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Weekly Newsletter, Saturday, 02/03/2007

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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

R-A-L-L-Y

The rebound has been simply amazing with oil prices rising +18% since the January lows of $49.90. I doubt anybody, especially me, would have thought oil would rebound this quickly. I expected to slog it out in the trenches for 4-6 weeks while the excess inventory was burned off ahead of the summer driving season. Now, with February normally a weak month for oil prices, we are nearing $60 once again. I suggest celebrating while we can and expect some profit taking very soon.

The stair step rebound has created some decent support points at $54 and $57 so that gives us some buy targets on any dip. $60 may be on everyone's mind but that is really only a psychological resistance level. The true resistance is $65 and baring any new wars in OPEC countries or a meteor strike on a Saudi oil field it could be very difficult to cross that $65 barrier.

In Nigeria the country's two main oil workers unions threatened a strike next week to protest the rising violence and lack of security in the southern oil-producing region. Dozens of workers both foreign and Nigerian have been seized in attacks on oil facilities. The unions said they would protest with a work stoppage beginning on Monday. Nigeria is Africa's largest oil producer and a producer of high demand light sweet crude.

OPEC is said to have actually cut additional production on Feb-1st as planned but we will need to see if outside oil production trackers confirm lower shipments over the next couple of weeks. It is easy to say we are going to cut but difficult to actually close the valves on the flow of black gold into the country treasury.

The cold weather is continuing with a forecast of cold for the next two weeks. At this point in the winter with only 4-6 weeks of potential cold remaining it is not likely we will see any more price hikes due to increased demand. Heating oil inventories are very high and consumers are likely to hold off filling the tanks if they can in hopes of lower prices later in the year.

Energy earnings are surprising nearly everyone but not in a positive way. Coming into the quarter estimates for Q1 earnings growth were +13%. Based on guidance from early reporters those expectations have fallen to a decline of -2%. Lower prices for oil and natural gas are limiting the upside while rising expenses are reducing margins. Nobody is crying for the big oil companies because they still posted record profits in Q4.

Chevron said 2007 production would fall below 2006 due to depletion rates at existing fields and the loss of 90,000 bpd in Venezuela when the country cancelled prior agreements. Chevron also said they only replaced 70% of conventional oil reserves in 2006. If you add the oil sands properties they claim 101% reserve replacement. What they are not saying is the majority of those new reserves came from the Unocal acquisition NOT from new discoveries. For Chevron it show on the ledger as 101% reserve replacement but for those tracking global reserves the numbers just moved from one column to another with little net gain. You have to be careful when you listen to companies brag about reserve replacement. Did they find new oil or buy it from somebody else. There will be a lot of companies bragging about increasing their reserves in 2007 but much of that came from a sell off of those reserves from Anadarko Petroleum. Buyers are circling like hungry sharks around Anadarko as it continues to prune non-core assets and sell them to the highest bidder. Anadarko said this week they had sold $9 billion in assets in the six months since closing the acquisitions of Kerr McGee and Western Gas Resources.

Chevron and Talisman both said they would be drilling new wells in Alaska. Chevron acquired some leases in the Unocal acquisition and initially planned on selling them off. After further review they decided to keep the properties and drill some exploration wells. Talisman is going to drill three wells off Federal leases in the National Petroleum Reserve. They said the wells were expensive and there was a long lead-time to convert into production. They estimated ten years from drilling to production. That is an amazing statistic. That is a very long time to invest money without any return. Talisman has 1.5 million acres under lease on the North Slope.

Congratulations to holders of the TSO position. Tesoro reported outstanding earnings and an acquisition of a refinery and 250 service stations in California. The resulting upgrades pushed TSO higher by +10.16 for the week! We are up +$17.60 in that LEAP or +229%.

Nabors spiked again this week on takeover talk with call option volume on Friday over 60,000 contracts. No analyst really expects Nabors to be acquired but GE and DO have been rumored as potential suitors.

For next week I would expect some profit taking in oil prices but nothing is ever guaranteed. I would look to add to positions on dips back to $57 and $54. The next cycle is probably a short decline as refineries shift from heating oil and back to gasoline for the summer driving season. In March the prices should rise again in anticipation of summer demand. In May/June prices should get another boost as we approach hurricane season. So far we have heard nothing about a 2007 forecast but since they missed it completely in 2006 I doubt they will get much credibility for a 2007 prediction.

