $30 move from the Oct lows. Marathon is still a strong company with outstanding assets and outlook. $90 could be decent support but it depends on how many more funds are looking to shuffle their energy positions before year end. $85-$90 would represent a good buying opportunity if crude continues to firm above $60. No change in play.

To see the initial commentary on this position click here

Current recommendation: Buy at $85

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

Insurance put: None

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

HES - $50.30 -1.95 - Hess Corporation ** New put **
(Formerly (AHC))

The Monday dip on a downgrade by FBR was quickly bought. However, the weakness persisted as the news agencies continued to repeat the fact the CEO sold a whopping 8500 shares through a prearranged plan. I saw the article repeated literally half a dozen times for the week. Must have been a very slow news week. FBR said Hess was leveraged to the price of oil and this analyst expected oil to fall in 2008. I hope he eats his words. No complaints and no change in play.

To see the initial commentary on this position click here

Current recommendation: Buy at $46

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

Insurance Put:
12/24/06 Let's add the May $45 put HES-QI if HES trades at $49

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

BHP - $38.77 -1.61 - BHP Billiton *** Stop Loss $38 ***

BHP broke support at $39.50 and appears headed to test stronger support at $36. Since we have a $40 insurance put I am going to plan on exiting at $38 on the LEAP and leaving a profit target of $36 on the put. The minerals sector has taken a significant hit over the last two weeks and worries about a global slowdown in demand coupled with an uptick in production is pressuring the stocks. An exit at $38/$36 should be a breakeven with the put premium offsetting the loss in the LEAP.

To see the initial commentary on this position click here

Recommendation: Buy under $40

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

Insurance Put:
11/12/06 Feb $40 Put BHP-NH @ $1.50, profit target $36

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

BTU - $40.70 -3.14 - Peabody Energy *** New Put ***

BTU posted back to back -$3 weeks and that is not the kind of performance we like to see. However it has reached strong support at $40 and I would be a buyer at this level. The drop has been due to the implosion in the natural gas sector making it cheaper to generate electricity with gas. People do not realize that Peabody has presold their production for the next couple of years and the drop in gas prices has very little if any impact on their profits.

I added an insurance put if BTU trades at $39.

To see the initial commentary on this position click here

Current recommendation: Buy at $40

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

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

Insurance put:
12/24/06 March $35 Put BTU-OG if BTU trades at $39

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

DVN - $68.11 -2.57 - Devon Energy

Devon took some heat on Tuesday after Citigroup cut it and several others to a hold. Citigroup did raise the price target for DVN to $78 in the same action. The glut of natural gas was the reason for the ratings change.

The insurance put was triggered at $69 on Monday. I suggest closing it if DVN trades at $70.50.

To see the last full commentary on this position click here

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

Current recommendation: Buy at $65

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

Insurance put: Triggered 12/18 at $69
Position: Apr-2007 $60 Put DVN-PL @ $1.30, close at $70.50

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

RIG - $80.77 -2.69 - Transocean Inc

RIG gave up only a little of the ground gained in the prior week and announced a new 3-year $500 million contract with Statoil. The prior Friday was a new five-month high so profit taking was expected. 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

Current recommendation: Buy at $75, or an aggressive $80

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

Insurance put:
Buy Feb $75 PUT RIG-O only if RIG trades at $79.

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

TSO - $65.44 -6.19 - Tesoro Corporation ** Stop Loss $60 **

FBR downgraded TSO and HOC on Monday saying oversupply and valuations. The analyst said traders should take profits because a rising supply of ethanol would pressure margins. Somebody explain to me how a added ethanol supply is going to keep me and 200 million other drivers from buying gasoline if we don't have an E85 car?

I added a stop loss at $60 and cancelled the insurance put trigger. If we hit $60 support has failed.

To see the last full commentary on this position click here

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

Current recommendation: Buy at $62.50 with stop at $60

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

Insurance put: cancelled

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

APC - $42.14 -3.36 - Anadarko Petroleum

APC continued to slide on those downgrades from the prior week. Their debt was called into question until the outcome from their current asset sale is known. I am still a fan of APC and I am still recommending a buy only at a lower level this week. There is strong support from $40-$42 and that is exactly where we are today. Next support level is $35 and that is the profit stop for our current insurance put.

Last week 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

Current recommendation: Buy at $40, stop at $34

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 $88.01 -1.84 - Cnooc Ltd

Last week's test of resistance at $90 look a lot like a potential breakout in motion. That was before Deutsche Securities downgraded them on Monday to a hold. They also announced a $16 billion deal with Iran to develop a gas field with 80 TCF of reserves into an LNG project. CEO will develop it in exchange for 50% of the gas. If the next move to $90 does not breakout I am going to exit the play.

To see the last full commentary on this position click here

Current recommendation: Hold

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

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

No insurance put

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

SU $77.91 -2.99 - Suncor Energy

No downgrade, no news and no change in play. Suncor continues to consolidate in a $5 range after hitting a new 4 mo high the prior week.

To see the last full commentary on this position click here

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

Current recommendation: Hold

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 $62.89 -4.66 Schlumberger

Rough week for SLB after retesting a 8mo high twice in two weeks. SLB tagged $69 Friday the 15th and closed at a new 6-week low at $63 this Friday. Goldman kicked SLB off its Buy list and recommended Baker Hughes instead. SLB was cut to a neutral from buy. Goldman maintained their $80 price target on SLB. No change in play.

