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Weekly Newsletter, Saturday, 01/13/2007

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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

End In Sight?

It has been a rough two weeks but hopefully the end is in sight. The rebound in oil on Friday to close at $53 was more short covering and profit taking ahead of the long weekend than anything else. The support at $55 broke and now the odds are very good of a test of $50 before any meaningful rebound.

Volatility is likely to increase next week with the expiration of the February futures contract on Jan-22nd. That leaves only five days for that contract to trade. With the sharp increase in the number of shorts I am hoping that means we will see some short covering but we never know. There are still a lot of longs even though the short positions have increased. Keep your eye on the market and should we get a test of that $50 level on expiration volatility it could be a buying opportunity in my opinion.

Another factor impacting oil was a rebalancing of the Dow Jones AIG and Goldman Commodity Indexes. They changed the weighting of the components causing all kinds of havoc in the trading community. There were some really big moves as institutions were forced to alter positions significantly to match the new index weightings. This should filter out of the markets by next week and everything go back to normal. Unfortunately there is no definition of normal that fits the recent price action.

I sent out an email on Thursday night to all subscribers suggesting that the end was near and I thought it would be a good time to add to positions. I still believe that despite the fact we may test $50. You can never tell when traders like us will jump in early and prevent a lower low from forming. Either way the difference in option prices from Thursday night's close of $52 and a test of $50 would be minimal.

I am sure many traders noticed that most oil stocks quit falling earlier in the week and began trading sideways or higher. Several have a nice 3-day uptrend in progress all ready.

Nothing has changed in the OPEC outlook since Thursday night. They are making noises about another meeting, another cut, cuts from non-OPEC nations and whining about those members who did not cut in November. The bottom line still comes back to them. The OPEC ten must follow through on the promised cuts regardless of the financial pain. If they had done it two months ago it would have been a lot less painful. If they do it a month from now it will be even more painful and they know it but they are addicted to our dollars and cannot force themselves to diet. Information out on Friday suggested they actually increased production by +350,000 bpd to offset the loss in income from the reduced prices. That dog won't hunt and they are going to be chasing prices until the next ice age if they don't take a stand.

Conoco confessed they don't have any exploration prospects by announcing a $1 billion stock buyback this week. That equates to 15.6 million shares and will reduce their market cap from $105 billion to $104 billion if the share price stayed the same. That is hardly a wise use of their cash. It would be much better put to use buying up leases or bidding on new blocks to explore. Oh, right, there are not any new blocks with big deposits just waiting to be found. Just a lot of small deposits that the majors don't feel justify their effort. It is easier to just give the money to shareholders while their company assets dwindle away. Rant off!

Next week begins the earnings cycle for energy stocks with SLB on Friday. They should report decent earnings and give the other service companies something to shoot at.

Murphy Oil warned on Thursday that earnings would be between 40-45 cents per share. Analysts had predicted 65 cents. Dry hole charges were expected to be $70 million including one for $22 million for a failed test at Bata Kapur offshore Malaysia. This just proves again that finding oil is not as easy as those armchair experts think. A company like Murphy has the best intelligence and seismic available and they still suffer dry holes from trying to extract oil where there isn't any.

Production at the Hibernia platform off Canada's east coast was cut in half from 180,000 bpd to 100,000 bpd by the failure of an electrical generator. It will take 8-weeks to correct and cause a loss of 4.5 million bbls of production. Heck, that is more than several OPEC nations agreed to cut. The field is owned by Exxon (33.125%), Chevron (26.875%) Petro-Canada (20%), Murphy Oil (6.5%), Hibernia Holding (8.5%) and Norsk Hydro (5%). Lots of owners shares the risk but also limits the individual profits. Of course any platform pumping $10 million in oil per day can afford many owners.