Jim Brown


March Crude Chart - 60 min

March Gas Futures Chart - Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays

New Watch List Plays Triggered
UPL $52.20 - Ultra Petroleum ** Stopped @ $49.50 **

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.

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OSX - $198.05 +8.44 Oil Service Index - Stop loss OSX $179

No change, nice bounce. New support now at $187.

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

Breakdown trigger $185 hit Jan-04

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

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

ECA - $48.19 +1.24 - Encana

Continued nice rebound from Monday's lows. No change. Six more weeks of winter?

To see the initial commentary on this position click here

Earnings schedule: Feb-15th

Current recommendation: Buy at $45

Breakdown target: $45 hit Jan-3rd

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

Insurance put: None

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

THE $34.23 +1.76 - TODCO

No earnings date yet. Strong support just below at $31. No change in play

To see the initial commentary on this position click here

Earnings schedule: N/A

Current recommendation: Buy at $32

Breakdown target $39 hit 12/7/06

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

Insurance Put: None

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CHK $29.46 +0.46 - Chesapeake Energy ** New stop loss $28.50 **

CHK is holding the bounce but I am growing skeptical with winter expiring. I am adding a new stop loss at $28.50. Earnings still a month away. No change in play.

To see the initial commentary on this position click here

Earnings schedule: Feb-23rd

Current recommendation: Hold

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

Insurance put: none

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FXI $103.95 -1.55 - FTSE/Xinhua China 25 Index Fund

The profit taking on the Chinese indexes is continuing but slowing. Eventually a rebound will appear and money will begin to flow once again. $103 is support and we are holding at that level.

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 $89.62 +0.80 - Marathon Oil

Marathon reported earnings that declined -15% on the drop in gas prices, higher operating costs and lower refining margins. Considering the record profits in the comparison quarter this is not surprising. They still earned $1.08 billion for the quarter. No change in play.

To see the initial commentary on this position click here

Earnings: Feb-1st 3.06 vs 3.43 (Q4/05) $1.08 billion profit

Current recommendation: Buy at $85

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

Insurance put: None

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

HES - $54.57 +2.63 - Hess Corporation
(Formerly (AHC))

Hess reported a -20% drop in earnings for the quarter but said it replaced 310 mb of reserves or 230% of the oil produced in 2006. The reserves came from a project in the Gulf and a return to fields in Libya. Reserves rose by +14% for the year. Production for 2007 is expected to rise from the Q4 rate of 366,000 bpd to between 370,000-380,000 bpd. A more over $56 would be a breakout to a new high! No change in play.

To see the initial commentary on this position click here

Earnings: Jan 31st, $1.13, vs $1.44 in Q4/05, 230% replacement

Current recommendation: Buy at $47

Position:
11/05/06 2009 $50 LEAP Call VHS-AJ @ $6.80
Cost adjustment put exit +1.60, cost = $8.40

Insurance Put: Triggered Jan-3rd @ $49
01/03/07 May $45 put HES-QI @ $2.60, exit 1/26 $1.00

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BTU - $42.02 +1.67 - Peabody Energy

BTU is showing a steady recovery from the post earnings dip and positive comments about coal from the Arch Coal earnings on Friday did not hurt. BTU said prices and demand were rising for exports to China from their new mines in Australia. BTU would be my choice from the 4 prominent coal stocks. (MEE, CNX, ACI and BTU) No change in play.

To see the initial commentary on this position click here

Earnings: Jan-25th +42% including special items.

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

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DVN - $70.40 +2.36 - Devon Energy

Nice move higher ahead of earnings. They are now advertising their conference call so hopefully the news is good. No chang ein play.

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
Cost update: 1/22 Put exit +0.20 = $9.20

Insurance put: Triggered 12/18 at $69
Position: Apr-2007 $60 Put DVN-PL @ $1.30, exit $1.10 1/22

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RIG - $76.37 +.75 - Transocean Inc

RIG continues to move sideways ahead of earnings. I suspect investors are worried that rates are falling. I checked out their latest rig report listed below and it appears to me rig rates are still rising. Still two weeks until earnings. No change in play.

