Table of Contents
Leaps Trader Commentary
"I love it when a plan comes together" was a famous quote from Hannibal Smith (George Peppard) on the 80s TV show the "A Team." It works just as well today as it did then. We planned our exits weeks in advance. We planned for oil to top out around the first week of August. We entered our puts just as that energy top appeared. Now oil is finally starting to crack and the correction in the energy sector has pushed our put profits over 100% each and pushing those energy stocks closer to our new entry points for fall. I love it when a plan comes together.
Multiple factors are lining up to give us the decline we expected. OPEC said they still believe there is plenty of oil and no shortage and they believe oil is fairly valued at $65. This put pressure on prices although supply and demand did not change.
Secondly, refiner utilization rose +2.0% for the week to 93.6% and the highest level since the week before Hurricane Katrina. Oil supplies fell sharply but it was due to the increased refinery runs and the timing of some imports. Because refinery utilization is up and driving season is almost over the price of gasoline for September delivery has fallen to just over $2 and a break of that support could have us back to $1.75 in a week. This was also pressuring oil prices.
Lastly the hurricane predictors cut their predictions for hurricanes for this season because weather patterns have not been conducive to their formation. The peak of the season is around Sept-10th so there is plenty of time for a storm or two to appear but so far none have shown. All the pent up anticipation of hurricane related gasoline price spikes has dissipated and traders are taking profits and moving on to other investments.
Just because oil may return to $65 this fall does not mean oil is no longer a good investment. It is very cyclical with routine rises and dips. We just need to be patient and buy the dip to capitalize on the future move higher. Nothing has changed in the demand fundamentals and based on recent estimates we could actually see peak oil in 2008. Depletion continues to subtract -3% from our annual production and new production coming online is being delayed for months and sometimes years by technical and geopolitical issues. Meanwhile demand is expected to grow by 2.2% for the rest of 2007 and again in 2008. Demand is growing by 1.87 mbpd and supply is falling by -2.55 mbpd. Do the math and we need to add 4.42 mbpd of production each year just to stay even. It is not happening and this will be more evident as we head into 2008.
I am adding a couple more plays to the watch list with what may seem like ridiculous entry points but we have plenty of time to wait and oil at $65 will be murder on stock prices. The only bug in this plan would be the sudden appearance of a hurricane headed for the Gulf. That would jack up crude prices and halt the current decline in energy stocks. If that happens I will adjust the targets for the next entry cycle in October.
I am also adding Bear Stearns as a non-energy play. I think BSC has been beaten so badly there is a good chance of a takeover play and $100 is strong support. Let your conscience be your guide on entering that position.
September Natural Gas Futures Chart - Daily
September Gasoline Futures Chart - RBOB Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
None this week.
CVX - $81.02 -4.18 - Chevron Put *** Stop loss $88.00 ***
Profit stop: $75
Chevron continues to decline now down over 15% from its July high. $80 should be support but a break in crude prices back under $75 should help crack that Chevron support. I am going to target the 200-day average for an exit, currently at just over $75.
For initial commentary see the July 22nd newsletter.
7/23/07 Position: Dec $90 Put CVX-XR @ $4.70
TSO - $45.42 -2.47 Tesoro Put *** Stop Loss $53 ***
Profit stop: $37.50
Tesoro has already broken its 200-day average and could easily return to something in the $35 range. I am going to target $37.50 for an exit.
For initial commentary see the July 22nd newsletter.
7/23/07 Position: Nov $50.00 PUT TSO-WJ @ $3.50
XLE - $66.12 -2.38 Oil SPDR Put *** Stop Loss $71.50 ***
Profit stop: $62
The XLE cracked major support at $67 on Friday thanks to the weakness in the oil service sector. The 200-day is currently $62 and that is going to be my exit target. I know this is the second time I changed it but you have to keep up with the changing environment.
For initial commentary see the July 15th newsletter.
Breakdown trigger: $72, hit 7/18
7/18/07 Position: Dec $70 Put XBT-XR @ $3.00
Profit target: XLE $62
RIMM - $218.50 +2.80 - Research in Motion
No harm here despite the -$10 intraday drop on Friday. Plenty of time and no hurry to exit.
For initial commentary see the July 1st newsletter.
Earnings schedule: Sept 27th.
Breakdown trigger: $168.00 hit 6/25
HOS - $43.19 +0.72 - Hornbeck Offshore *** Stop $39.50 ***
Hornbeck continues to push higher although very erratically given the sorry shape of the market in general and the energy sector. This is the little energy stock that thinks it can!