A little platform trivia:

The Hibernia platform is the only platform in the world designed to survive a collision with an iceberg. Because of the frequency of icebergs in this area a platform support vessel has been configured to "lasso" icebergs and tow them out of harms way. The platform crew numbers 185. It went into operation in 1997 with a rated capacity of 230,000 bpd with an estimated recovery potential of 615 million bbls. Natural gas produced with the oil is recompressed and injected back into the field to maintain field pressure and for storage until future use. The platform is 315 km east of St Johns, Newfoundland and sits in 80 meters of water on top of two principal reservoirs. The Hibernia deposit is an average depth of 3,700 meters and the Ben Nevis-Avalon deposit is at 2,400 meters. This is the 5th largest field ever discovered in Canada. The reservoir spans 68 km and the longest well drilled from this platform is 30,000 feet where most of that depth is horizontal. This horizontal drilling through the deposit results in as much as 1,125 feet of net pay in the longest wells. The platform can drill two wells at one time and more than 80 wells are planed to complete the field. The base is constructed of high strength concrete, sits on the ocean floor and has storage capacity for 1.3 million bbls of oil. The base is a 105-meter, hollow concrete block weighing 600,000 tons. Once sunk an additional 450,000 tons of solid ballast was added. Hibernia oil is offloaded onto tankers in 675,000 bbl increments for shipment to the east coast of the US.

Hibernia Platform

Hibernia Concrete Base

I will never cease to be amazed that a project like Hibernia can exist. But the scope of that platform is not the real point here. If the technology in 1990 could locate a field 11,500 feet deep in 250 feet of water 315 km off shore in an area with 45% visibility or less 80% of the time due to fog then why won't people believe that the big oil has already been found? Think about it. This process has been duplicated all over the planet for the better part of four decades. Onshore, offshore, shallow water, deepwater, in mountains, prairies, deserts and ice fields. If there was a geologic formation open to exploration capable of producing and holding oil it has been tested or at least charted. Wells have been drilled in as much as 10,000 feet of water and 34,000 feet into the earth. There are no giant fields left. Each find continues to be smaller and smaller simply because the big ones are the easiest to find. This constant discussion about $50 oil or $40 or $60 is going to eventually be mute. It is only a matter of time. Keep the faith and we will be well rewarded!

US Weather Map Early Saturday Morning

Cold weather is coming despite what the weatherman is predicting for the east coast for the next month. This cold front should do wonders for increasing gas consumption and heating oil demand once it slides to the east.

The average change for all our positions last week was -29 cents. Considering the crushing blow to oil prices this was very manageable. If you eliminate the portion of the -$6.65 from SNP that was not attributable to us after we were stopped out that -29 cent number quickly turns positive. It was not a bad a week as it seemed in the press. Be sure to check the play notes for those positions you currently own.

Jim Brown


February Crude Chart - Weekly

February Gas Futures Chart - 90 min

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays
SNP $84.24 Sinopec  *** Stopped $88.50 ***

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.

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

OSX - $185.41 -0.96 Oil Service Index - Stop loss OSX $160

No change, support at $180 is holding.

Index Description:

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

To see the initial commentary on this position click here:
http://tinyurl.com/yghpyo

Breakdown trigger $185 hit Jan-04

Position:
SHORT Sept $250 PUT - OFJ-UJ @ 58.50, Stop loss OSX $160

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

ECA - $46.15 +1.28 - Encana

Encana announced it had sold all its interests in Chad to a subsidiary of the China National Petroleum Company (CNPC) for $202.5 million. Encana had drilled 11 wells in seven sedimentary basins with encouraging results. However, Encana has decided to exit its non core assets to focus more on North America properties. This concludes its liquidation of all assets in Africa.

Encana is respecting the support at $44 and the level where we entered the play. No change. Pray for cold weather.

To see the initial commentary on this position click here

Earnings schedule: Feb-15th

Breakdown target: $45 hit Jan-3rd

Position: 2009 $50 LEAP Call ZBM-AJ @ $6.60

Insurance put: None

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

THE $32.73 +0.08 - TODCO

No news. Strong support just below at $44. No change in play

To see the initial commentary on this position click here

Earnings schedule: N/A

Current recommendation: Buy at $43

Breakdown target $39 hit 12/7/06

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

Insurance Put: None

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

CHK $28.05 -+0.10 - Chesapeake Energy

Still respecting support. No news. No change in play.

To see the initial commentary on this position click here

Earnings schedule: Feb-23rd

Current recommendation: Buy at $29

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

Insurance put: none

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

SNP - $84.30 -6.65 Sinopec *** Stopped $88.50 ***

Sinopec finally cracked and it happened all at once. After holding up great for a week while everybody else was diving the end came swiftly on the 10th. We still escaped with better than a +100% gain so no complaints with this trade.