Their rig report released Feb-2nd

To see the last full commentary on this position click here

Earnings schedule: Feb-14th

Current recommendation: Buy at $74

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 $72.50, $77.50

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TSO - $83.98 +10.15 - Tesoro Corporation ** Stop Loss $79.00 **

TSO blew out earnings with a +129% increase in profits and announced a major acquisition in California. They announced they were buying a major Los Angeles refinery from Shell and 250 Southern California gas stations. Ratings upgrades were flying and everybody thought the acquisition was a great deal that gave Tesoro an retail outlet in the high demand California market.

I raised the stop loss to $79 to preserve profits. If we are stopped we will look for another entry on the next dip with a new strike.

To see the last full commentary on this position click here

Earnings: Jan-29th, $2.28 +129%

Current recommendation: Buy at $65.00 with stop at $60

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

Insurance put: None

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APC - $43.83 +1.91 - Anadarko Petroleum ** Stop Loss $40 **

APC continued to announce sales of assets with a total of $9 billion over the last six months. They are reducing debt from $26 billion after the acquisition of Kerr McGee and Western Gas Resources to about $12 billion by the end of 2007. This is a very positive move by APC and I am expecting some strong guidance language with earnings next week. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-6th

Current recommendation: Hold

LEAP Position:
9/20/06 Position: 2009 $50 LEAP Call OCP-AJ @ $6.90
Cost adjustment for expired Jan put +2.35 = $9.35

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

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SU $73.98 -0.55 - Suncor Energy

No change in price and no news. No change in play.

To see the last full commentary on this position click here

Earnings: Jan 25th $0.78 per share

Current recommendation: Buy at $70

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

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

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

SLB $65.12 +2.47 Schlumberger

SLB closed at a new high for 2007 on Friday. Strong earnings by Exxon and Weatherford helped push the service companies higher. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Jan 19th, +71% to $1.13 billion

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

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
Cost update for expired Jan put +2.00 = $10.30

Insurance Put: 9/18
Position: Jan $50 Put SLB-MJ @ $2.00, expired

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

UPL $52.20 +2.20 - Ultra Petroleum ** Stopped @ $49.50 **

We were stopped on the Monday dip but that was the plan. I expect gas prices to fall once this current cold snap is over and I am looking to reenter the UPL position with another dip to $45. We are long the March $45 put at 95 cents and we will use any gains there to offset the loss in this position.

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/A

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

LEAP Position:
9/12/06 Position: 2009 $60 LEAP Call OZH-AL @ $10.60
Cost update expired Jan put +2.85 = $13.45, exit $9.40, -4.05

Insurance Put:
9/18 Position: JAN $40 Put UPL-MH @ $2.85, expired

Insurance put:
1/28 Position March $45 Put UPL-OI @ 95 cents. No stop

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

SUN $63.86 +2.92 - Sunoco

Sun set another 2007 high on Thursday at $64.85. This was surprising after they reported earnings that dropped -57% due to lower refining margins. Their earnings of $1.00 still beat the street by +4 cents. Not bad when earnings fell -57% and you still beat the street. No change in play.

To see the last full commentary on this position click here

Earnings: Jan-31st, -57% $1.00 vs $.96 analyst est.

Current recommendation: Buy at $60, stop at $54

LEAP Position:
9/12/06 Position: 2009 $70 LEAP Call VUN-AN @ $13.50
Cost update expired Jan put +2.40 = $15.90

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

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

PXP $48.94 +2.86 - Plains Exploration

PXP has caught fire with a nice run for the week to a new six-week high. Earnings date was announced as Feb-22nd. No other news, no change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-22nd

Current recommendation: Buy at $44, stop $40

LEAP Position:
9/12/06 Position: 2009 $50 LEAP Call ZXL-AJ @ 7.50
Cost update expired Jan put +1.90 = $9.40

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

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FST $31.99 +.52 - Forest Oil

Slowly creeping higher on no news. Still no earnings date but I am expecting strong results when they are announced. No news and no change in play.

