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Weekly Newsletter, Saturday, 02/17/2007

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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

Volatility Returns

I mentioned last week that I expected some rocky prices to return and that is exactly what we got. We saw a high on Tuesday of $59.60 and a low on Thursday of $56.62. Friday's short covering rebound took us right back to the highs to close at $59.40. Each day this week saw ranges of a dollar or more.

Part of that volatility and especially the rebound on Friday was due to the pending expiration of the March crude contract next Tuesday. The options for heating oil, RBOB and natural gas expire next Friday. With the futures markets closed on Monday that meant the next trading day for crude was expiration day. I also noticed when writing tonight that the April crude contract closed within 45 cents of the expiring March contract. This lack of divergence suggests there is little expectation for higher prices over the next month. The reason for this is the expiration of winter as I have explained before.

NOAA, the National Oceanic & Atmospheric Administration, is forecasting warmer than normal weather for the next 10-12 days. That will take us out of February and nearly out of winter. The demand for heating oil and natural gas will begin to wane along with the price for crude assuming there are no geopolitical events. That may mean crude will just continue to remain volatile or slip into a nearly dormant state as refineries make their longest planned shutdown of the year for maintenance and switch over to summer products. Normal gasoline demand will begin to accelerate in April and the summer cycle will repeat once again.

What will cause the next move higher in prices will be the expectations for summer gasoline demand and predictions of summer hurricanes. Crude prices don't have to decline ahead of summer and we have seen many instances where they continued a positive trend higher. Comments like we saw this week from OPEC and the IEA will provide support to prices and could prevent any major support retests.

The new OPEC secretary-general said the global oil market had become more balanced as a result of the OPEC production cuts and demand was steady at 86 mbpd. He said compliance with the cuts was about 66%, which is very strong support among a cartel of cheaters. According to OPEC the actual cut is running around 1,122,000 bpd compared to the target cut of 1.7 mbpd. Independent surveys put the cuts closer to 850,000 bpd. Regardless of what the number is the result has been a balance of supply and demand and support for prices in the high $50s. OPEC also said the demand for OPEC oil would rise by 200,000 bpd above prior estimates due to failing production from non-OPEC sources. If you remember in late 2006 there were glowing expectations for a strong surge in non-OPEC production but it now appears reality is a decline of 170,000 bpd due to stalled projects and increasing depletion rates from several fields.

The IEA said the demand for oil will rise this year by 273,000 bpd more than previously expected due to rising demand from China. China demand is seen as rising from the 7.1 mbpd 2006 level to 7.6 mbpd in 2007. Vehicle sales are seen as a major driver along with strong economic growth at more than 10%. China saw a 25% jump in vehicle sales in 2006 to 7.2 million units. Despite strong controls to slow auto buying that growth rate is expected to continue in 2007.

On Wednesday the IAEA, International Atomic Energy Agency, will report to the UN Security Council on Iran's compliance with the UN demand to halt enrichment of uranium. Since there has been no compliance and Iran claims they are installing thousands more centrifuge cascades it should be a short report. The Security Council will retire to discuss new sanctions to force compliance and that should take several more weeks if the last discussions are any guide. The Wednesday event will get plenty of press but I doubt it will be material to the price of oil. It is an ongoing process and this week's update is just a chapter in the process.

Baker Hughes stunk up the services sector on Thursday after missing earnings estimates and warning that the current quarter will be short due to weakness in the North American market. BHI lost 10% on the news to $65. BHI reported $1.02 compared to analyst estimate of $1.19 and the prior quarter at 75 cents. BHI would not give long term guidance due to uncertainty in the North American markets. It guided for Q1 at $1.09 compared to analysts estimates at $1.19. For the full year BHI expects revenue to increase 18%.

For those interested Ultra Petroleum finally announced an earnings date of Feb-21st with the conference call at 11:AM.

Check your play descriptions this weekend for some new insurance suggestions and new stop losses.

Jim Brown


March Crude Chart - Daily

April Crude Chart - Daily

March Gas Futures Chart - Daily

 


Changes in Portfolio

New Energy Plays

We will be looking for new entries on any March dip in crude prices.


New Non-Energy Plays

None


Dropped Plays
OSX $196.20 -3.03 Oil Service Index - ** Closed **

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 - $196.20 -3.03 Oil Service Index - ** Closed **

I am not happy with the chart on the OSX and I fear we could retest the $175 level over the next few weeks. Let's close this naked put now and take our $8.90 profit. We can reenter the same position on a dip back to $175. I will put it on the watch list today.

