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Weekly Newsletter, Saturday, 06/09/2007

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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

Opec Blackmail

We saw one of the stranger things I can remember last week. It was widely reported that OPEC threatened to send oil prices through the roof if the U.S. and others continued their quest towards volume production of biodiesel. I was shocked speechless when the first quote hit the wires. I could not believe OPEC would say such a thing in public. They may want to see it happen but they would never admit it publicly. The press had a field day with the news.

What was actually said was a lot different. Abdalla El-Badri, Secretary General of OPEC, said the cartel was considering cutting its rate of investment in exploration and production if the demand for oil was going to slow due to the increase in biofuels. Currently OPEC members are spending about $130 billion to raise production by about 4 mbpd by 2012. The next step higher is rumored to have a price tag of as much as $230 billion to increase production to meet demand by 2020.

Badri basically said OPEC nations would consider cutting back on exploration if biofuels were going to increase substantially. The reduced oil demand would not require the same level of investment. The press saw a threat when Badri warned that unsustainable production of biofuels could lead to a greater demand for oil and OPEC would not be prepared if they cut back on exploration. Badri warned that biofuel production may be difficult to maintain given the added cost to the food chain as corn and other crops were sold into fuel production.

It is a catch 22. We want to know that OPEC will continue to increase production to meet demand and allow us to live our energy rich life style. OPEC wants us to continue using all the oil they can produce to maintain an upward trend on prices. We want oil security while they want demand security. Badri warned, "If we are unable to see security of demandwe may revisit investment in the long term."

Demands on the food crops for ethanol production is the primary reason for what could be the largest annual increase in food prices in over 30 years.

OPEC has always been skeptical of alternative fuels and rightly so since they are hard to produce in volume and relatively costly. Oil is the only cheap source of energy that can be tapped with a drill bit in Saudi Arabia, flow up the pipe under its own pressure, be transported by pipeline to waiting tankers, cross oceans in days, be offloaded at refineries, refined, shipped by pipeline and truck all across the country to eventually be used in our cars for a trip to the mall. Throughout the entire process the oil is never touched or seen by humans and it sells for 1/6th the price of bottled water produced here in the U.S. They constantly complain about windfall profits made by the oil companies but the costs and risks to that entire supply chain are unimaginable to the average person. You never hear anyone claiming Pepsi or Coke are making windfall profits selling 20 ounces of bottled water for $1.79 a bottle ($11.46 a gallon) with minimal risks and negligible costs.

I doubt OPEC has anything to worry about any time soon. Bush has pledged to cut oil demand by 20% by 2020 but that is about how much demand will grow if left unchecked. By cutting 20% we will just be maintaining the status quo. We will have reached the end of cheap oil long before then so the entire conversation is mute.

Oil prices surged to $67.42 on Thursday on news that Turkish troops had crossed into Iraq. The situation never escalated and they were back home by dark. At the same time Typhoon Guno blew itself out and withered into a drenching rainstorm over Iran with no material damage to any oil installation. Oil inventory levels remained flat for the week while gasoline levels rose +3.5mb with the addition coming from imports. Refinery utilization fell to 89.6% and well under the 94% level needed to keep supplies level over the summer driving season. The jump in inventory levels pushed prices lower but I suspect it was a delivery anomaly rather than a sharp increase in production. According to the DOE refiners only added 60,000 bpd over the prior week. Imports surged to a near record of 1.6 mbpd. The U.S. imports gasoline from 36 different nations and the Virgin Islands. The biggest exporters of gasoline to us are the UK 15,908,000 bpm (barrels per month) Virgin Islands 11,802,000 bpm and France 7,678,000 bpm. The rest of the majors in declining order are Netherlands, Norway, Italy, Germany, Canada, Spain, Russia, Belgium, Brazil, South Korea and Finland to round out the top 15. You may remember that the Colonial Pipeline was shutdown for six days in the prior week for a leak in an undisclosed location. The pipeline transports 1.3 mbpd of gasoline from the Gulf Coast to customers along the East Coast. A six-day shutdown suggests nearly 7 million barrels of gasoline did not flow and backed up in refiner inventories giving us the unexpected jump in inventory levels.

