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Weekly Newsletter, Saturday, 03/10/2007

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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

Last Dip Before Summer?

Crude prices returned to $60 on Friday in what may be the last dip before the summer escalation begins. We have seen a tight range form between $60 and $62.50 and money flow shows increasing amounts of buying on every dip. Gasoline futures broke out to a new six-month high last week at $1.94 and only retraced a couple of cents on Friday's dip. This is normally the low point of the spring for gasoline prices and instead they are breaking out to new highs. This should be a clue for investors that oil prices will follow.

We have seen very poor refinery utilization, which fell to 85.8% last week due to maintenance work and a continuing rash of accidents a numerous installations. This low utilization has impacted gasoline and distillate inventory levels with distillates down 20 million barrels since mid January and gasoline down 15 mb in the same period according to the American Petroleum Institute. Last week's inventory report saw crude stocks fall -4.8 mb, distillates -1.3 mb and gasoline a whopping -3.8 mb and this is not even driving season yet. The API showed even worse numbers with crude falling -6.6 mb and gasoline -7.4 mb. Crude imports fell 650,000 bpd for the reporting week. Gasoline inventory levels are now 3.9% below the same period in 2006 with crude inventory 5.1% below 2006.

Driving this drop in inventories is a surge in demand for gasoline of +3% in February. Remember February was blanketed by blizzards and severe winter weather and should not have seen much additional driving but demand was still up +3%. Retail gasoline prices rose +20 cents in February and the sharpest February increase in over a decade. Gas prices are expected to rise through the summer and $3 gas will likely return.

OPEC meets for the 144th time this week and nothing is expected to change. Prices are holding above $60 and the increased summer demand is just ahead. Of the 1.7 mbpd in announced production cuts it appears they actually cut 1.2 mbpd according to recent reports. These cuts have helped bring inventory levels back in line with demand and has provided them a firm base price at $60 heading into summer demand AND the summer hurricane season. The stage is set and all the players are ready.

The big news this week was from Exxon. You did not think it was the Bush anti-Chavez goodwill tour did you? Exxon said it would bump its capital spending to about $20 billion a year for the next 3 years to try and add to current reserves. Exxon hopes to add 1 mbpd to its production by 2010 by developing 20 new global projects. Exxon only spent $2.2 billion in 2005 but upped that to $20 billion in 2006. Exxon averaged production of 2.7 mbpd in Q4. Exxon also bought back $25 billion in stock (12%) in 2006. A Citigroup analyst said as long as oil remains over $50 Exxon can continue buying back stock at the rate of $25-$28 billion a year and maintain its $20 billion capex effort. Exxon posted record profits of $39.5 billion in 2006.

However, Exxon is in trouble long term. Exxon may have produced 2.7 mbpd in Q4 but it refined 5.5 mbpd. Half of its refinery production came from other oil producers. Of the 2.7 mbpd it actually produced about half was produced in countries with varying degrees of political instability. Exxon announced last week it had reluctantly agreed to turn over its last group of assets in Venezuela to Venezuelan control. Chevron and Conoco also quietly agreed to the takeover of their facilities. It was either agree and salvage a small portion of future production or be kicked out of the country and lose it all. Exxon has said for years that there is plenty of oil. Unfortunately they have been unable to find and produce it in a timely manner. The extra oil is all in unfriendly countries. The announcement that they are going on a crash exploration and development binge is a clue that there is trouble brewing. Exxon is not one to charge off and produce a lot of small projects. Their sheer size makes tackling small projects expensive and less rewarding. They need big projects but unfortunately there are none. Production from the 20 global projects they announced was expected to be 1 mbpd when completed. That means each project averages only 50,000 bpd. Counting the sharp increase in capex in 2006 to $20 billion and extending that through 2010 as they announced means they are spending $100 billion to produce an additional 1 mbpd. Don't get me wrong that is a good investment if they can maintain that production for at least 5 years. 1 mbpd @ $60 equals $60,000,000 per day in crude or $21 billion a year in revenue. Assuming those projects continue producing even at a lesser rate for another 10 years it is a good deal for Exxon. It is not a windfall and not a cash cow that will continue forever. They will be forced to continue investing at those levels to maintain production through the next decade. I fear the sudden spike in capex from $2 billion a year to $20 billion was not brought on by greed and high oil prices. I fear it was inspired from declining production rates on existing projects. The new CEO, Rex Tillerson, realized that the future was theirs to lose or control and he elected to take on nearly two dozen smaller projects rather than sit back and wait for that major find that may never come. I am afraid the next round of capex may be even higher as the cost of finding and producing oil from increasingly harsh environments rises. All the easy money has been made and every year that passes Tillerson's task will grow harder.