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 - $48.94 0.27 - Encana ** New Stop $47.50 **

Earnings fell -72% on sharply lower gas prices compared to the same quarter in 2006. Profits fell to 84 cents compared to $1.46 in Q4-2006. Encana's realized price for gas fell to $5.79 compared to $10.29 in the comparable quarter. Encana did not roll over on earnings but it is not showing a positive trend. With lower gas prices ahead I added a stop loss to take us out with a profit if it does lose traction.

To see the initial commentary on this position click here

Earnings: Feb-15th, 84 cents vs $1.46 on lower gas prices.

Current recommendation: Buy at $40

Breakdown target: $45 hit Jan-3rd

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

Insurance put: None

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THE $32.95 -0.82 - TODCO ** New Stop $30.00 **

They announced an earnings date of March 1st. After slipping lower last week I was considering dropping THE but they are still above support at $31 and last quarter they spiked significantly on very strong earnings. It looks like all the bad news is priced in so I am sticking with it through earnings. I am adding a stop loss at $30.

To see the initial commentary on this position click here

Earnings schedule: March 1st

Current recommendation: Hold

Breakdown target $39 hit 12/7/06

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

Insurance Put: None

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CHK $29.68 0.05 - Chesapeake Energy ** Stop loss $28.50 **

With earnings next Friday CHK is holding above support and remains in its range. Fear of falling gas prices in the spring is keeping a lid on the stock price but not on the outlook for CHK. I suspect we will see similar results from CHK as we saw from ECA. The CEO continues to buy stock with his latest purchase of 340,000 shares at $27.83 per share. He has amassed 27 million shares over the last two years for a 6.1% stake in the company worth $802 million. That is a very strong endorsement for CHK. 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 $106.90 1.53 - FTSE/Xinhua China 25 Index Fund

We are starting to see a firming in the FXI. A move over $107.50 would be a new four week high and the resumption of the prior trend.

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

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MRO $91.03 -.10 - Marathon Oil

Marathon saw a nice spike on Tue/Wed after announcing they added 146 million bbls of proven reserves in 2006. This replaced 109% of its production for the year. This brought total proved reserves to 1.262 billion BOE with a reserve life of 9.7 years. Only 3 million BOE was added by acquisition. The rest came from discoveries, extensions, improved recovery and revisions to prior estimates. I am adding a very short insurance put for 65 cents. If we do get a decline in oil prices over the next month it could make up for some of the loss in the LEAP. If not it was cheap insurance.

Insurance put: Buy the March $85 put for 65 cents.

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: 2/18/07
BUY March $85 PUT MRO-OQ currently 65 cents. Stop $85

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

HES - $54.27 -.67 - Hess Corporation
(Formerly (AHC))

Hess still wedging up to $55 although the pattern is not as strong as the prior week. This is still a very promising chart and would warrant new positions on the break. No news.

I am adding a new insurance put using the May $50 strike.

BUY MAY $50 PUT IGG-QJ if HES trades at $52.75.

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

Insurance Put: 2/16/07
BUY MAY $50 PUT IGG-QJ if HES trades at $52.75.

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

BTU - $41.03 .16 - Peabody Energy

BTU is holding the flat line at 40.50 on no news. 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
02/05/07 March put stopped -$1.00, cost = $9.70

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

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DVN - $66.69 -1.62 - Devon Energy

Devon is suffering from post earnings depression and the drop in nat gas prices. I am adding a short term put as insurance against a return to $64 or lower.


To see the last full commentary on this position click here

Earnings: Feb-7th, $1.36 vs est of $1.36

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: 2/16/07
BUY MARCH $65 PUT DVN-PM currently $1.05. Stop $63.

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 - $76.24 -1.16 - Transocean Inc ** New Stop $72 **

RIG reported earnings of $1.25 compared to estimates of $1.19 and comparisons of 45 cents in Q4-2006. RIG also said it sold a couple of rigs and may sell some more given the strong prices being offered. RIG also said they would be interested in acquisitions that would increase their deepwater capability. The stock sold off after one analyst with a price target of $92 said there was nothing new in the report. RIG increased day rates on its rigs 17% to an average of $171,000 per day from $146,900. That is pretty good news to me and further proof that the oil patch remains healthy. I added a stop just in case.

