Option Investor

Weekly Newsletter, Saturday, 06/23/2007

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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

Gas Implosion

The week before expiration of July natural gas futures the price of gas finally crumbled. Support for two months at $7.60 finally broke and gas closed at a six month low just over $7.00. Milder weather in many areas of the country and no hurricanes in sight convinced traders to close positions ahead of next Wednesday's expiration. Gas in storage rose by 89bcf to 2,344bcf and +18% over the five-year average. I thought this was an expiration event complicated by the lack of hurricanes BUT the August contract also fell to $7.20 from last Friday's high of $8.15. This -12% drop was very unexpected and could have been prompted by other equity market forces.

Meanwhile crude futures held the high ground near $70 as the general strike in Nigeria continued. Experts fear the strike will deteriorate into widespread violence and a significant disruption to oil production.

We had new comments from the IEA mentioning expectations for a ramp in global demand to as much as 88 mbpd in Q4. That would be a historic high and it is thought to be more than we can currently produce. If this kind of demand is coming then global producers will need to be ramping production well ahead of this demand to build inventory levels. According to the IEA inventory levels are down to only 23 days of supply. OPEC continues to refuse to boost output until their next scheduled meeting in September. Everyone knows they are hoping for a hurricane in the Gulf of Mexico to crimp U.S. production and push prices to new historic highs. They are in the drivers seat and we are at their mercy.

We heard from Tanker Traffic that OPEC shipments did rise slightly over the last four weeks despite OPEC's claim to the contrary. Obviously the cheating on the current quotas is increasing. OPEC officials rely on outside research to determine actual member production because cheating is so prevalent they can't rely on members to report valid numbers.

Russia completed another nationalism of a previously private energy project. BP had been threatened with the revocation of its permit to operate the Russian Kovykta gas field. BP caved in just like all the other operators before them of multiple Russian projects and ceded control to Gazprom in exchange for $900 million. The project was expected to cost $20 billion and BP had invested $600 million to date. BP will retain a minority interest of something around 25% in the field. Since Russia has been kicking companies out right and left the payment to BP and the minority ownership should be considered a major win for BP. Most expected BP to end up with nothing. Gazprom also announced the companies will be launching a $3 billion global venture. BP had never booked any reserves from this field because of the Russian threat to take control. This suggests there is no downside to BP and only upside. I considered adding BP this weekend but with the announcement after the close on Friday I decided to wait to make sure the market was going to see this favorably.

Refinery utilization plunged to 87.6% for the week and well below the expectations for an uptick to something near 90%. Capacity is 5.7% below normal and were it not for massive imports of gasoline we would be in serious trouble. We are currently importing 1.3 mbpd of gasoline. That is the equivalent output of four average U.S. refineries.

Transocean (RIG) announced a $900 million five-year drilling contract with BP with an option to increase to seven years and $1.2 billion. Transocean will build a drillship for BP's offshore operations. RIG gained +$5 on the news to a new high of $109. RBC Capital markets raised their price target to $142 with the analysts saying they expected more big contracts to follow. Bear Stearns analyst, Robin Shoemaker, said the deal could point to a supply shortage of deepwater rigs and raised their target to $140. RIG has a fleet of 82 offshore drilling rigs. Diamond Offshore (DO) also gained on the news. We are not currently in either RIG or DO having recently exited. These are stocks we will try to reenter on any late summer decline.

Like OPEC we are waiting for the first hurricane to show to break that price resistance at $70. Until then we are just passing time until our planned exit of current positions in August.

Jim Brown

August Crude Futures Chart - Daily

July Gas Futures Chart - Daily

July Gasoline Chart - RBOB Daily


Changes in Portfolio

New Energy Plays


New Non-Energy Plays


Dropped Plays


New Watch List Plays Triggered
NOK Nokia

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

NOK - Nokia

Nokia has been rising on news of a new phone the N95, which will compete with the iPhone on a global basis. I would like to buy it a little cheaper if possible but we don't want it to get away from us either.

Company info:

Nokia Corporation (Nokia) is a manufacturer of mobile devices. Nokia offers consumers a range of mobile devices. The Company also provides equipment, solutions and services for network operators, service providers and corporations. Nokia operates through four business groups: Mobile Phones, Multimedia, Enterprise Solutions and Networks. On February 10, 2006, Nokia acquired Intellisync Corporation (Intellisync). On June 30, 2006, Nokia acquired additional 22% ownership interest in Nokia Telecommunications Ltd. The Company acquired Loudeye Corporation on October 16, 2006. It acquired gate5 AG on October 15, 2006.

