Option Investor

Weekly Newsletter, Saturday, 07/07/2007

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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

Crude Breakout Continues

Despite a complete lack of fundamental support the breakout in crude continues with Friday's close at $72.81 an 11-month high. Crude inventories are still at decade highs and no hurricanes in sight. Even the refinery picture is improving with three coming back online this week after protracted outages.

Conoco's 150,000 bpd refinery in Borger is being restarted after a 6-week outage. Sunoco is restarting their 85,000 bpd refinery in Tulsa after a 4-week outage. Exxon is restarting production from their large Beaumont refinery this weekend. There is no start date yet for a restart of the flooded Kansas refinery but there was no damage and they are just waiting for the surrounding water to settle. Still, gas futures soared to their high for the year with a $2.31 close on Friday.

Nothing has changed on the global outlook to push crude prices higher. The same set of circumstances we saw last week and the week before are still in the news and none got worse. This is simply a run by the bulls and they are crushing shorts by the thousands. $75 appears to be the target price and still no hurricane. I shudder to think what would happen if a category 4 storm appeared around Cuba and headed our way. We could see $80+ dollars a barrel in a heartbeat.

Brent crude is also hitting records but for different reasons. North Sea production has been dropping sharply due to depletion and some major problems at several offshore platforms. They are expecting a 300,000 bpd drop in production for June. Brent was nearing $75 last I looked and it should get worse. This could be one reason WTI prices are soaring as well. If Brent is unavailable the refineries will have to bid for WTI to keep production running.

With all the refineries coming back online you would expect gasoline prices to decline and crude inventories to drop. That may happen but very soon several refineries are going to have to shift production to heating oil to prevent a shortage this winter. Heating oil inventory levels are -42% below the same period in 2006 because all the operating refineries have been concentrating on gasoline.

I fear we are sitting up for a repeat of last year's oil crash. If you remember prices ran up into the first week of August with the current August contract nearing $81. The Sept-06 contract hit $79.45 on July-14th before the crash began. Rising gasoline inventories as the summer driving season began to ease prompted gasoline prices to implode followed immediately by crude. The ensuing crash knocked -$15 off crude prices by summers end.

We are setting up for exactly the same kind of crash. The summer driving season is more than half over with summer family vacations ending by the second week in August. Once it is clear that there is plenty of gasoline to get past Labor day the crash will begin assuming there are no hurricanes headed for the gulf.

It was under reported but finished gasoline production last week was the highest since the EIA started reporting the weekly data in 1982. With all the refineries coming back online we could easily see that record broken over the next couple of weeks. That will take all the bullishness out of gasoline prices and by default oil prices as well.

Saudi Arabia is planning on bringing 500,000 bpd of light crude online before year-end. Odds are good they will cut back on heavy sour crude to capitalize on the higher price of the light crude. This will further depress the WTI prices later this year if those plans are not changed.

We have been preparing to exit many of our energy positions in early August to beat the normal end of summer decline. We may have to move that timetable up by a couple weeks to capture the current highs. It would be nice if we could get one more week and a move to $75 oil but I would be a seller once that level is reached assuming no hurricanes on the horizon.

We could close all our long term energy positions today and claim we had a good year. They say pigs get fat and hogs get slaughtered. I know several of the positions we exited early went on to some monster gains so I hate to just close up shop in expectations of a crash. I am going to keep pushing the stops higher so any material dip will take us out. We have $15-$20 profit in some of those positions so any exit from here would continue to be profitable.

Notes from around the world.

The number of autos globally is expected to rise from the 700 million in 2005 to 1.2 billion by 2030 according to OPEC. The biggest gains will come from developing countries, primarily China.

China, through the China National Petroleum Corp (PTR), won the rights to explore oil sands in Canada's Alberta province. This is a breakthrough according to China.

Conoco CEO James Mulva questioned last week whether supply will be developed to meet the EIA's optimistic demand expectations. He believes demand will be constrained by supply. That is a polite way of saying peak oil will arrive.

