Option Investor

Weekly Newsletter, Saturday, 04/21/2007

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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

Futures Expiration, Again

We saw volatility return once again as the May futures expire and the June contract becomes the current month. Friday's close on the May contract rose to $63.51 from Thursday's low of $61.34 while the June contract sank over the entire week to close at $64.07 and equalize the prices for the contract roll over. The June contract traded as high as $68.20 in early April and $66.80 just last Friday. The futures expiration was bound to pull the prices closer to parity and we are fortunate the June contract held at $64. We now have four weeks before the process is repeated on May 22nd with the July contract.

Natural gas prices finally collapsed despite a larger than expected -46bcf draw from supplies as the last winter storm wore itself out in the US northeast. Prices on the June contract fell from just over $8 to $7.51 at Friday's close. I still expect to see lower prices until hurricanes begin to form.

This is a major week for energy earnings with four of the major integrated oil heading the list of announcements. With oil prices averaging about $5 below last year's levels during Q1 the odds are good we will see some disappointments. However, because of the difference in crude prices the expectations are not high and we could actually see some surprises. I am not recommending exiting any positions ahead of earnings as we would in short term plays. We will hang on an use any post earnings dips to add to positions ahead of summer hurricane/driving season.

Partial Earnings Schedule

The situation in Venezuela is getting worse. The foreign companies producing in the Orinoco Belt have until May 1st to give 60% of control to state owned Petroleos de Venezuela SA or leave the country. Negotiations are not going well. Exxon has threatened to leave the country and abandon their facilities. Other companies have been very tight lipped about the change and are saying nothing to avoid having their comments used against them later. Last week Chavez said Venezuelan armed forces would occupy the oil projects on May 1st to insure compliance with his decree. The next day he said the oil companies could sue Venezuela if they did not like the situation. This suggests the talks are not going well and the foreign companies are not happy about turning over their billions in investments to Chavez and being forced to operate under Venezuelan control. The Orinoco heavy oil projects produce about 600,000 bpd and it is so technically difficult that most observers doubt PdVSA would be able to maintain current production levels. The US was importing 1.5 mbpd last summer but falling production and Chavez efforts to sell oil to others beside the US have seen that number shrink to something around 1.0 mbpd today. If the Orinoco transfer go badly that number could drop significantly lower. Since the US is already seeing a large drop in imports from Mexico due to the Canatrell field decline this would mean additional imports would be needed from the OPEC overseas. We are already seeing shortages of gasoline imports and a shortage of crude on our side of the pond would create even more problems. A tanker can do a round trip from Venezuela in 10 days but that same tanker takes 40 days to make a delivery from Saudi Arabia.

Chevron has already warned that production in Q1 would be lower because Venezuela took over larger stakes in two fields.

Nigerian elections took place last week and over 50 people were killed in violence around the country. Nigeria exports 1.1 mbpd of light crude to the US and that has been in danger from various militant and rebel factions. It was hoped that the elections would resolve some of the problems but it appears the situation has gotten worse. Last week a coalition of militant groups gave the government 72 hours to withdraw all military personnel from the Niger Delta or they would declare a full blown war. All foreigners were also told to leave the Delta. It was reported in the Nigerian newspapers that multinational oil companies have started pulling out and many projects are on hold because foreign workers are refusing travel to vulnerable job sites.

China reported that its GDP grew at an 11.1% rate in the first quarter and oil imports rose +6.8% to 3.23 mbpd and may accelerate in the coming months as strategic petroleum reserves are filled.

Uranium prices spiked 19% to $113 per pound at a US auction last week. That same pound of uranium sold for $7.10 per pound in Dec-2000. Analysts expect prices to exceed $140 by next year.

In a departure from normal positions on global oil production the IEA said last week that "demand growth has exceeded the capacities put on the market, which are currently barely balanced." "Even if we were happy with the increasing investments in Middle East countries of OPEC, we think the rate of investment and capacity growth is not enough to meet future oil demand." Somebody finally woke up at the IEA! Preliminary figures for March show inventories on track for a draw down of 1 mbpd and the biggest Q1 decline since 1996. The IEA is increasing pressure on OPEC to release more production rather than let supplies dwindle and prices rise. Good luck!