For initial commentary see June 10th newsletter
Earnings schedule: August 2nd
Breakdown trigger: $39.00 hit 6/08
Position: 2009 $40 LEAP Call ZIG-AH @ $8.00
ATW $64.65 -4.12 - Atwood Oceanics ** Stopped $67 **
We lost another player on Thursday when Atwood finally succumbed to sector selling. We still doubled our money so no complaints here.
Interesting article in Investors Business Daily regarding Atwood.
For initial commentary see April 29th newsletter.
Earnings schedule: Aug 8th
Breakout trigger $60.50 hit 4/23/07
CHK $35.17 +1.39 - Chesapeake Energy ** Stop $29.00 **
This is an insurance put we bought really cheap several months ago when CHK was a long LEAP position. We were stopped on the LEAP but kept the put in play.
CHK reported earnings on 8/02 and spiked +$2 above congestion on the news. The true test will be next week. Now that earnings are over can it sustain its trend?
BZH - $11.30 -4.30 - Beazer Homes *** STOPPED $12.75 ***
Beazer plunged to $8.11 on the bankruptcy rumor. Almost immediately multiple brokers came out in support of Beazer and the stop recovered half its losses. I sent an email on Wednesday afternoon lowering the stop to $12.75 just in case the abundance of broker support caused a rebound in BZH. On Thursday BZH rose to hit our stop and take us out of the play. It may still continue lower but we can't complain about making $12 on a $3 put.
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: July 26th, loss of $3.20 per share vs Est -.32
Position: Jan-08 $25 PUT WZF-ME @ $3.10
Leaps Trader Watch List
Current Watch List
UPL - Ultra Petroleum
Still looking for another drop. Maintain the entry target.
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.
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
BHP - BHP Billiton
We were stopped on BHP for a nice profit and I want to re-enter the position using a longer LEAP on any further price declines.
BHP Billiton Limited is a diversified resources group. The Company has seven business units, or Customer Sector Groups: Petroleum, which explores for, produces, processes and markets hydrocarbons, including oil, gas and liquefied natural gas; Aluminium, which explores for and mines bauxite, and processes and markets aluminium and alumina; Base Metals, which explores for, mines, processes and markets copper, silver, zinc, lead, uranium and copper by-products, including gold and molybdenum; Carbon Steel Materials, which explores for, mines, processes and markets metallurgical coal, iron ore and manganese used in the production of carbon steel; Diamonds and Specialty Products, which explores for and mines diamonds and titanium minerals; Energy Coal, which explores for, mines, processes and markets energy coal for use in electricity generation, and Stainless Steel Materials, which explores for, mines, processes and markets nickel, which is used in the production of stainless steel.
Breakdown target: $55
Buy 2010 $70 LEAP Call LPH-AN
JEC - Jacobs Engineering Group
Jacobs has been on a very strong growth path and the recent market weakness has knocked it back into range. It has oil and gas exposure but it not an oil and gas company.
Jacobs Engineering Group Inc. is a professional services firm that focuses on providing a range of technical, professional and construction services. It provides project services, which include engineering, design, architectural, and similar services; process, scientific, and systems consulting services; operations and maintenance services, and construction services, which include direct-hire construction and construction management services. It concentrates its services on selected industry groups and markets, including oil and gas exploration, production and refining; programs for various federal governments; pharmaceuticals and biotechnology; chemicals and polymers; buildings, which includes projects in the fields of healthcare and education, as well as civic, governmental and other buildings; infrastructure and technology and manufacturing. In April 2006, its Canadian subsidiary acquired Techna-West Engineering Limited. In October 2006, it acquired W.H. Linder & Associates, Inc.
Breakdown target: $55
Buy JAN 2008 $60 Call JEC-AL
NOV - National Oilwell Varco
This may be wishful thinking but a major drop in crude prices over the next several months could bring NOV back into range once again.
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 target: $100
BUY FEB $110 Calls NOV-BB
VLO - Valero Energy
Looking to buy Valero cheap on the fall dip.
Valero Energy Corporation owns and operates 18 refineries located in the United States, Canada and Aruba that produce refined products, such as reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasolines, distillates, jet fuel, asphalt, petrochemicals and other refined products. It markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of approximately 5,800 retail and wholesale branded outlets in the United States, Canada and Aruba. During the year ended December 31, 2006, it sold all of its ownership interest in Valero GP Holdings, LLC. In July 2007, the Company sold its Lima, Ohio refinery to Husky Energy Inc.