Monday's drop finally stopped us out of Tesoro at $89. The end of week rebound saw TSO climb to a new high at $95.55 but we can't complain. The exit on the option at $29.70 provided a $22.00 profit. Now we need to see a crack in the refiners to reenter the position with a different strike. Unfortunately with refiners hot right now that may not come soon. On the bright side we have $29.70 to invest in other possibilities while we wait.

Jim Brown


April Crude Chart - Daily

April Gas Futures Chart - Daily

 


Changes in Portfolio

New Energy Plays

None - see watch list


New Non-Energy Plays

None -  see watch list


Dropped Plays
TSO
$94.88 +2.68
Tesoro Corporation ** Stopped $89.00 **
FXI $98.25 +3.15 China 25 Index Fund ** Stopped $93 **
RIG $77.57 +2.14 Transocean Inc ** Stopped $74 **

New Watch List Plays Triggered
PTR $113.94 Petrochina
CCJ $37.23 Cameco

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

PTR - $113.94 - Petrochina

We were not out of Petrochina very long before a sharp drop in China's indexes gave us a new entry on Monday at $110. We only have 1/2 position at present with a target of $105 to fill the other half. The breakout target has been cancelled.

Cost reduction play:

Sell the June 105 PUT PTR-RA with a touch of $110 by PTR. Set a stop loss at $100 on the short put.

Company Info:

PetroChina Company Limited operates a range of petroleum and related activities through four primary business segments: Exploration and Production Segment, Refining and Marketing Segment, Chemicals and Marketing Segment, and Natural Gas and Pipeline Segment. The activities include the exploration, development, production and sales of crude oil and natural gas; the refining, transportation, storage and marketing of crude oil and petroleum products; the production and sales of basic petrochemical products, derivative chemical products and other chemical products, and the transmission of natural gas, crude oil and refined products, and the sales of natural gas.

Breakdown targets:
$110 1/2 position - hit Mar-5th
$105 1/2 position - not yet triggered

Position: JAN-09 $120 LEAP Call ZJK-AD @ $10.70

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CCJ - $37.23 - Cameco

CCJ dipped to $35.22 on Monday but failed to hit our breakdown target of $34. A strong rebound pushed it through the breakout trigger at $37.50 on Wednesday giving us our entry.

Company info:

Cameco Corporation (Cameco) is primarily engaged in the exploration for and the development, mining, refining and conversion of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries. The Company has a 31.6% interest in Bruce Power L.P. (BPLP), which operates the four Bruce B nuclear reactors in Ontario. Cameco's 52.7% subsidiary Centerra Gold Inc. (Centerra) is involved in the exploration for and the development, mining and sale of gold. Cameco has four segments: uranium, fuel services, nuclear electricity generation and gold. In June 2006, the Company acquired a 19.5% interest in UNOR Inc

Cameco appears to have the Cigar Lake disaster under control and is taking steps to reopen the mine.

http://biz.yahoo.com/iw/070301/0222031.html

Breakout trigger: $37.50 Hit March 7th

Position: JAN-09 $40 LEAP Call ZBK-AH @ $7.80
 


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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SNP - $78.45 +2.40 - Sinopec

No news but the rebound is gaining speed. No complaints and no change in play.