Gasoline inventories continue to fall with a drop of -2.7 million bbls last week. Refinery activity is increasing as maintenance is completed but with spring weather the demand for gasoline is also increasing. It is going to be a race to the Memorial Day kickoff of driving season.

The rebound in builders triggered our watch list entry into Toll Brothers but also set us back on the Beazer Homes LEAP Put. Evidently retail traders don't realize that the charges against BZH could eventually put them out of business. BZH reports earnings next week and that will require an update on all the lawsuits and criminal investigations. That should separate them from the crowd.

Ultra (UPL), currently on the watch list, reported on Friday a +42% increase in quarterly production to 28.5 bcfe. Production in Wyoming jumped +50%. UPL has a 27-year backlog of drilling inventory. Earnings are scheduled for May 2nd.

Jim Brown

June Crude Futures Chart - Daily

May Gas Futures Chart - Daily

May Gasoline Chart - Daily


Changes in Portfolio

New Energy Plays

With most energy stocks up strongly over the last few weeks I really don't want to add any at these levels until after earnings are over.

New Non-Energy Plays


Dropped Plays


New Watch List Plays Triggered
TOL $29.60 +$1.90 Toll Brothers

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

TOL - $29.60 +$1.90 - Toll Brothers

Toll rallied off support at $27.50 and triggered our entry on Monday. The builders continued higher all week on stronger than expected New Home starts. Toll does not have the same kind of subprime pressures some other builders are facing. They deal in a higher class home and buyer.

Company info:

Toll Brothers, Inc. designs, builds, markets and arranges financing for single-family detached and attached homes in luxury residential communities in the United States. It is also involved, directly and through joint ventures, in projects where it is building or converting existing rental apartment buildings into high, mid and low-rise luxury homes. It caters to move-up, empty-nester, active-adult, age-qualified and second-home buyers in 21 states of the United States. At October 31, 2006, the Company operated from 398 communities containing approximately 31,910 home sites that it owned or controlled through options. Of the 31,910 home sites, 25,377 were available for sale and 6,533 were under agreement of sale but not yet delivered. Of the 398 communities, 300 were offering homes for sale, 14 had been offering homes for sale but were temporarily closed, and 84 were sold out but not all homes had been completed and delivered.

Toll is relatively free of the subprime stigma. Toll deals in luxury homes for an older population. Strong support at $27 has been holding since early March. Options are VERY cheap. Fitch ratings said on Friday they felt the housing market was bottoming and gave Toll its highest rating of the group. We are going to buy a breakout of the current range of a washout to 52-week support.

Breakout target: $28.50 hit 4/16
Position: 2009 $35 LEAP OTY-AG @ $3.50

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.


TS - $47.87 -0.52 - Tenaris

The breakout over $48 was short lived but TS is positioning for another attack. Earnings are two weeks away.

To see the initial commentary on this position click here

Earnings schedule: May 4th


Position: Sept $50 Call TSW-IJ @ $3.80 Stop TS @ $45.50


BHP - $50.44 +.03 - BHP Billiton

Serious volatility but no change for the week. No news and no change in play.

To see the initial commentary on this position click here

Earnings schedule: No date announced.

Breakout target $43.50 hit March 12th

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


CCJ - $46.71 -.61 - Cameco

Cameco is holding the high ground with uranium prices spiking +19% in the prior week. That was the biggest weekly jump since tracking began on prices in 1968. There has not been a weekly drop in uranium prices since 2003. The NYMEX announced it would begin trading a uranium commodity contract on May 7th. The contract would cover 250 pounds of uranium. No change in play.

Worldwide there are 28 new reactors being built, 64 on the drawing boards and 158 in the proposal stages. If all were built it would be a 57% increase from the 435 reactors now in operation. In 2006 the world consumed 180 million pounds of uranium but produced only 100 million pounds. The rest came from Russian nuclear warheads being decommissioned. The supply from those warheads is dwindling and will be completely gone by 2015.

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


PTR - $116.70 +0.28 - Petrochina

The China implosion on Thursday took out our short put but the damage was minimal with a profit on the position of +$2.25. PetroChina reported on Sunday that they increased oil and gas production by 3.7% in the first quarter. The number of service stations increased by 2.31% to 18,385. PTR is the worlds 5th largest oil producer.