Enercom conference presentation

To see the last full commentary on this position click here

Earnings schedule: N/A

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 $56.23 +3.74 - Valero Energy

Valero hit a new two-month high at $56 and is very close to a breakout to a five-month high over $57. Earnings declined -15% to $1.59 but still beat the street estimates of $1.37. VLO said it was considering selling the Lima Ohio refinery rather than spend millions upgrading it. Valero CEO said President Bush's goal of 35 billion gallons of renewable fuel by 2017 is impossible with current technology. At best Klesse said output could double to 15 bgpy. No other news and no change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-1st

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

LEAP Position:
9/24/06 Position: 2009 $60 LEAP Call VHB-AL @ $7.70
Cost update expired Jan put +2.25 = $9.95

Insurance Put:
Position: 9/25 Jan $45 Put VLO-MI @ $2.25, expired

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

PBR - $99.46 +2.09 - Petroleo Brasileiro

Another good week for PBR and signs of a possible resumption of that elusive uptrend. PBR said it was in talks with ONGC, India's national oil company about partnerships in some deepwater plays. No change in the play.

To see the last full commentary on this position click here

Earnings schedule: N/A

Current recommendation: Buy at $92, stop at $85

LEAP Position:
9/08/06 Position: 2009 $100 LEAP Call VDW-AT @ $14.90
Cost update Jan expired put +1.80 = $16.70

Insurance put:
9/11 January $70 PBR-MN @ $1.80, expired

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

DO - $84.58 +3.54 - Diamond Offshore

DO declared a special dividend of $4 per share payable March 1st to holders on Feb-14th. This helped send shares of DO to a new six-month high. Definitely no complaints here with earnings next week. No change in play.

To see the last full commentary on this position click here

Earnings schedule: Feb-8th

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 - $41.16 +.92 - ATP Oil and Gas Corp

ATPG hit a brick wall at $42 and a new high for 2007. No news and still no earnings date. I would continue to 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/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 - $124.15 +0.30 - Petrochina

Not a big gain for PTR but I believe we have seen the bottom. You know how fast this stock can move once a direction appears. I would look to add to positions here and again on a move over $128. With the Yuan expected to increase +5% over the dollar in 2007 and oil demand in China soaring I believe PTR will benefit once the profit taking in the Chinese indexes is over.

I 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/A

Current recommendation: Buy at $125.50, stop at $119

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

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

DHI - $30.86 +3.04 - DR Horton

Outstanding breakout in DHI over $30 and the long term uptrend resistance. $35 is the next target and builders are catching fire again! DHI is the only stock in the group rated an aggressive buy by A.G. Edwards! The reason given by AGE is "its broad geographic diversification, focus on the first and second move-up markets, low-cost operating structure, conservative capital stewardship and industry-leading dividend." No change in play.

To see the last full commentary on this position click here

Earnings: Jan-23rd, +35 cents vs 98 cents in 2005.

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
SNP
Sinopec
UPL Ultra Petroleum

Current Watch List

SNP - Sinopec

China Petroleum & Chemical Corporation (Sinopec Corp.) is an integrated energy and chemical company with upstream, midstream and downstream operations. The Company and its subsidiaries operate mainly in the People's Republic of China. The principal operations of Sinopec Corp. and its subsidiaries include exploring for and developing, producing and trading crude oil and natural gas; processing crude oil into refined oil products, producing refined oil products and trading, transporting, distributing and marketing refined oil products, and producing, distributing and trading petrochemical products. Sinopec Corp. has five operating segments: exploration and production, refining, marketing and distribution, chemicals, and corporate and others. On June 21, 2005, Sinopec Corp. entered into an agreement with Beijing Yanhua Hitech Co., Ltd., pursuant to which Sinopec Corp. acquired 95% equity of Beijing Yanhua Hi-tech Catalyst Co., Ltd., held by Yanhua Hi-tech Corp.

Breakdown target $80.50

Buy JULY $85 Call SNP-GQ currently $6.30

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

UPL - Ultra Petroleum

Ultra Petroleum Corp. (Ultra) is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused primarily in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. As of December 31, 2005, Ultra owned interests in approximately 148,007 gross acres in Wyoming covering approximately 230 square miles. The Company owns working interests in approximately 330 gross productive wells in this area and is operator of 53% of the 330 gross wells. Its domestic operations are focused on developing and expanding a tight gas sand project located in the Green River Basin in southwest Wyoming. During the year ended December 31, 2005, the Company's Wyoming production was approximately 87.4% of total oil and natural gas production on a thousand cubic feet of natural gas equivalent (MCFE) basis and 98.5% of the Company's estimated net proved reserves were in Wyoming on an MCFE basis.

Breakdown target $45

Buy JAN 2009 $50 LEAP Call AZH-AJ
 


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