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Weekly Newsletter, Saturday, 05/26/2007

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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

Got Gas?

The price of gasoline rose to a national average of $3.26 per gallon according to one survey while another survey claimed $3.22. Either number would be a record high even after adjusting the prior high of $1.42 in 1981 for inflation. Adjusting for inflation that $1.42 high converts to $3.22. Whatever number you want to use the price of gasoline is at record levels as the summer driving season begins this weekend. I am in Albuquerque this weekend and I paid $3.59 for gas just outside Santa Fe. Those drivers on the coasts are paying even more and odds are good there are some $4 gallons being sold this weekend. 38 million people will travel more than 60 miles for the holiday. The national average has a long way to go to hit that level and the lower prices in the heartland will probably prevent it from happening unless a hurricane blows through the Gulf. Meanwhile the refiners continue to print money.

The "penalize big oil movement" awakened in Congress again and they again started making noises about breaking up the big companies or windfall profit taxes. Most lawmakers don't realize the oil companies really don't determine the cost of oil or gasoline. It is set by the global market. With gas prices hitting all time records it is easy to blame big oil but the sad fact is expenses are rising sharply, demand is increasing, supplies are shrinking and the big oil companies only produce a fraction of the global production. National oil companies like Saudi Aramco, PDVSA and the various nationalized OPEC entities produce the vas majority of oil. Exxon, Conoco or Chevron could not impact the price if they wanted to without losing money on their operations.

For instance Exxon has more than 45,000 service stations in over 100 countries around the world. Each day they sell more than 100 million gallons of gasoline. Less than 10% of the oil used to refine this gasoline is produced by Exxon. The rest is bought by Exxon on the open market. For a company of this scale to make $9 billion a quarter in profits may seem extreme but considering the magnitude of the enterprise that breaks down to about a 10% profit margin. Pretty remarkable but far less than companies like Citigroup (33%), Microsoft (32%) and Coke (21%) to name a few. Congress is not trying to breakup Citigroup or Coke.

A typical barrel of oil produces about 19.5 gallons of gasoline, 9 gallons of fuel oil, 4 gallons of jet fuel and 9 gallons of other products including lubricants, kerosene, asphalt and chemical feedstocks used to make other products like plastic. Light sweet crude produces more gasoline while heavy sour crude produces less. The table below shows how the price of gasoline is broken down into its component parts. These are rough estimates from the EIA in early 2006. The biggest portion is obviously exploration and production but those same producers are seeing their costs per barrel climb sharply. Those producer costs are rising even faster as countries nationalize assets and impose additional taxes and fees many times approaching 75% of the price of the barrel.

Gasoline Cost Breakdown Table

The two day sell off in oil prices was due in part to a jump in refinery utilization from 89.5% to 91.1% over the past week indicating the recent challenges are being slowly overcome. Gasoline inventories rose +1.4 mb last week but some of that was due to the Colonial pipeline running at capacity and unable to accept any additional fuel. Still, inventory levels are well below normal and refinery utilization needs to continue climbing to a normal summer range around 94% to catch up to demand. That demand is up +1.7% year to date but below the +2% level reached early in the year before prices began to accelerate.

This is the 30th anniversary of Star Wars and the networks were full of comparisons to prices in 1977. Gasoline hit $1 for the first time when crude oil hit the unbelievable price of $20 per barrel. Personally that is not as shocking to me as realizing Princes Leia is now 51, Luke Skywalker is 56 and the dashing hero Hans Solo is now 65. The Dow was stuck in what seemed to be a permanent range at 900.

Next week should see oil prices continue to rebound from the bout of profit taking we saw on Thursday with developments in Iran, the strike in Nigeria and any weather developments in the gulf the primary movers. Prices should remain over $64 but under $68 unless one of those events produces another round of panic buying. The 100-day average is providing support at $63 with downtrend resistance at $67.

Apple, Terex, Marathon and SUN were big winners this week with Deutsche Bank the biggest loser. The Beazer put and Toll Brothers call might be finally moving in our favor. BZH fell nearly $4 from its Thursday high. While our main focus is still energy stocks those non-energy plays can keep us in trades while we wait for the hurricanes.

Jim Brown


July Crude Futures Chart - Daily

June Gas Futures Chart - Daily

June Gasoline Chart - RBOB Daily

 


Changes in Portfolio

New Plays

With most energy stocks up strongly over the last few weeks I really don't want to add any at these levels. We have a full portfolio and time is on our side.


Dropped Plays
DB Deutsche Bank Stopped
SNP Sinopec Profit exit

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


New Plays

Most Recent Plays

None this week.
 


Play Updates

Existing Plays

TSO - $119.79 +.81 - Tesoro

TSO sprinted higher to the tune of +3.85 on Friday after the two day sell off in energy stocks. TSO is still having trouble holding over $120 but still attacking that resistance on every spike. S&P upgraded TSO to positive after it completed the $2 billion West Coast refinery acquisition from Shell. No change in play.

For initial commentary see April 29th newsletter.