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 4/19 $10.70 -2.25 = $8.45

Cost reduction play:
Position: stopped @ $114 4/19
Short June $105 Put PTR-RA @ $3.40, exit $1.15. +2.25


SNP - $89.40 -2.35 - Sinopec

Sinopec was hammered on the -4.5% drop in Chinese stocks on Thursday. There were fears that the soaring Chinese GDP of 11.1% and inflation of 3.3% might cause regulators to hike rates. I doubt China will take this action ahead of the 2008 Olympics. They need to complete as much expansion as they can before attendees show up for the games. 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


CHK $32.81 -0.88 - Chesapeake Energy ** Stop loss $30.50 **

CHK did give up some ground after testing resistance at $34 but there is still no clear evidence it is going to make another round trip to $29. Just in case it does I am going to add insurance in the form of an October $30 put for 90 cents. No news.

Insurance put:
Buy Oct $30 Put CHK-VF currently 90 cents. Profit stop $28.

To see the initial commentary on this position click here

Earnings schedule: May 4th

Current recommendation: Hold

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

Insurance put: none


MRO $100.55 -1.44 - Marathon Oil

MRO was downgraded to a market underweight (sell) at Bear Stearns on fears that refining margins were about to fall across the sector. BSC said MRO was the most susceptible to changes in margins. BSC also downgraded FTO, VLO and SUN. No change in play.

To see the initial commentary on this position click here

Earnings schedule: May 1st

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 - $57.56 -0.31 - Hess Corporation
(Formerly (AHC))

Hess rebounded sharply on Friday after three days of declines. They were named as one of the top five value stocks and investors rushed to enter positions. Earnings are next week so expect some volatility. I am adding a cheap put as earnings insurance.

Insurance put:
Buy May $55 Put IGG-QK currently 80 cents. Profit Target $51

To see the initial commentary on this position click here

Earnings schedule: April 25th

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

Current recommendation: Buy at $47

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


BTU - $46.55 +0.37 - Peabody Energy

BTU reported earnings that fell -32% blaming the drop on acquisition expenses, the weak dollar and a blizzard that shut down the Powder River Basin shipments for nearly two weeks in late March. Their guidance was positive and the hits to earnings were one-time events. This allowed BTU to cling to the high ground and finish the week slightly positive in spite of the earnings.

To see the initial commentary on this position click here

Earnings schedule: April 19th, -32% on special items

Current recommendation: Buy at $37.50

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 $75.23 -0.77 Schlumberger

SLB reported earnings that spiked +63% on strong international growth. Net income rose to $1.18 billion or 96 cents per share. Analysts were expecting 91 cents. CEO Andrew Gould said accelerated oilfield activity in Europe, Africa, the Middle East and Asia created a heavy demand for their services. Analysts suggested SLB could see $90 per share soon.

To see the last full commentary on this position click here

Earnings schedule: April 20th, 96 cents vs est of 91 cents

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 $72.39 -2.36 - Sunoco

SUN retreated from its highs on a downgrade from Bear Stearns and problems at a Philadelphia refinery. I believe it is just profit taking from the +18 run in 2007.

To see the last full commentary on this position click here

Earnings schedule: May 3rd

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 $65.93 -2.47 - Valero Energy

Valero took a header on the Bear Stearns sector downgrade but has already begun to rebound. The Texas refinery is back in production at about a 60% rate and the backlog of WTI crude at Cushing should begin to ease over the next couple weeks. No change in play.

To see the last full commentary on this position click here

Earnings schedule: April 24th

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 - $82.19 -1.31 - Diamond Offshore ** Stop $73.00 **

DO failed to break resistance at $85 and pulled back slightly ahead of earnings. No news and no change in play.

To see the last full commentary on this position click here

Earnings schedule: April 26th

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

Non-Energy Positions

BZH - $33.44 +4.13 - Beazer Homes ** LEAP PUT **

A +4.13 gain on a put position is painful but I believe the legal problems at Beazer will eventually push it to lower lows. Beazer jumped sharply after an investment partnership announced it had acquired an 8.8% stake in the struggling builder. Why they would step into the gap is anybody's guess. BZH has earnings next week so we should hear something on their various problems.