Their rig report released Feb-2nd

To see the last full commentary on this position click here

Earnings: Feb-14th, $1.25 vs 46 cents in prior quarter.

Current recommendation: Buy at $74

LEAP Position:
10/03/06 Position: 2009 $80 LEAP Call VOI-AP @ $12.90
01/31/06 Cost update Put stopped -1.15 cost = 14.05

Insurance put: Triggered at $79 on Jan-3rd
1/3/07 Feb $75 PUT RIG-NO @ $2.55, stopped $77.50, $1.40

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

TSO - $85.78 1.42 - Tesoro Corporation ** Stop Loss $81.00 **

Tesoro move one notch higher to $86 and held there the entire week. The volatility was near zero with the intraday ranges measured in nickels. It appears we have found the level where willing buyers met willing sellers and they are spoon feeding orders to each other. It will be interesting to see what direction emerges. I am going to leave the stop at $81 to give it room when the volatility finally emerges.

To see the last full commentary on this position click here

Earnings: Jan-29th, $2.28 129%

Current recommendation: Hold

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

Insurance put: None

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

SLB $63.33 -1.13 Schlumberger

SLB lost ground on the Baker Hughes earnings miss. Even though SLB had stellar earnings the stink from BHI caused a slide in SLB. No news and 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

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

SUN $61.78 .33 - Sunoco

Sun announced a new coke plant for Haverhill Ohio and said long term contracts to buy the production had been signed with construction to begin later this quarter. The news gave SUN a slight lift and blunted the downdraft from the prior week. No other material news and 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 $48.36 -.40 - Plains Exploration

PXP continues to hold near its highs as we await earnings next week. 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

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

FST $33.28 .12 - Forest Oil

Forest continues to trend higher despite the fractional gains for the week. Earnings are still ahead and I expect a strong report. No news and no change in play.

Enercom conference presentation

To see the last full commentary on this position click here

Earnings schedule: Feb-27th

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 $55.96 .34 - Valero Energy

Valero was hit by fires at two different refineries in the same week but it did not hurt the stock price. The Sunray Texas plant caught fire around 2:PM on Friday and that was after the market closed. 19 people were taken to hospitals and all but four were released. This should pressure the stock on Tuesday. The plant was shutdown and there is no news about a reopening schedule. Prior to the Friday fire VLO was pressing resistance at $66 in hopes of a breakout to a new 5-month high. In other news ex-CEO Bill Greehey said crude prices should remain in the $62-$63 range for 2007 baring any geopolitical events, hurricanes or natural disasters.

They presented at the Credit Suisse Energy Conference on the 8th. You can listen to that presentation here

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 - $94.05 -1.30 - Petroleo Brasileiro

Petrobras continued its two-week plunge as Brazilian President Luiz da Silva and Bolivian President Evo Morales continued to argue about the price of gas shipped between those two countries. Morales has been on a nationalism binge like his hero Chavez. The argument was reportedly resolved late this week and new agreements will be signed over the coming days. The argument knocked $6 off PBR and pressured the equity markets in both countries. 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 - $78.59 -6.69 - Diamond Offshore

That was an unwelcome event! Investors woke up on Monday to a DO price that was $5 less than the Friday close. It was ex-dividend day for the special $4 dividend declared by DO in January. The drop knocked us back to support at $78 as the price adjustment caught many traders off guard and the drop was interpreted as profit taking and the herd mentality took hold. 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 - $41.13 1.36 - ATP Oil and Gas Corp

I told you I would be a buyer last week under $40 based on their strong outlook. That outlook propelled them to a rebound from $39 on Monday to $41 at Friday's close. I realize that does not seem like much when a stock like PTR or SNP can move $6 in a day but it was a big move for ATPG. Earnings were announced for March 2nd.

To see the last full commentary on this position click here

Earnings schedule: Mar-2nd.

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 - $122.83 .23 - Petrochina

PTR continued to languish above support at $120 for yet another week while waiting for the profit taking in the Chinese indexes to be over. I believe PTR will recover strongly once money starts flowing back into the markets after the Chinese New Year.

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 under $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 - $28.21 .16 - DR Horton

Slowly he crept, step by step, goes the script for dozens of horror movies. That same script applied to DHI last week as it slowly moved higher from the Toll Brothers warning disaster. Strong support at $27.50. 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
OSX
Oil Service Index

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

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

OSX - Oil Service Index

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

Breakdown trigger $175

SHORT Sept $220 PUT - OFJ-UD, Stop loss OSX $160
 


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