Chevron postponed development of its $3.5 billion Tahiti project in the Gulf of Mexico due to metallurgical problems with the mooring shackles in the very deep water. It was supposed to begin production in 2008. This is how production estimates always fail to come true. There are always unexpected problems when stretching the drilling envelope.

Petro Canada (PCZ) will spend C$26.2 billion to build a new oil-sands project in northern Alberta. The Fort Hills project is planning on producing 280,000 bpd of synthetic crude by 2014. Nobody said where they are going to get the natural gas to fire the boilers.

The International Energy Agency's (IEA) chief economist Faith Birol said last week that "If Iraq production does not rise exponentially by 2015 we have a very big problem, even if Saudi Arabia fulfills all its promises. The numbers are very simple, there is no need for an expert." The IEA has been very optimistic projecting oil demand to rise to 125 mbpd by 2030. We currently have trouble producing 85 mbpd. Recently they have been hedging their statements with comments like "$2 trillion must be invested in exploration and production to meet global demand by 2030." Since it is extremely unlikely that amount will ever be invested by OPEC nations the end result is clear. Peak oil will be arriving earlier than the IEA had previously expected. Part of their forecast is for Saudi Arabia to increase production from their current 9 mbpd to 15 mbpd by 2015. Even Saudi with their most optimistic projects and tens of billions in new investment only expect 12 mbpd by that date. This appears to be the IEA's way of blaming their miss on Peak Oil by 25 years on OPEC. Birol's comments imply that Peak Oil could come as soon as 2012 and they always understate the problem. Birol called into question Saudi Arabia's reserve claims and called on Saudi to make public verifiable data to support their claims. The term "when pigs fly" came immediately to mind.

Keep looking for storm clouds in the gulf and raised stop losses on the plays.

Jim Brown

August Crude Futures Chart - Daily

August Gas Futures Chart - Daily

August Gasoline Chart - RBOB Daily

Changes in Portfolio

New Energy Plays


New Non-Energy Plays


Dropped Plays


New Watch List Plays Triggered


Portfolio Listing & Top Picks

New Plays

Most Recent Plays

None this week.

Play Updates

Existing Plays

RIMM - $215 +15.36 - Research in Motion

RIMM continued its unbelievable ride with another $15 gain. RIMM announced it was preparing to deliver BlackBerry phones to corporate customers in China. Expect some profit taking!

For initial commentary see the July 1st newsletter.

Breakdown trigger: $168.00 hit 6/25

Call spread:
Position: LONG 2009 $180 LEAP Call VHO-AP @ $32.60
Position: SHORT 2009 $230 LEAP Call VHO-AF @ $10.47


NOV - $110.11 +5.87 - National Oilwell ** Stop Loss $104 **

No news for NOV but the rally continues. A move over $110 could trigger additional buying. Earnings were scheduled for July 25th. I raised the stop to take us out with a profit should oil crash.

For initial commentary see the July 1st newsletter.

Earnings Schedule: July 25th

Breakdown trigger: $100 hit 6/27
(no leaps)

Position: Feb 2008 $110 Call NOV-BB @ $10.50


GSF - $75.07 +2.82 - GlobalSantaFe *** Stop Loss $70 ***

GSF closed at a new historic high on Friday and there appears to be a lot of rising support on no news. I raised the stop just in case.

For initial commentary see the July 1st newsletter.

Breakdown target: $70 Hit 6/27

Position: 2010 $80 LEAP Call WEJ-AP @ $10.10


CNQ $67.80 +1.45 Canadian National Res ** Stop Loss $64.50 **

The rebound continued on no news. I raised the stop to protect the position.

For initial commentary see the July 1st newsletter.

Breakdown target: $65 Hit 6/25

Position: Jan 2009 $70 LEAP Call OKR-AN @ $9.50


NOK - 28.92 +0.81 Nokia

Nokia continued its bounce but suffered on Thursday after saying it would take a $100M charge for restructuring. It is poised to break that $29.50 barrier and that could produce some additional short covering. The more Apple and RIMM are in the spotlight the better for Nokia. They are bigger than both put together and have dozen more products.