I I am going to personally buy some of the May $30 puts ahead of earnings to average down my cost in the LEAP play. They closed at 60 cents on Friday so the cost of entry is cheap.

Beazer is being flooded with suits, some seeking class action status on charges it practiced predatory lending, filed illegal loan documents and manipulated its stock price. These types of suits appear whenever bad news appears about a company but in this case it looks grim.

To see the last full commentary on this position click here

Earnings: April 26thbr>
Position: Jan-08 $25 PUT WZF-ME @ $3.10

No stop loss

Leaps Trader Watch List

Dropped Entries


New Watch List Entries
Atwood Oceanics

Current Watch List

UPL - Ultra Petroleum *** New trigger ***

Ultra reported on Friday a +42% increase in quarterly production to 28.5 bcfe. Production in Wyoming jumped +50%. UPL has a 27-year backlog of drilling inventory. Earnings are scheduled for May 2nd.

The announcement rescued them from a potential breakdown below $54 and prevented us from getting a potential entry at $50. I am hoping a continued decline in gas prices next week will help our cause. I am raising the trigger point to $53.

Company info:

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 $53 *** New price ***

Buy JAN 2009 $60 LEAP Call OZH-AL


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 $106.00

Call spread:
BUY JAN-09 $110 LEAP Call OYG-AX


TEX - Terex Corp *** New target/New Strike ***

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 $72.00

Call spread
BUY JAN-09 $80 LEAP Call VXQ-AP *** New Strike ***


TSO - Tesoro *** New targets ***

What is this? A multi-day decline? There appears to be strong support at $107 and I am raising the target to $105. Any support break may only be temporary.

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: $105
BUY 2009 $120 LEAP Call ZGC-AD *** New Strike ***

Breakout target: $110
BUY 2009 $120 LEAP Call ZGC-AD *** New target/strike ***


HAL - Halliburton

Halliburton Company provides a variety of services, products, maintenance, engineering and construction to energy, industrial, and governmental customers. Its six business segments are: Production Optimization, Fluid Systems, Drilling and Formation Evaluation, Digital and Consulting Solutions, Energy and Chemicals, and Government and Infrastructure. It refers to the combination of Production Optimization, Fluid Systems, Drilling and Formation Evaluation, and Digital and Consulting Solutions segments as its Energy Services Group (ESG). Halliburton Company’s Energy and Chemicals, and Government and Infrastructure segments are part of KBR, Inc. (KBR). As of December 31, 2006, the Company held an approximate 81% interest in KBR, Inc. In January 2007, Halliburton Company acquired Ultraline Services Corporation, a division of Savanna Energy Services Corp. In April 2007, the Company completed the separation of KBR. As a result, the two companies are separate and independent of each other.

HAL has completed the KBR spinoff and I don't think traders know how to value HAL yet. Options are cheap and we have plenty of time to wait for an entry.

Either entry cancels the other.

Breakdown target: $30
Buy 2009 $35 LEAP Call VHW-AG

Breakout target: $35
Buy 2009 $40 LEAP Call VHW-AH


ATW - Atwood Oceanics

Interesting article in Investors Business Daily regarding Atwood.

Company Info:

Atwood Oceanics, Inc. is engaged in the international offshore drilling, and completion of exploratory and developmental oil and gas wells and related support, management and consulting services. The Company's operations include eight offshore mobile drilling units located in five regions of the world, such as offshore southeast Asia, offshore Africa, offshore Australia, the Black Sea and the United States Gulf of Mexico. It also manages two self-contained platform rigs. During the fiscal year ended September 30, 2006 (fiscal 2006), 93% of its contract revenues were derived from foreign operations. The submersible RICHMOND is its only drilling unit working in the United States waters. The Company supports its operations from its Houston headquarters and offices located in Australia, Malaysia, Egypt, Malta, Indonesia, West Africa, Singapore and United Kingdom.

Breakout trigger $60.50
Buy 2009 $70 LEAP Call ZFJ-AN

Breakdown trigger $55.00
Buy 2009 $60 LEAP Call ZFJ-AL


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