Breakout trigger: $30.50
Buy 2010 $30 LEAP Calls WIK-AF

Breakdown trigger: $28.00
Buy 2010 $30 LEAP Calls WIK-AF @ $4.90 6/21

Play Updates

Existing Plays

BRS - $51.21 +0.02 Bristow Group

Bristow continues to hold at the highs and did rather well compared to some energy stocks that lost ground. There was no news and no change in the play.

For initial commentary see June 17th newsletter

Bristow has no LEAPS

Breakout trigger: $50.50 hit 6/14

Position: Dec $50 Calls BRS-LJ @ $5.00


MDR - $81.33 -2.16 - McDermott Intl

We saw MDR pull back to what became firm support on Thr/Fri at $80 and we saw a spike at the bell on Friday. McDermott and Fluor (FLR) are going to partner to build a monster gas drilling and production platform off the coast of Trinidad. Fluor will handle overall project management and the design and fabrication of the 4,000-ton topside. McDermott will design, procure and fabricate a 9,100-ton jacket and 4,600 tons of piles including installation. No price was given for the project but you can bet it is not cheap!

For initial commentary see June 17th newsletter

Breakout trigger: $78.00 Hit 6/11

Position: 2009 $80 LEAP Call OYZ-AP @ $9.80


HOS - $41.25 +0.20 - Hornbeck Offshore Services

Hornbeck recovered from a mid-week decline and returned to close near its historic high on Friday. There was no news for the week.

For initial commentary see June 10th newsletter

Breakdown trigger: $39.00 hit 6/08

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


HDY - $3.03 - +0.03 Hyperdynamics Corp

Hyperdynamics continues to consolidate while we wait for the contract to be ratified in Guinea. Meanwhile they signed a new lease agreement for 1,100 acres in Louisiana. The lease reportedly contains 250,000 barrels of proven reserves and in excess of one million barrels of probable reserves. Claude Rabb, an independent producer in Louisiana will operate and manage the lease to produce the maximum recoverable amounts. This is just small change compared to the pending lease in Guinea.

The Guinea National Assembly is going to ratify the HDY contract for revenue sharing before the current special session closes. This contract when ratified will become a "Project of Law" or super contract that cannot in normal circumstances be broken. Once the contract is ratified HDY will begin a rapid development phase on its 31,000 square mile lease.

Once the contract is ratified I doubt we will see $3 again. Last chance!

For initial commentary see June 3rd newsletter.

Position: HDY stock @ $2.44


TSO - $61.44 -1.32 - Tesoro

TSO lost ground late in the week but continued to hold near the highs. TSO reported a refinery in California lost power and had to be restarted early in the week. No other news and no change in the play.

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 $69.76 +1.98 - Atwood Oceanics

Atwood closed at a new historic high on Friday after reacting to the RIG/BP news. ATW is a potential takeover candidate. 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 - $59.47 +1.60 - BHP Billiton

BHP continued to move higher after Goldman Sachs reiterated its conviction buy rating. Goldman said expected volume growth across its base metals, iron ore and petroleum divisions should drive substantial increases in cash flow. It was a good week and no weakness in sight.

Prior commentary:

BHP continues to rise 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 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 - $53.15 -2.45 - Cameco

CCJ lost some ground after the monster news driven spike the prior week. No news but the price of uranium is not going down.

In April Cameco projected sales would be 50% higher in 2007.

Worldwide there are 24 new reactors being built, 41 on the drawing boards and 113 in the proposal stages. If all were built it would be a 50% 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 - $149.26 +9.61 - Petrochina

PTR produced another stellar week by announcing they were going to launch so-called A shares in Shanghai. Mainlanders are prohibited from buying HK-listed companies will finally be able to invest in the second largest global oil company. PTR will sell 4 billion yuan-denominated A shares in a Shanghai public offering and use the money to fund exploration. With the Shanghai markets exploding it is a good bet that investors will snap up the new offering very quickly. That news was good for a massive spike. We are up a massive $25 on this leap as we should be taking profits. Unfortunately we have gotten out of several winners lately that continued much higher. I am going to ride it out until August. 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 $36.22 -1.10 - Chesapeake Energy ** Stop loss $33.50 **

CHK came off its highs as the price of gas plummeted but still remains above ascending support at $35.60. No news and 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 $62.12 -5.13 - Marathon Oil

MRO split 2:1 after the close on Monday and post split depression immediately hammered the stock back to support at $62. We now have 2 $50 LEAPS for every one you owned before. AG Edwards cut MRO to a hold on June-19th. They just raised it to a buy on May 22nd. Make up your mind guys! No other news.