2:1 Split: Record date May-14th, Pay date May 29th.

Earnings: May 3rd, $1.67 vs 61 cents in comparison qtr

Breakout target: $110 hit 10:AM on 4/23/07
Position: 2009 $120 LEAP Call ZGC-AD @ $16.68

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

ATW $64.33 +1.22 - Atwood Oceanics

Atwood is not setting the world on fire but still recovering nicely from the big dip two weeks ago. No news and no change in play.

Interesting article in Investors Business Daily regarding Atwood.

For initial commentary see April 29th newsletter.

Earnings: May 8th est $1.08, actual $1.01

Breakout trigger $60.50 hit 4/23/07
Position: 2009 $70 LEAP Call ZFJ-AN @ $6.50

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

BHP - $50.95 -.15 - BHP Billiton

BHP was volatile all week as metals prices experienced volatility. BHP was rumored to be in talks with Alcan now that the Alcoa buyout has been nixed. BHP is also rumored to be looking at a deal with RTP. No specific news and no change in play.

No earnings date announced.

For initial commentary see March 17th newsletter.

Earnings schedule: No date announced.

Breakout target $43.50 hit March 12th

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

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

CCJ - $51.10 +1.05 - Cameco

CCJ continues to hold the high ground at $50 despite market volatility. The CCJ CEO was on TV this week reminding everyone that 2006 demand was 180 million pounds but only 103 million were produced. Long term the price is only going higher. A Lehman analyst pointed out that Rio Tinto (RTP) which produced 18% of global supplies last year has been selling their uranium on fixed price contracts that range from 3-10 years. The price when those contracts were signed was under $20 and current prices are over $120 per pound. He estimated that by 2009 more than 70% of those contracts would expire allowing RTP to obtain a market rate for its future production. That is sure to raise their profits and prices worldwide.

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 103 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.

For initial commentary see March 10th newsletter.

Earnings: Apr-27th, -47% due to revenue timing

Breakout trigger: $37.50 Hit March 7th

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

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

PTR - $128.95 -2.20 - Petrochina

PTR along with many other Chinese stocks took a pounding on the Greenspan comments. Traders with large profits raced to collect them before a repeat of the February disaster occurred. No other news and no change in play.

For initial commentary see March 10th newsletter.

Breakdown target:
$110 1/2 position - hit Mar-5th

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 - $102.20 -1.30 - Sinopec *** Stopped $101 ***

Sinopec dipped to hit our stop on Thursday with the option at $19. It was an October call and not a LEAP and I thought it wise to take profits before any recovery in refiners started putting pressure on oil prices or the Chinese market corrected. Nice play, +$12, no complaints.

For initial commentary see March 3rd newsletter.

Breakdown target $82.50 hit on 2/27

Position: OCT $85 Call SNP-JQ @ $7.00, exit 5/24, $19, +$12

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

CHK $34.89 -.37 - Chesapeake Energy ** Stop loss $32.00 **

CHK is still holding near its highs and should continue to do so if nat gas prices remain over $7. CHK announced it had started the first gas well at DFW. Yes, Dallas/Fort Worth Airport! They plan to drill more than 300 gas wells into the Barnett Shale, which runs under the airport. DFW received an up front signing bonus of $186 million and will receive a royalty of 25% on any production. The first 170-foot rig broke ground with a large gold bit in the ceremony. I imagine that is going to be very psychologically disturbing to pilots as they come in for a landing and see a bunch of 170-foot plane catchers spotted around the runways. To minimize locations and disruptions they plan to drill as many as a dozen wells from each pad site to a depth of 8000 feet and then turn horizontal for another 4000 feet through the shale. Maintain the stop at $32.

For initial commentary see Dec-9th newsletter.

Earnings: May 4th, 87 cents vs est of 78 cents

Current recommendation: Hold

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

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

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

MRO $119.60 +5.08 - Marathon Oil

MRO continued to move higher to new historic highs after AG Edwards upgraded them to a buy. It did not hurt when they announced a new discovery in Angola that tested over 2000 bpd in a restricted test. Expectations are for higher production rates and additional wells. No change in play.

For initial commentary see Nov-18th newsletter.

Earnings: May 1st, $2.04 vs est $1.93

2:1 Stock Split June 18th, record date May 23rd

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 - $60.28 +.60 - Hess Corporation
(Formerly (AHC))

HESS continued moving higher despite some serious volatility during the week. A lease sale in Guinea was postponed for two months and HESS had been expected to do well in the sale. Hess was also named one of the top five all around stocks in an article on TheStreet.com. No material news and no change in play.

For initial commentary see Nov-4th newsletter.

Earnings: Apr-25th, $1.17 vs $2.22

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
Cost adjustment May puts +2.15, cost = $10.55

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 expired
May $55 Put IGG-QK @ $.80 expired

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

BTU - $53.96 +0.45 - Peabody Energy

BTU continued to move higher after shaking off the midweek dip. Coal stocks have risen strongly over the last few weeks with BTU up +31% in the last seven weeks. Meanwhile lawmakers are considering plans to build some coal-to-liquids plants for auto fuel but opponents claim the greenhouse emissions would be going backwards in the attempt to clean up the atmosphere. No change in play.

