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Weekly Newsletter, Saturday, 03/24/2007

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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

Right On Schedule

The post OPEC meeting, futures expiration dip is over and the rebound has begun. Last week saw crude futures fall to $56.10 on the expiring April contract but only $58.80 on the now current May contract. The rebound was swift to hit $62.65 on Friday amid new tensions about Iran and a revised hurricane forecast for 2007.

Iran captured 15 British naval troops while they were inspecting a private vessel in Iraqi waters. They were taken back to Iranian soil and their boats impounded. Iran said they were captured to protect the "Iraqi oil terminal." That has to be the lamest excuse ever. We are taking British seals off a civilian ship where they were inspecting for contraband cargo in order to protect Iraqi oil terminals. The Iranian leadership must be breathing too many oil fumes.

Eventually they will be forced to return the captives and then the real fun will start. Any future attempts by the Iranians to protect anything in Iraqi or international waters will likely end up creating a new submerged reef with a high metal content. I am sure the military powers on our side in the Gulf are going to be just waiting for another stunt for some serious payback. That is guaranteed to escalate the tensions and the oil prices at the same time.

The Iranian president cancelled a planned trip to New York to make a speech and plead his nuclear case in front of the UN Security Council on Saturday. He claimed it was due to a delay getting a visa from the US but other officials claim it may have been fruitless to claim to be peaceful only one day after attacking troops from another country in Iraqi waters. He would probably have found it difficult as well to argue the case for nuclear trust while the Iranian Supreme Leader Ayatollah Ali Khamenei warned on Wednesday that they would continue their nuclear plans illegally if the UN tries to stop them. It is tough to appear peaceful and law abiding when your not and your press releases precede you.

British storm forecasting group Tropical Storm Risk (TSR) warned this week that the 2007 hurricane season could be 75% stronger than the 1950-2006 averages. For the 6-month season which begins on June 1st they predicted 17 tropical storms of which 9 will strengthen into hurricanes. Four of those are expected to be intense and destructive. They had originally predicted a 60% increase but the rapid dissipation of El Nino in February led them to increase their storm estimates. With crude inventories reduced due to the OPEC production cuts and prices already hovering over $60 it did not take energy analysts long to start talking about $70 crude before the year is out. If we get even one storm in the Gulf that shuts down the rigs the amount of crude in storage will suffer and prices will rise. To add to that shortage the government announced this week they are going to start adding to the strategic petroleum reserve in May at the rate of 129,000 bpd. This will also reduce the available oil.

The SPR currently contains around 689 million bbls of oil and the government is going to add 4 million bbls. They also submitted a request last week to officially double the size of the SPR to 1.5 billion bbls. The government said it would buy crude in the open market beginning in May to add that 4 million bbls. This is the first time in 13 years we have needed to buy commercially. Normally oil producers transfer oil to the SPR instead of royalty payments on the oil they produce. This keeps the government from having to buy it on the open market. After the initial fill ending in July the government is planning on reactivating the royalty oil program to increase the SPR to 727 mb by the end of 2008. Observers will be watching China to see if they are going to add to their SPR reserves as they have already indicated. This sudden interest in adding to global reserves comes at a time when overall global demand is expected to be the highest ever. The EIA said US refiners are expected to boost processing rates to an average of 15.8 mbpd in May. That is a jump of 1.2 mbpd from current levels and would be +282,000 more than last year. The EIA is anticipating record high global oil demand in Q2 of 84.6 mbpd, up +1.3 mbpd from 2006. Q2 typically sees a drop in the demand for oil as winter demand slows and summer demand has yet to increase. The EIA is expected to show the smallest drop in demand since 1985.

On October 5th, 2005, U.S. Energy Secretary Samuel Bodman requested the National Petroleum Council (NPC) to conduct a global study of global oil and natural gas supply. The motivation by the Secretary was an investigation into the timing and response to Peak Oil and the subsequent decline of world oil production. Hundreds of organizations and individuals have contributed to the process. Three weeks ago there were two multi-hour web-cast conference calls where the NPC heard comments from many prominent researchers in this field including Colin Campbell, Matt Simmons and others. A draft report is due out in April and the final report due out by late June. You can track the progress on the NPC website at http://www.mpc.org. There are a couple of interesting power points already posted but nothing referring to the final draft until April. Let's hope it is not just another government cover up in progress.

The IEA raised their global demand estimates for 2007 to 86 mbpd, an upward revision of 273,000 bpd for all of 2007. They predicted China's demand would rise by +2%. Since demand from China rose +9.3% in 2006 the odds are good that 2% target will be soundly beaten. According to China they consumed 6.9 mbpd in 2006.

Iranian production is falling as fields age and equipment wears out. At the same time Iranian consumption of oil products is growing. The EIA is projecting Iran will become an importer of oil rather than an exporter by 2020. Since Iran currently has the second largest reserves this is a major change in production trends and will have a resounding impact if it comes to pass.

Even Greenspan sounded off on the topic of energy recently. He warned that crude oil supplies are precarious and susceptible to disruption. (No kidding?) He explained that new discoveries take a long time to put into production and even small disruptions create large movements in prices. "We are treading on the edge in which any minor catastrophe creates a spike in prices." I wonder if he just learned this or he is having a senior moment where stray facts suddenly return to his consciousness? He also said, "a sharp decrease in supply would have a very major impact on global economic activity." Alan, toss your calendar you are no longer relevant. There is a rocking chair somewhere calling your name. Thanks to Dave R. for the Greenspan article!!