To see the last full commentary on this position click here

Earnings: Jan 19th

Current recommendation: Buy at $62, stop at $57

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 $30.71 -1.73 - Nabors Industries

Nabors is struggling to avoid the sharp drops seen in other stocks and had been winning the battle until this week when two days of concentrated selling knocked -$2 off Wednesday's high. 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

Current recommendation: Buy at $30, stop at $27

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

No insurance

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

UPL $48.05 -2.42 - Ultra Petroleum

Falling gas prices continue to pressure UPL even though their production is almost entirely hedged at much higher levels. They submitted a proposal to the state of Wyoming to work year round instead of the current summer only plan. Shell and Questar joined with them in asking for year round privileges. 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

Current recommendation: Buy at $45, stop at $40

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 $62.69 -5.57 - Sunoco

That was a nasty drop on no news. The majority came on two days, Monday and Thursday but it was enough to knock us back four weeks in price. No change in play.

To see the last full commentary on this position click here

Earnings: Nov 1st, $2.76 vs $2.39

Current recommendation: Buy at $60, stop at $55

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 $47.25 -1.93 - Plains Exploration

PXP held up better than most and remains above support at $47. 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

Current recommendation: Hold

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 $33.18 -1.87 - Forest Oil

Forest was one of the few companies to get upgraded last week. Credit Suisse upgraded them to an outperform but that did not keep the funds from taking profits. Still in the consolidation range and waiting for oil to find a direction. 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

Current recommendation: Buy at $30, stop at $27

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

No insurance due to cheap LEAP

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

XTO $48.47 -1.41- XTO Energy

A very volatile week for XTO but the damage was not that bad. No change in play.

OOGIS 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

Current recommendation: Buy at $46

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 $51.59 -3.53 - Valero Energy

No news and no change in play. The last three days contained the brut of the selling and that left VLO near the bottom of its recent range.

To see the last full commentary on this position click here

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

Current recommendation: Buy at $50, stop at $45

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 - $98.13 +0.49 - Petroleo Brasileiro

Petrobras is amazing and actually posted a gain for the week on no news. Resistance at $99 remains the challenge but PBR is not shying away. No change in the play.

To see the last full commentary on this position click here

Earnings: Nov 10th, +29%

Current recommendation: Buy at $96, stop at $91

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 - $80.18 -3.87 - Diamond Offshore

The three month uptrend in DO finally broke support on no news. It was just more of the same and I expect DO to rebound sharply once the managers complete their portfolio shuffle. 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

Current recommendation: Buy at $75, stop at $69

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

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

ATPG - $40.84 -4.27 - ATP Oil and Gas Corp

The profit taking was sharp and without letup on ATPG with a -10% drop in only a week. No news and no change in play.

To see the last full commentary on this position click here

OGIS Investment Conference on Oct 5th.

Earnings schedule: N/A

Current recommendation: Buy at $38, stop at $34

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 - $132.92 -1.23 - Petrochina

Friday's close was only about -1.50 from an historic high and that leaves PTR a golden opportunity for a breakout soon. 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%

Current recommendation: Buy at $128.50, stop at $124

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 $52.66 -4.92 - Southern Copper

PCU retreated from its all time high on only two days of selling but a nearly -10% drop. The collapse in copper prices is being felt by companies and investors alike. No change in play.

To see the initial commentary on this position click here

Current recommendation: Buy at $50, stop at $45

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 - $60.59 -1.23 - Caterpillar ** closed **

Twice since the initial drop in October CAT has returned to the post drop highs near $64. Each time some economic news knocks them back again. There is no traction and further bad economic news in Q1 could force a break in support. Close CAT for a loss of 60 cents and let's move on.

To see the initial commentary on this position click here

Position:
10/22/06 JAN-2009 $70 LEAP Call VKT-AN @ $7.20, exit $6.60, -.60

Insurance Put: none

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

TEX - $63.30 +1.95 - Terex Corp

Saved by the addition to the S&P. TEX rebounded more than $8 from the prior Friday's lows after being added to the S&P-500. That is another new high for TEX.

Sell a Jan $65 Call - TEX-AM currently $1.85
Set a stop at $66.

To see the initial commentary on this position click here

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

Current recommendation: Hold

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

Insurance Put:
10/23/06 Jan-$50 PUT TEX-MI only if TEX trades at $54.

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

DHI - $25.99 -1.13 - DR Horton

DHI only gave up a buck and new housing data is due out next week. 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

Current recommendation: Hold

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
OSX
Oil Service Index - Naked Put

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

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OSX - Oil Service Index - Naked Put

The Philadelphia Oil Service Index is an index of 15 companies that provide drilling and production services, oil field equipment, support services and geophysical/reservoir services. This index contains companies like Halliburton, Nabors, Schlumberger, etc.

Complete list of OSX components

Play description:

Raymond James analyst, Marshal Adkins, the second best stock picker in the energy sector as rated by StarMine believes oil will reach $100 and the Philadelphia Oil Service Index (OSX) will reach $275 some time in 2007 due to a combination of supply problems, extreme weather, hurricanes or other geopolitical occurrences. Long-term options on the OSX are expensive so I am electing to sell a put instead of buy a call. I am going to put a stop $160 and just under the 52-week low of $170. That is a $2500 risk with the potential for a $6500 profit. The entire key will be the price of oil. As long as oil remains over $55 per bbl the demand in the oil patch for oil well servicing will remain very strong. Once past this current weakness OPEC has said they would cut production again if oil slipped below $60. This is our insurance on the play. Our breakeven is $185 and our maximum profit comes with the OSX over $250 at the September expiration.

Breakdown trigger $185

Sell Sept $250 PUT - OFJ-UJ
 


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