Venezuela continued its program of oil export diversification and signed an agreement with Vietnam to produce heavy crude and build a refinery in Vietnam. Chavez is trying to find anybody possible to sell oil to other than the U.S. Fortunately it appears the wheels are about to come off the Chavez regime. He is running out of money to fund his massive spending programs that kept him in power. The natives are growing restless and he new management by decree program is causing problems at the grass roots level. Analysts give him 12-18 months before being removed from office.

Oil production at major fields around the world continues to decline. I have reported on the sharp drop in Mexico's Canatrell field several times as the decline continues to accelerate. This week we heard that production from the UK sector of the North Sea fell -5% month over month to 1.4 mbpd. That is a 14% drop over the same period last year. Gas output also declined -3% M-O-M and -6% Y-O-Y.

I expect oil prices to continue to trade in a range from $63-$68 while we wait on the hurricanes to appear. The longer we hold at these levels the better chance of a new spike higher on any news. Oil producers are making money by the barrel at these levels and profits for Q2 should be outstanding.

Lehman raised it target price for oil in 2006 by $1.90 per bbl to $62. They also raised 2007 earnings estimates for integrated oil companies by +9% and refiners by +17%. They also raised their estimates for 2008 by 13% for integrated and 4% for refiners.

The individual recaps this weekend are going to be short since they are all the same. The market drop and the drop in oil prices knocked a couple dollars off several positions with the biggest drop in TSO. There was no major news in the sector that impacted our positions. I view the dip as a buying opportunity.

The dates for the two major energy conferences I attend each year were announced this week. The World Oil Conference sponsored by ASPO will be in Houston on Oct 17-20 with all the major speakers you would want to hear including Boone Pickens, Matthew Simmons and many others. This conference focuses on the study of Peak Oil and features oil experts from around the world giving their views on when it is likely to arrive.

The other is EnerCom's 12th Annual Oil and Gas Conference to be held in Denver on August 19-23rd. Over 70 exploration and production companies will make presentations about their current operations and future outlook including XTO, APA, CHK, ECA, UPL and HP to name just a few. It is an excellent conference if you really want to know who is on track to improve production and increase earnings with a focus on growing small cap firms. This conference is tailored for high net worth individual investors, funds and institutional investors.

Jim Brown


July Crude Futures Chart - Daily

July Gas Futures Chart - Daily

July Gasoline Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays
VLO $73.43 -2.45 Valero Energy *** Profit Stopped $72.00 ***
DO $91.62 -2.85 Diamond Offshore ** Profit Stopped $91.00 **

New Watch List Plays Triggered
HOS $39.59 Hornbeck Offshore Services

Portfolio Listing & Top Picks


New Plays

Most Recent Plays

HOS - $39.59 - Hornbeck Offshore Services

Hornbeck declined just enough to trigger our LEAP entry on Friday at $39. There was no news for the week and the -$2 drop from Tuesday's highs was very respectable given the market conditions.

Company info:

Hornbeck Offshore Services, Inc. provides offshore supply vessels (OSVs) to customers in the offshore oil and gas industry, primarily in the United States Gulf of Mexico and in select international markets. The focus of the Company's OSV business is on complex exploration and production activities, which include deepwater, deep well and other logistically demanding projects. Such other projects include, among others, the construction, maintenance and repair of offshore infrastructure. Hornbeck Offshore Services, Inc. is also a transporter of petroleum products through its tug and tank barge segment serving the energy industry, primarily in the northeastern United States and Puerto Rico. Oil companies, independent oil and gas exploration, development and production companies, and oil service companies constitute the majority of its customers for its OSV services, while refining, marketing and trading companies constitute the majority of its customers for its tug and tank barge services.

Breakdown trigger: $39.00 hit 6/08

Position: 2009 $40 LEAP Call ZIG-AH @ $8.00


Play Updates

Existing Plays

HDY - $2.99 - +0.51 Hyperdynamics Corp

Hyperdynamics hit $4 on Thursday before being knocked for a loss on the market weakness and the drop in oil prices. They had a favorable settlement of a suit with US Oil severing any claims US Oil had to the 31,000 square mile exploration tract they are working in West Africa.