For initial commentary see Oct-22nd newsletter.

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

Current recommendation: Buy at $46.50

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 $79.24 -.16 Schlumberger

Calyon cut SLB and several other oil service stocks to "add" from "buy" but raised the price targets. That was the most exciting news I could find on SLB for the week. No change in play.

For initial commentary see Oct-14th newsletter

Earnings: 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

Insurance put:
Position: June $70 PUT SLB-RN @ $1.15

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

SUN $78.29 +2.27 - Sunoco

No news but the dip buying continues. SUN will be presenting at two energy conferences over the coming weeks so we could see further gains on their positive outlook. No change in play.

For initial commentary see Oct-14th newsletter

Earnings: May 3rd, 70 cents vs 59 cents in comparison qtr

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

Insurance put:
Position: June $70 PUT SUN-RN @ 85 cents.

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

VLO $74.74 +0.77 - Valero Energy *** Stop Loss $70.00 ***

Valero has experienced a lot of volatility over the last two weeks but continues to inch higher. Critics claim the refinery boom is over and once all the refiners come back online the price of gas and oil will fall. That could very well be the case if we don't have an early season hurricane. Maintain the stop at $70.

For initial commentary see Oct-14th newsletter

Earnings: April 24th $1.86 vs $1.32

Current recommendation: Buy at $65, stop at $57

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 - $93.38 +0.48 - Diamond Offshore ** Stop $84.00 **

DO continued to hold near its highs on absolutely no news.

For initial commentary see Oct-14th newsletter

Earnings: Apr 26th, $1.64 vs $1.06

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

TEX - $81.00 +3.28 Terex Corp *** Stop Loss $77.00 ***

Terex called another special meeting of shareholders to authorize an increase in shares by 150 million. Shareholders voted down a prior request last week to increase shares by 450 million. Terex claims it needs the additional shares for splits and acquisitions. Terex was just named the fourth best performing company in the Barron's 500.

For initial commentary see May-13th newsletter

Breakout target $81.00 Hit 5/07

Position: Jan-09 $90 LEAP Call VXQ-AR @ $16.40

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

AAPL - $113.62 +3.60 Apple, Inc

Apple continued higher after CNBC reported a check of AT&T stores confirmed a June 20th date for the iPhone launch to begin. No change in play.

For initial commentary see May-13th newsletter.

Breakout target: $102.00 Hit 05/07

Position: Jan 2009 $110 LEAP Call VAA-AB @ $17.50

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

DB - $151.13 -6.76 - Deutsche Bank *** Stopped $152 ***

DB crashed through our stop when news broke that the Federal Banking Commission had raided the DB offices on possible securities violations.

For initial commentary see May-13th newsletter.

Breakout target: $156.50 Hit 05/-7

Positon: Oct $160 Call DB-JL @ $7.00, exit $5.40, -1.60
(No LEAPS)

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

ATI - $111.06 -3.22 - Allegheny Tech

Thursday's drop in the market took its toll on ATI although it did rebound +2.14 on Friday. No news and no change in play.

For initial commentary see May-5th newsletter

Breakdown target $110.00 hit 04/30

Call spread:
LONG JAN-09 $110 LEAP Call OYG-AX @ $21.50
SHORT JAN-09 $140 LEAP Call ZKG-AH @ $9.50

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

TOL - $29.96 +1.41 - Toll Brothers

Toll reported earnings that fell -79% for Q1 but they were rescued by the +16% jump in new single family homes reported for April. That would be a 14 year high but analysts are skeptical. Still Toll rebounded nearly +4 off last week's low and was showing positive internals. No change in play

For initial commentary see Apr-21st newsletter

Earnings schedule: May 24th

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

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

BZH - $35.35 +.89 - Beazer Homes ** LEAP PUT **

Beazer gained ground early in the week on positive new home sales news but crashed and burned late in the week after another class action suit was filed. Hopefully the tide has finally turned.

Beazer has several suits pending, some seeking class action status on charges it practiced predatory lending, filed illegal loan documents and manipulated its stock price.

For initial commentary see March-31st newsletter

Earnings: April 26th, -1.12 vs +2.35 in the comparison quarter.

Position: Jan-08 $25 PUT WZF-ME @ $3.10

No stop loss
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries

None

Current Watch List

I searched high and low this week for potential watch list targets but came up empty handed. I do not want to add any more energy plays at this level because a true ramp up by the refiners could pressure gasoline prices and oil prices by default. We have plenty of energy positions already.

The current instability in the broader market also suggests we could see some decline into summer but I am not yet ready to make that bet with real money. I think anything today is a crap shoot and I would rather wait until we get a correction or until a suitable target appears. I like RTP but options are extremely expensive. I like MDR but after the recent gains I would like to see a pullback first. If you have any candidates I would be glad to review them. Thanks to those readers who submitted several this week.
 


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