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 above $60

Position 2009 $100 LEAP Call VXM-AT @ $12.60
Cost update: Expired March put +65 cents to $13.25
Post split: (2) 2009 $50 LEAP Calls VXM-AJ @ $6.62

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


HES - $59.72 -1.28 - Hess Corporation *** Stop Loss $57 ***
(Formerly (AHC))

The rebound ended sharply but not quite enough to trigger our stop at $57. I am considering exiting this position for lack of movement. No reason to sit on it while the premium evaporates. I will decide this week based on oil prices and Hess's reaction to those prices. No news.

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

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 - $49.18 -3.11 - Peabody Energy *** NEW STOP $48 ***

BTU is still struggling after the news broke on double emissions on coal to liquid generation. I added a stop to BTU to take us out of the trend continues. No change in play.

For initial commentary see Oct-22nd newsletter.

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

Current recommendation: hold

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 $89.20 +4.60 Schlumberger *** Stop Loss $83 ***

SLB closed at a new historic high on Friday as a result of being included in the Russell. Considering the last five analyst rating changes have been downgrades we should be very thankful of the Russell inclusion. Next week will be the key for direction. I changed the stop loss to capture profits if we get a sudden roll over.

For initial commentary see Oct-14th newsletter

Earnings schedule: July 20th

Current recommendation: hold

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
Cost update for expired June put +1.15 = $11.45

Insurance Put: 9/18
Position: Jan $50 Put SLB-MJ @ $2.00, expired

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


SUN $83.75 -1.17 - Sunoco *** Stop Loss $76 ***

That was a minor pullback given the +$5 gain in the prior week. No news and no change in the play. 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: Hold

LEAP Position:
9/12/06 Position: 2009 $70 LEAP Call VUN-AN @ $13.50
Cost update expired Jan put +2.40 = $15.90
Cost update expired June put +0.85 = $16.75

Insurance Put:
Position: Jan $55 Put SUN-MK @ $2.40, expired

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

Non-Energy Positions

TEX - $83.50 -1.40 Terex Corp *** Stop Loss $80.00 ***

TEX has failed to maintain any momentum and I am maintaining the stop at $80 on no news.

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 - $106.77 -3.43 - Allegheny Tech *** New Stop $105 ***

The Nucor warning in the prior week continues to weigh on the entire metals sector. This is a directional spread and we are dead even on profit today. I am adding a stop at $105 and we will find another play if we are taken out.

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


BZH - $29.44 -2.34 - Beazer Homes *** STOP LOSS $36.50 ***

Beazer is finally dropping like a rock on the general weakness in the homebuilders. There was no news but maybe investors are starting to lose their wishful thinking on Beazer's future.

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


New Watch List Entries
GSF GlobalSantaFe
NOV National Oilwell
CNQ Canadian National Resources
UPL Ultra Petroleum

Current Watch List

RIMM - Research in Motion

RIMM should capture a lot of cell phone customers frustrated at not being able to buy the iPhone for months after its release due to lack of supply. Other customers may decide the iPhone is not focused enough towards business customers and opt for the Blackberry instead.

Company info:

Research In Motion Limited (RIM) is a designer, manufacturer and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software and services that support wireless network standards, the Company provides platforms and solutions for seamless access to time-sensitive information, including e-mail, phone, short message service (SMS), Internet and intranet-based applications. RIM technology also enables an array of third-party developers and manufacturers to enhance their products and services with wireless connectivity to data. RIM's primary revenue stream is generated by the BlackBerry wireless solution, comprised of wireless devices, software and service. Other revenue includes accessories, non-warranty repairs, and non-recurring engineering development contracts (NRE).

Breakdown trigger: $168.00

Buy 2009 $180 LEAP Call VHO-AP
Sell 2009 $230 LEAP Call VHO-AF

Profits will be capped at $30-$40 but cost is cheaper.