For initial commentary see June 24th newsletter

Breakdown trigger: $28.00 Hit 6/21

Position: 2010 $30 LEAP Calls WIK-AF @ $4.90


BRS - $50.90 +1.35 Bristow Group ** Stop Loss $49.50 **

Bristow recovered some lost ground but is not performing as well as the rest of the sector. I put on a stop loss in case there is something happening we don't know about.

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 - $89.89 +6.77 - McDermott Intl ** Stop Loss $81 **

MDR continues to explode higher. The only news for the week was an upgrade in their credit rating by S&P and Moody's. I put on a stop loss just in case.

For initial commentary see June 17th newsletter

Breakout trigger: $78.00 Hit 6/11

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


HOS - $39.33 +.57 - Hornbeck Offshore *** Stop $38.25 ***

No news on HOS and no move. I raised the stop to take us out on any future weakness.

For initial commentary see June 10th newsletter

Breakdown trigger: $39.00 hit 6/08

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


HDY - $2.95 -0.19 Hyperdynamics Corp

No news and no movement. Still waiting for the contract to be ratified.

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.

For initial commentary see June 3rd newsletter.

Position: HDY stock @ $2.44


TSO - $58.91 +1.76 - Tesoro *** Stop Loss $56.00 ***

I am afraid the Tesoro rocket has run out of gas. There was no news but with the refineries coming back online and crude supplies rising the odds are good we are going to see a refiner crash soon. I raised the stop once again.

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 $71.87 +3.25 - Atwood Oceanics ** Stop Loss $66 **

Atwood closed at a new historic high on Friday and appears to be in full breakout mode. ATW is a potential takeover candidate. 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 - $65.28 +5.53 - BHP Billiton *** Stop Loss $61 ***

BHP rocketed higher on renewed M&A interest in the sector. BHP has literally gone ballistic again and we could see some strong profit taking if the global metals story dies. I raised the stop again. BHP has risen more than 50% since we entered this position back in March.

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 - $50.26 -.48 - Cameco *** Stop Loss $47.50 ***

CCJ rebounded from another midweek slump and news on Friday of a successful union contract revision provided a minimal boost. I am going to keep the stop in place.

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 Schedule: July 30th

Breakout trigger: $37.50 Hit March 7th

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


PTR - $157.50 +8.82 - Petrochina *** Stop Loss $147.50 ***

PTR was unbelievable again with nearly a $10 gain on no real news. I raised the stop to $10 under Friday's close just in case this rocket runs out of fuel. We are up +$33 in this one position!

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 $35.25 +.65 - Chesapeake Energy ** Stop loss $33.50 **

Still simple math but CHK is holding just over our stop. Gas plunged to levels not seen since May-2005 and gas stocks imploded. CHK did say it had acquired another 8500 acres in the Barnett Shale and was looking to acquire more. Maintain the stop at $33.50 but don't close the put if the LEAP is stopped. 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 $63.59 +3.63 - Marathon Oil *** Stop Loss $59.00 ***

MRO is finally recovering from its post split depression and put several days of gains together. No other news.

I raised the stop.

For initial commentary see Nov-18th newsletter.

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

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


SLB $88.33 +3.39 Schlumberger *** Stop Loss $83 ***

SLB appears ready for a new breakout. It could be residual interest from the addition to the Russell indexes supplying the support or just the rising price of oil. Maintain the stop at $83.

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 $82.08 +2.40 - Sunoco *** Stop Loss $78.50 ***

No news. SUN continued its rebound and is currently out of danger but once the price of gasoline breaks it will drop like a rock. Maintain the raised stop at $78.50.

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

BZH - $23.98 -.69 - Beazer Homes *** STOP LOSS $28.75 ***

Beazer was heading south in a hurry until Friday. Thursday's low was a fresh 52-week low and our put was finally in the money. Friday's rebound by the homebuilders in general gave it a dollar boost but this is still a stinker heading for lower levels.

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


Current Watch List

UPL - Ultra Petroleum

UPL failed to fall on the implosion in gas prices. I believe it will eventually break so I am not changing the entry.

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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