To see the initial commentary on this position click here

Breakdown target $82.50 hit on 2/27

Position: OCT $85 Call SNP-JQ @ $7.00

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THE $33.71 +.77 - TODCO ** Stop Loss $30.00 **

Todco dipped again on Monday to $32 but rebounded sharply on the signing of new contracts with Mexico and Malaysia for drilling services. The Malaysian contract is for a rig that has been in storage since March 2002 and will represent a new source of revenue. Expected contract revenues from this rig are in the range of $130 million. Not a bad deal for a 27 year old rig that was in storage.

To see the initial commentary on this position click here

Earnings: March 1st, $1.11 vs .34 cents in comparison quarter

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 $30.13 +.24 - Chesapeake Energy ** Stop loss $28.50 **

CHK continues to hold above support but lacks any momentum. Maintain the stop. No news and no change in play.

To see the initial commentary on this position click here

Earnings: Feb-23rd, 90 cents vs est 76 cents.

Current recommendation: Hold

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

Insurance put: none

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FXI $98.25 +3.15 - China 25 Index Fund ** Stopped $93 **

The gap down on Monday hit our stop at $93 and we exited for a small profit. I am not sure I want to reenter this position until a new tend returns on the China indexes.

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 $90

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

Position:
2009 $100 LEAP Call VHF-AT @ $13.50, exit 3/5 $15.40 +1.90

No insurance

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MRO $94.73 +5.49 - Marathon Oil

It was a very strong week for Marathon with nearly an +$8 rebound from Monday's lows. No news and 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: 2/18/07
Position: March $85 PUT MRO-OQ @ 65 cents. Stop $85

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HES - $52.80 +1.38 - Hess Corporation
(Formerly (AHC))

HES is holding near its recent highs but remains lackluster after the prior week's drop. No news and 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

Insurance Put: 2/26/07
MAY $50 PUT IGG-QJ @ $1.35, profit stop $47


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BTU - $38.85 -.09 - Peabody Energy

BTU announced a contract with Rentech to supply coal for their initial coal to liquids plant in Illinois. They are also exploring two other locations to build additional plants to convert coal to diesel and jet fuel. Several analysts have been recommending BTU at what they are calling as a depressed level.

SELL JAN-08 $30 PUT LLW-MF is BTU touches $35

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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RIG - $77.57 +2.14 - Transocean Inc ** Stopped $74 **

RIG continued its drop from the prior week to touch our stop at $94 for an instant on Monday. The low was $73.90 before RIG rebounded to hit $78.50 before the week was out. I hate to see RIG go but the decline appeared to be nearing breakdown levels and it was a tactical exit.

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, exit $13.60

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

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TSO - $94.88 +2.68 - Tesoro Corporation ** Stopped $89.00 **

Tesoro finally cracked enough on Monday to hit our stop for about a ten minutes but that was enough to force the exit on the play with a profit of $22. We will look to reenter TSO on a dip with a different strike.

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
03/05/07 Exit $29.70, profit $22.00

Insurance put: None

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

SLB $65.10 +2.85 Schlumberger

SLB returned to two-month highs and with the added exploration budget by Exxon they should move higher soon. No change in play.

SELL JAN $55 PUT WUB-MK on a touch of $60 by SLB

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

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SUN $65.27 +1.50 - Sunoco

Not as strong as Valero nut holding at the high end of its recent range. No change in play.

SELL JAN $55 PUT WUD-MK on a touch of $60 by SUN

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

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

VLO $60.23 +3.23 - Valero Energy

Valero broke out to a new six month high on the spike in gasoline prices and the rising crack spreads. No news of note and no change in play.