I would like to buy SNP again with a different strike but I am not sure it is done correcting. I will keep watch and notify you if we get another chance like the last one.

To see the initial commentary on this position click here

Earnings schedule: N/A

Current recommendation: Buy at $85

Entry $74.44 11/28/06

Position: July $80 Call SNP-GP @ $5.40, exit $12.00, +6.60

No insurance

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

FXI $105.40 -0.55 - FTSE/Xinhua China 25 Index Fund

The FXI took another dip this week to a low of $98.23 but recovered significantly once profit taking in China slowed. The Chinese indexes were up huge last year and it was time for a pause. I still consider this a buying opportunity.

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 under $105

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 $86.77 +0.85 - Marathon Oil

Marathon posted its mid quarter update saying that sales of refined products slipped slightly in Q4 and sales prices of oil also fell. Production available for sale remained in the predicted range. Earnings will be announced Feb-1st. MRO gained +3.34 on Friday and was one of the stocks I singled out on Thursday night as a speculative buy. No change in play.

To see the initial commentary on this position click here

Earnings schedule: Feb-1st

Current recommendation: Buy at $85

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

Insurance put: None

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

HES - $49.02 +1.07 - Hess Corporation
(Formerly (AHC))

Hess is holding over support at $47 on no news with earnings 2-weeks out. No change in play.

To see the initial commentary on this position click here

Earnings schedule: Jan 31st

Current recommendation: Buy at $46

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

Insurance Put: Triggered Jan-3rd @ $49
01/03/07 May $45 put HES-QI @ $2.60, stop loss $51.50

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

BTU - $40.00 +2.78 - Peabody Energy

BTU was the surprise of the week with a nice rebound from the prior week's drop. Citigroup was the benefactor with a buy recommendation pumping the stock. Citigroup said its rating was based on a positive longer-term view of Peabody's production growth, its strategic position within the coal industry and the inherent value of its massive reserve base. Citigroup also said it expects the coal market to normalize between the bullish extremes of 2005 and the "bearish misery" of 2006 as U.S. power generation rises by 1.5 percent this year. In the longer term, the industry could also benefit from technologies such as Integrated Gasification Combined Cycle (IGCC) with carbon capture and Coal-to-Liquids (CTL), the brokerage said in its research note.

Too bad they did not issue the recommendation the prior week before our insurance put was triggered. I am keeping it one more week just in case.

To see the initial commentary on this position click here

Earnings schedule: Jan-25th

Current recommendation: Buy at $35

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

Insurance put: Triggered with drop through $39
01/03/07 March $35 Put BTU-OG at $1.15, stops at $35 and $42.50

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

DVN - $65.63 -1.45 - Devon Energy

No news and no change in play. Cramer is still pounding the table on it and support at $64 is holding.

I suggest closing the insurance put if DVN trades at $68.50.

To see the last full commentary on this position click here

Earnings schedule: Feb-7th

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 $68.50

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

RIG - $74.67 -1.88 - Transocean Inc

RIG was one of the weaker stocks despite winning a $493 million contract from Chevron for global exploration. The contract has a 10% bonus clause as well. I think we hit decent support at $72.50 and could move higher from here depending on sector earnings.

Their rig report released Jan-5th

To see the last full commentary on this position click here

Earnings schedule: Feb-14th

Current recommendation: Buy at $75

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

Insurance put: Triggered at $79 on Jan-3rd
1/3/07 Feb $75 PUT RIG-NO @ $2.55, stops $70.50, $78.50

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

TSO - $67.98 +2.31 - Tesoro Corporation

Sprinted higher on Friday on no official news. They were mentioned early in the morning as an under priced refiner and evidently somebody with lots of cash was listening. No change in play.

Maintain a stop loss at $60. If we hit $60 support has failed.

To see the last full commentary on this position click here

Earnings schedule: Feb-1st

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: None

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

APC - $41.83 +0.52 - Anadarko Petroleum

Support at $40 holding on no news. Earnings announced for Feb-6th. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-6thbr>
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, stop @ $39.00

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

SU $73.12 +0.47 - Suncor Energy

Suncor spiked +3.41 on Friday to bring it back from a nasty loss for the week. On top of the -6.65 loss from the prior week this sell off was entirely overdone. Support at $70 holding. No change in play.