In the truth is stranger than fiction department a bill was introduced in Florida last week to ban oil drilling within 250 miles of the coast. Another bill was introduced that would allow drilling within 45 miles of Florida's coast. Congress approved a bill and Bush signed it last year that provided a safe zone of 125 miles from the coast. Don't they have something else to do in Florida than argue about places to drill?

For next week I would like to think the rebound in oil prices will continue but I suspect there needs to be some profit taking before the next move higher begins. Nat gas prices rebounded back over $7.25 on the continued cold weather in the northeast but their time is rapidly fading. Storage levels are nearing the 5-year average but winter is done with the first day of spring behind us. I expect a drip back below $7 very soon.

Jim Brown


MMay Crude Futures Chart - Daily

April Gas Futures Chart - Daily

April Gasoline Chart - Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays
THE Todco Buyout announce

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.

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BHP - $47.25 +3.09 - BHP Billiton

So far so good for our first week in this position. BHP said it had approved a $1.85 billion cap ex program to expand the iron ore operations in Western Australia to 155 million metric tons per year. The news pushed the stock to a new 10-month high.

To see the initial commentary on this position click here

Breakout target $43.50 hit March 12th

Position: JAN-09 $50 LEAP Call ZPK-AJ @ $6.00

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CCJ - $40.08 +3.22 - Cameco

Cameco held a conference call last Monday to discuss the progress at the Cigar lake mine and investors cheered sending CCJ to a new three month high over $40. No complaints here!

To see the initial commentary on this position click here

Breakout trigger: $37.50 Hit March 7th

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

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PTR - $112.40 +2.09 - Petrochina

PetroChina released earnings last week and profits rose +6.6% on a revenue gain of +24.8%. A +34% increase in expenses kept profits in check. This is a communist country and a government owned entity. Expecting rampant "reported" profits would be an unreasonable expectation. CapEx spending was projected at $24 billion in 2007 or $9 billion more than Exxon in 2006. The news was enough to send PTR to a new two week high. We need to take these small gains as a gift and a stepping-stone to the bigger ones in our future. No change in play.

To see the initial commentary on this position click here

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

Cost reduction play:
Position: Short June $105 Put PTR-RA @ $3.40, stop $100

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SNP - $83.19 +7.82 - Sinopec

Now that is the stellar gain we knew Sinopec was hiding. The rebound took it to a new 5 week high on strong daily gains. No news 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 $40.92 +8.14 - TODCO ** Closed **

The news of the Todco buyout by Hercules Offshore was about the worst news we could have gotten. The $42 offer was a 30% premium to the closing price the day before but it was well below our strike price of $45. That effectively killed our LEAP within seconds of the announcement. With a $42 acquisition price the odds of Todco moving over $45 by 2009 are nearly zero. With no long term upside expectations the premium in the LEAPS evaporates instantly. We took a beating on THE and there is nothing we can do about it.

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, exit $3.40, -$5.00

Insurance Put: None

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CHK $30.76 +1.19 - Chesapeake Energy ** Stop loss $28.50 **

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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MRO $101.12 +7.83 - Marathon Oil

Marathon powered to nearly an $8 gain for the week on the strength in gasoline prices and the falling oil prices early in the week. Crack spreads were soaring and so was Marathon hitting an all time high at $103. 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
Cost update: Expired March put +65 cents to $13.25

Insurance put: 2/18/07
Position: March $85 PUT MRO-OQ @ 65 cents. expired

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

HES - $55.98 +5.53 - Hess Corporation
(Formerly (AHC))

The selling pressure from the prior week evaporated and Hess came very close to a new all time high over $56. Definitely no complaints 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 $477

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 $46

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BTU - $40.84 +2.89 - Peabody Energy

After 3 weeks of wandering near the bottom BTU finally found a spark. We are still well below a breakout but the $3 gain was inspirational. BTU announced it was expanding its office in China. No other news.

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

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

SLB $69.10 +4.62 Schlumberger

In an interesting contradiction of events SLB gained +4.62 last week while Halliburton was knocked for a substantial loss after an intraday earnings warning. HAL was knocked for a -10% loss after warning that slowing drilling in North America would knock up to a dime off its earnings. This was midday on Tuesday and all the service companies were knocked for a loss. SLB immediately rebounded and end the week with a strong gain and a new 52-week high. Good companies succeed and lousy companies make excuses. 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

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

SUN $71.16 +5.26 - Sunoco

SUN hit a new six-month high on Friday and posted a nice string of successive daily gains. It is simply a refiner story and we are not complaining.

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

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VLO $63.65 +3.64 - Valero Energy

Valero hit a new 7-month high and there is no change in sight. Refiners are printing money on the rising price of gasoline and that is not expected to change. $3 gas this summer will mean golden profits for Valero. 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 - $81.40 +5.28 - Diamond Offshore ** Stop $73.00 **

The acquisition of Todco by Hercules and comments by RIG convinced investors that further consolidation in the drilling sector was still ahead. With Diamond the leader in deepwater they will probably be an acquirer rather than acquired. 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
OSX Oil Service Index

New Watch List Entries

None - new targets and strikes on existing entries

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 $47

Buy JAN 2009 $50 LEAP Call AZH-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 $98.50 ** New Target **

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 $66.00 ** New Target **

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: $96 ** New Target **

BUY 2009 $110 LEAP Call ZGC-AB ** New Strike **
 


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