To see the last full commentary on this position click here

Earnings: 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

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

DO - $76.66 +1.54 - Diamond Offshore ** New Stop $73.00 **

DO barely rebounded off the Monday lows and is not performing as you would expect with all the global exploration in progress. I believe it is just caution in the broader markets until a new market direction is decided. 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


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

None
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
TSO
Tesoro

Current Watch List

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 $180

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

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BHP - BHP Billiton

BHP Billiton Limited is a diversified resources group. The Company has seven business units, or Customer Sector Groups: Petroleum, which explores for, produces, processes and markets hydrocarbons, including oil, gas and liquefied natural gas; Aluminium, which explores for and mines bauxite, and processes and markets aluminium and alumina; Base Metals, which explores for, mines, processes and markets copper, silver, zinc, lead, uranium and copper by-products, including gold and molybdenum; Carbon Steel Materials, which explores for, mines, processes and markets metallurgical coal, iron ore and manganese used in the production of carbon steel; Diamonds and Specialty Products, which explores for and mines diamonds and titanium minerals; Energy Coal, which explores for, mines, processes and markets energy coal for use in electricity generation, and Stainless Steel Materials, which explores for, mines, processes and markets nickel, which is used in the production of stainless steel.

Breakdown target $40.00
Breakout target $43.50

BUY JAN-09 $50 LEAP Call ZPK-AJ

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

ATI - Allegheny Tech

Allegheny Technologies Incorporated (ATI) is a diversified specialty metals producer. The Company operates in three segments: High Performance Metals, Flat-Rolled Products and Engineered Products. The High Performance Metals segment produces, converts and distributes a range of high-performance alloys, including nickel and cobalt-based alloys and superalloys, titanium and titanium-based alloys, zirconium, hafnium, niobium, nickel-titanium and their related alloys. The Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys. The Engineered Products segment produces tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. ATI products are used in various markets. These markets include aerospace, defense, chemical process industry, oil and gas, electrical energy and medical.

Breakdown target $92.50

Call spread:
BUY JAN-09 $100 LEAP Call OYG-AA
SELL JAN-09 $140 LEAP Call ZKG-AH

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

TEX - Terex Corp

Terex Corporation (Terex) is a diversified global manufacturer of capital equipment delivering solutions for the construction, infrastructure, quarry, mining, shipping, transportation, refining and utility industries. The Company operates in five business segments: Terex Construction, Terex Cranes, Terex Aerial Work Platforms, Terex Materials Processing & Mining, and Terex Roadbuilding, Utility Products and Other. The Company's products are manufactured at plants in North America, Europe, Australia, Asia and South America, and are sold primarily through dealers and distributors worldwide. During the year ended December 31, 2005, it acquired Halco Holdings Limited and its affiliates, and Power Legend International Limited and its affiliates. It entered into a joint venture with North Hauler Joint Stock Company Limited to produce high-capacity surface mining trucks in China. It has a 50%-ownership interest in Sichuan Changjiang Engineering Crane Co., Ltd.

Breakdown target $60.00

Call spread
BUY JAN-09 $70 LEAP Call VXQ-AN
SELL JAN-09 $110 LEAP Call VXQ-AB

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

TSO - Tesoro

We were stopped out of our highly profitable TSO position and now we are looking to get back in with a different strike on the next dip in refiners.

Company info:

Tesoro Corporation (Tesoro) is an independent petroleum refiner and marketer with two operating segments: refining, which is engaged in refining crude oil and other feedstocks at its six refineries in the western and mid-continental United States and selling refined products in bulk and wholesale markets (refining), and retail, which is engaged in selling motor fuels and convenience products in the retail market through its 460 branded retail stations in 18 states. Through its refining segment, the Company produces refined products, primarily gasoline and gasoline blendstocks, jet fuel, diesel fuel and heavy fuel oils for sale to a variety of commercial customers in the western and mid-continental United States. Tesoro's retail segment distributes motor fuels through a network of retail stations, primarily under the Tesoro and Mirastar brands.

Breakdown target: $89

BUY 2009 $100 LEAP Call ZGC-AT (highest strike available)
 


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