NOV - National Oilwell

National has been on a very strong ramp higher for five months. I have wanted to buy it on a pullback but missed the April dip. I want to enter NOV on a dip back to its 30 day average currently at $97. I am going to make the trigger $100 and it could be a long time before we are hit. I want to be patient here and take the entry only if the market gives it to us.

Company Info:

National Oilwell Varco, Inc. (NOV) is a worldwide provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates in three segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services. The Rig Technology segment designs, manufactures, sells and services complete systems for the drilling, completion and servicing of oil and gas wells. The Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells, service pipelines, flowlines and other oilfield tubular goods. The Distribution Services segment provides maintenance, repair and operating supplies, and spare parts. In March 2006, NOV acquired Soil Recovery A/S. In November 2006, it acquired Rolligon Ltd. In December 2006, it acquired 87% of NQL Energy Services Inc.

Breakdown trigger: $100 (no leaps)

Buy Feb 2008 $110 Call NOV-BA


GSF - GlobalSantaFe

GSF has strong support at the 30-day average and I want to target that on the next dip. GSF is becoming more of an acquisition target as each day passes. It is less well known than some of the bigger names like DO and RIG but is very well regarded. We want to buy on the next dip as opposed to chase the price.

Company Info:

GlobalSantaFe Corporation is an offshore oil and gas drilling contractor, owning or operating a fleet of 59 marine drilling rigs. During the year ended December 31, 206, it commenced construction of an additional semisubmersible. The Company also has a jackup rig, the GSF High Island III. GlobalSantaFe Corporation provides offshore oil and gas contract drilling services to the oil and gas industry worldwide on a daily rate (dayrate) basis. The Company also provides oil and gas drilling management services on either a dayrate or completed-project, fixed-price (turnkey) basis, as well as drilling engineering and drilling project management services, and it participate in oil and gas exploration and production activities.

Breakdown target: $70

Buy 2010 $80 LEAP Call WEJ-AP


CNQ - Canadian National Resources

CNQ is already well off its highs and very close to support at $65. This may be a chance to get a choice entry at a reasonable price. It has no risk to offshore or overseas events.

Company Info:

Canadian Natural Resources Limited (CNRL) is an independent crude oil and natural gas exploration, development and production company head-quartered in Calgary, Alberta, Canada. The Company's operations are focused in North America, largely in Western Canada, the United Kingdom portion of the North Sea and Offshore West Africa. In November 2006, the Company completed the acquisition of Anadarko Canada Corporation from Anadarko Petroleum Corporation. The Company's crude oil and natural gas activities are conducted in three geographic segments: North America, North Sea and Offshore West Africa. These activities relate to the exploration, development, production and marketing of crude oil, natural gas liquids and natural gas. The Company's Horizon Project has been classified as a separate segment. Midstream activities include the Company's pipeline operations and an electricity co-generation system.

Breakdown target: $65

Buy Jan 2009 $70 LEAP Call OKR-AN


UPL - Ultra Petroleum

This is an unbelievable opportunity in progress. For some reason UPL has fallen out of favor even though production is rising and they are the lowest cost producer in North America. Cash flow in Q1 increased +15% on a +42% increase in production to record levels. They closed 2007 with more than 10 TCF of gas reserves in Wyoming and Utah. They have a 17 year drilling program on those assets alone. They raised guidance for 2007 to 114 BCFE for a +24% increase over 2006. Estimates for 2008 are 135 BCFE and 160 BCFE for 2009. They added $250 million to a $1 billion share repurchase agreement on April 30th. This company is printing money but suddenly the stock has fallen out of favor with investors. I would love to be a buyer at $50. Falling gas prices may give us a chance.

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 primarily in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. As of December 31, 2006, Ultra owned interests in approximately 147,917 gross (79,566 net) acres in Wyoming covering approximately 230 square miles. The Company owns working interests in approximately 464 gross producing wells in this area and is an operator of 50% of the 464 gross wells. During the year ended December 31, 2006, domestic production was approximately 89.5% of the Company's total oil and natural gas production on a thousand cubic feet of natural gas equivalent (Mcfe) basis and 99% of the Company's estimated net proved reserves were domestic on a Mcfe basis.

Breakdown target: $50

Buy Jan 2009 $60 LEAP Call OZH-AL


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