To see the last full commentary on this position click here

Earnings schedule: N/Abr>
Current recommendation: Buy at $70

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 $57.89 -1.31 Schlumberger

SLB suffered another small decline after Bank of America said they expected some weakness in service companies due to declines in drilling activity from low oil/gas prices. SLB reports next Friday. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Jan 19th br>
Current recommendation: Buy at $60, stop at $54

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

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

UPL $47.95 +1.07 - Ultra Petroleum

UPL continued to show strength and the rise in gas prices prompted a +1.65 rise in UPL on Friday. No news and no change in play. $45 is strong support and my recommended buy target. br>
UUPL 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
Enercom Oil and Gas presentation

To see the last full commentary on this position click here

Earnings schedule: N/Abr>
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, stop $39

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

SUN $59.83 +0.15 - Sunoco

Sun held support and received an upgrade to "market perform" on Wednesday. We have to be grateful for small favors. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Jan-31stbr>
Current recommendation: Buy at $60, stop at $54

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

Insurance Put:
Position: Jan $55 Put SUN-MK @ $2.40, stop $54

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

PXP $44.90 -0.95 - Plains Exploration

Minor loss on 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 schedule: N/Abr>
Current recommendation: Buy at $44, stop $40

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 $29.68 -1.54 - Forest Oil

Forest captured a major win this week with the acquisition of Houston Exploration (THX) for cash and stock equivalent to $51.57 per share. This was only a slight premium for THX and well below the $62 offered by Jana partners last June. THX hit a high of $71.50 last year and traded over $65 as late as August. Jana had been highly critical of Houston management and was highly positive on the Forest acquisition. Jana feels the Forest management team is top notch and they operate with a very low cost structure. The combined company will have about 2 TCF of gas reserves and daily production of 520 mcf. We took a hit on the announcement but I believe this is a positive for Forest and I added to my position on Friday. No change in play.

Enercom conference presentation

To see the last full commentary on this position click here

Earnings schedule: N/Abr>
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

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

VLO $50.57 +1.21 - Valero Energy

Nice bounce from support! Let's hope it continues. No news and no change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-1stbr>
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, stop $45

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

PBR - $94.40 -1.01 - Petroleo Brasileiro

Petrobras claims the new attack by Hugo Chavez on gas producing assets in Venezuela has no impact on their operations in conjunction with PDVSA. Support held. No change in the play.

To see the last full commentary on this position click here

Earnings schedule: N/Abr>
Current recommendation: Buy at $96, stop at $88

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 - $76.82 -0.45 - Diamond Offshore

No news, minor drop, earnings scheduled, no change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-8thbr>
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 - $37.61 +0.11 - ATP Oil and Gas Corp

ATPG announced record production of 50.5 bcf in 2006. Oil production increased to 3.2 mmboe from its gulf operations compared to 0.7 mmboe in 2005. Still no earnings schedule. No change in play. I would be a buyer here based on the very strong outlook and activity in 2007 and beyond.

To see the last full commentary on this position click here

Earnings schedule: N/Abr>
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 - $127.40 -3.14 - Petrochina

The -$3 loss shown above is minor compared to the nearly -$9 intraday loss as of Wednesday. This stock has been hammered but I think the damage is nearly over. $125 appears to be support. Every Chinese stock has been beaten severely after setting a new high around Jan-1st. The profit taking on the indexes appears to be slowing. This is one of my favorite stocks and I bought the dip again this week. br>
II still believe this stock could be well over $150 before our 2008 LEAP comes due.

To see the last full commentary on this position click here

Earnings schedule: N/Abr>
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
Cost adjustment: Closed Jan $135 put -2.60 = $17.40

Insurance put: (12/31)
1/03/07 Jan $135 Put PTR-MG at $138.50, $1.90
1/04/07 Profit stop at $132.50, $4.50 for +2.60.

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

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

DHI - $26.40 +0.56 - DR Horton

Another uptick in housing sentiment is keeping DHI off the bottom and we have new housing numbers due out next week. Resistance at $27.50 is the current challenge. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Jan-23rdbr>
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

None

Current Watch List

None

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.

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