The drop back to $2.99 at Friday's close gives you a second chance to enter this play.

For initial commentary see June 3rd newsletter.

Position: HDY stock @ $2.44

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

TSO - $59.20 -4.54 - Tesoro

TSO recovered some of the nearly $7 drop caused by the market and the drop in oil prices. There was no news and the drop was caused entirely by the unexpected jump in gasoline supplies I reported earlier.

This may be an excellent opportunity to enter this play if you have not already done so.

No change in play.

For initial commentary see April 29th newsletter.

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

Breakout target: $55 hit 10:AM on 4/23/07

Position: 2009 $120 LEAP Call ZGC-AD @ $16.68
Post split: (2) 2009 $60 LEAP Calls ZGC-AL @ $8.34

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

ATW $64.38 +1.55 - Atwood Oceanics

No news and a -$3 drop from the Monday highs to support on market weakness. No change in play.

Interesting article in Investors Business Daily regarding Atwood.
http://biz.yahoo.com/ibd/070418/newamer.html?.v=1

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 - $55.78 +1.84 - BHP Billiton

BHP rose to another 52-week high on speculation that China could be eying a takeout of BHP to help fuel their metal needs. China recently formed a $237 billion investment company and BHP is thought to be a target of that investment. China has a history of buying commodity assets to prevent other countries from having access. China is consuming large amounts of metals and ores and taking BHP's assets off the market would be a major achievment for China and a serious problem for the rest of the world. BHP has mining assets in everything from coal, uranium, various metals and oil. With a marker cap of $163 billion it would be a big bite for China but entirely doable. 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 - $52.00 -1.19 - Cameco

CCJ lost $3 in the melee after setting a new high on Tuesday. 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 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 - $134.66 +3.96 - Petrochina

PTR finally found some traction after HSBC upgraded them on Monday. The sprint to $136 held up great in the latter week selling with PTR holding its gains and looking very strong. No 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

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

CHK $35.58 +.54 - Chesapeake Energy ** Stop loss $33.50 **

CHK spiked over $36.50 on Monday on positive gas news but the end of week drop in gas knocked CHK back into the prior range. No change in play.

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 $125.45 -1.31 - Marathon Oil

If you were waiting for an entry point this is it. Marathon declined about $4 from the week's high but recovered to end up with a weekly loss of only $1.31. No news other than Lehman upgrading them to neutral with a price target of $109. With MRO trading at $125 that target would be embarrassing in my opinion. Don't forget the 2:1 split coming in a week.

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: Hold

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 - $59.07 -1.19 - Hess Corporation *** Stop Loss $57 ***
(Formerly (AHC))

HESS slipped -$2 from it highs on no news and a weak market. Maintain the stop at $57 just in case.

For initial commentary see Nov-4th newsletter.

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

Current recommendation: Hold

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 - $51.48 -3.22 - Peabody Energy

Same story different stock. No news and 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 $78.19 +0.57 Schlumberger *** Stop Loss $77 ***

SLB held remarkably firm despite the market volatility trading in a narrow $2 range and ending the week with a slight gain. Lehman raise their forecast for spending on exploration and production to show a +13% increase over 2006 levels to about $308 billion in 2007. SLB, RIG and DO were expected to profit from this increase. 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 $79.62 -1.49 - Sunoco *** Stop Loss $76 ***

After hitting a new high at $85 on Tuesday is was all downhill until Friday. SUN came within a buck of the stop loss before rebounding. The spike in gasoline inventories powered the dive. Maintain the stop at $76.

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 $73.43 -2.45 - Valero Energy *** Stopped $72.00 ***

VLO hit our raised stop at $72 at Friday's open. It was a shame to exit but we had $11 in profits on a $9 option. We can't complain. If gasoline levels continue to rise we may be glad we took this early exit.

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 - $91.62 -2.85 - Diamond Offshore ** Stopped $91.00 **

DO spiked to a new historic high on Monday at $97.60 and then fell straight to $90.74 on Friday triggering our stop at $91.00 by 26 cents. We exited the play with a profit of over $8 after a strong run.

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
Exit 6/08 @ $91.00 - $21.70, +8.25

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 - $82.17 -3.91 Terex Corp *** Stop Loss $80.00 ***

That was really close! TEX declined to $80.11 on Friday before rebounding. That missed our stop by only 11 cents. It declined right to support and this should be a buying opportunity if the market does not implode next week.

For initial commentary see May-13th newsletter

Breakout target $81.00 Hit 5/07

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

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

ATI - $111.66 -4.88 - Allegheny Tech

ATI gave back almost as much as it gained in the prior week before finding a bottom. The volatility is increasing on ATI on a daily basis. Fortunately this is a long term directional spread and our short call will decline faster than the long call. 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 (now 26.50)
SHORT JAN-09 $140 LEAP Call ZKG-AH @ $9.50 (now 12.10)

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

BZH - $32.49 -2.68 - Beazer Homes *** STOP LOSS $36.50 ***

We finally got a major breakdown in Beazer to a new six-week low. The drop came one day after builder Meyer-Sutton filed for bankruptcy due to a sudden and dramatic decline in housing fundamentals. Beazer reported a -$43 million loss on declining home sales for Q1.

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
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
MDR
McDermott Intl

Current Watch List

BRS - Bristow Group

Bristow came within 4 cents of hitting our breakout trigger on Monday before declining to within 41 cents of hitting our breakdown trigger. Relatively speaking it held its gains from the prior week very well.

Bristow recently reported earnings that rose +36% on increased flight hours and better pricing. They provide flight services to offshore platforms around the world. Since offshore drilling is rapidly expanding and the distance from shore is increasing I expect Bristow to continue to grow earnings.

Last week they announced a private placement of $250 million in debt. They plan to use the proceeds to fund the purchase of additional aircraft to handle the increased workload.

Company info:

Bristow Group Inc., formerly Offshore Logistics, Inc., is a provider of helicopter transportation services to the worldwide offshore oil and gas industry with operations in the United States Gulf of Mexico and the North Sea. The Company also has operations, both directly and indirectly, in offshore oil and gas producing regions of the world, including Australia, Brazil, China, Mexico, Nigeria, Russia and Trinidad. The Company also provides production management services for oil and gas production facilities in the United States Gulf of Mexico. As of March 31, 2006, the Company operated 331 aircraft, and its unconsolidated affiliates operated an additional 146 aircraft worldwide. The Company operates business in two segments: Helicopter Services and Production Management Services. Bristow Group Inc. conducted Helicopter Services through six business units: North American, South and Central American, Europe, West Africa, Southeast Asia, and Other International Operations.

Bristow has no LEAPS

Breakout trigger: $50.50
Buy Dec $50 Calls BRS-LJ

Breakdown trigger: $48.00
Buy Dec $50 Calls BRS-LJ

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

MDR - McDermott Intl

McDermott declined to support at $75 where it held on Friday. I considered just going long on MDR at this level but I am concerned we could see another dip. MDR has a lot of unrealized profit in the May bounce. I would like to see some consolidation before jumping in.

Company info:

McDermott International, Inc. (MII) is an engineering and construction company with specialty manufacturing and service capabilities. MII is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. (JRMSA) and its consolidated subsidiaries; McDermott Holdings, Inc. (MHI) and its consolidated subsidiaries; McDermott Incorporated (MI), a subsidiary of MHI, and its consolidated subsidiaries; The Babcock & Wilcox Companies (B&WC), a subsidiary of MI; BWX Technologies, Inc. (BWXT), a subsidiary of B&WC, and its consolidated subsidiaries, and The Babcock & Wilcox Company (B&W), a subsidiary of B&WC, and its consolidated subsidiaries. MII is a worldwide energy services company operating in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems.

Breakdown trigger: $73.00
Breakout trigger: $78.00

Buy 2009 $80 LEAP Call OYZ-AP
 


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