Breakdown target: $55
BUY 2010 $70 LEAP Call YPY-AN (*** LEAP CHANGED to 2010 ***)
COP - Conoco Phillips
I hesitate to add Conoco because of its Russian LUKOIL exposure but the company is doing everything else right. Now that it is out of Venezuela it should be more aggressive with other opportunities.
ConocoPhillips (ConocoPhillips) is an international, integrated energy company. The Company's business is organized into six segments. Exploration and Production segment primarily explores for, produces and markets crude oil, natural gas and natural gas liquids on a worldwide basis. Midstream segment gathers, processes and markets natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids, primarily in the United States and Trinidad. Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products, mainly in the United States, Europe and Asia. LUKOIL Investment segment consists of its equity investment in the ordinary shares of OAO LUKOIL (LUKOIL). The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. Emerging Businesses segment includes the development of new technologies and businesses outside the Company's normal scope of operations.
Breakdown target: $70
Buy 2010 $80 LEAP Call YRO-AP
BSC - Bear Stearns
Badly beat up, possibly a take over target.
The Bear Stearns Companies Inc. is primarily a holding company that through its broker-dealer and international bank subsidiaries, principally Bear, Stearns & Co. Inc. (Bear Stearns), Bear, Stearns Securities Corp. (BSSC), Bear, Stearns International Limited (BSIL) and Bear Stearns Bank plc (BSB) is an investment banking, securities and derivatives trading, clearance and brokerage firm serving corporations, governments, institutional and individual investors worldwide. The Company operates as a securities broker and dealer in three principal segments: Capital Markets, Global Clearing Services and Wealth Management. In February 2007, the Company completed the acquisition of the subprime mortgage banking platform of ECC Capital Corporation's subsidiary, Encore Credit Corp. Encore Credit will retain its brand name and operate as a separate division of the Company's mortgage bank subsidiary, Bear Stearns Residential Mortgage Corporation.
Breakdown target $100
Buy 2010 $120 LEAP Call YBO-AD
CFC - Countrywide Financial
Best run mortgage company that should come out on top of any continued meltdown. They will be grabbing market share with both fists. CEO said they had $50 billion in available credit on 8/03.
Countrywide Financial Corporation (Countrywide), incorporated on February 6, 1987, through its subsidiaries, is engaged in mortgage lending and other real estate finance-related businesses, including mortgage banking, banking and mortgage warehouse lending, dealing in securities and insurance underwriting. The Company has five segments: Mortgage Banking, which originates, purchases, sells and services non-commercial mortgage loans; Banking, which takes deposits and invest in mortgage loans and home equity lines of credit; Capital Markets, which operates an institutional broker-dealer that primarily specializes in trading and underwriting mortgage-backed securities; Insurance, which offers property, casualty, life and disability insurance as an underwriter and as an insurance agency, and Global Operations, which licenses technology to mortgage lenders in the United Kingdom. During the year ended December 31, 2006, Mortgage banking accounted for 48% of the Company's pre-tax earnings.
Breakdown target $20.00
Buy 2010 $30 LEAP Call YJD-AF
CCJ - Cameco
Strong earnings, major producer, the world is consuming more uranium than is currently produced.
Cameco Corporation (Cameco) is primarily engaged in the exploration for and the development, mining, refining and conversion of uranium for sale as fuel for generating electricity in nuclear power reactors in Canada and other countries. The Company has a 31.6% interest in Bruce Power L.P. (BPLP), which operates the four Bruce B nuclear reactors in Ontario. The Company wholly owns Zircatec Precision Industries, Inc., whose primary business is the fabrication of nuclear fuel bundles. Cameco's 52.7% subsidiary Centerra Gold Inc. (Centerra) is involved in the exploration for and the development, mining and sale of gold. Cameco has four segments: uranium, fuel services, nuclear electricity generation and gold. In June 2006, the Company acquired a 19.5% interest in UNOR Inc, whose principal properties are 226 mineral claims in northwestern Nunavut on the Hornby Basin.
Breakdown target: $35
Buy 2010 $50 LEAP Call LTA-AJ
MRO - Marathon Oil
On July 31st Marathon announced its purchase of Western Oil Sands for $5.5 billion. This will be an immediate increase in production for Marathon of 31,000 bpd. The acquisition gives them 20% interest in the Athabasca Oil Sands Project in Alberta. The other partners are Shell 60% and Chevron 20%.
Marathon Oil Corporation (Marathon) is engaged in exploration, production and marketing of crude oil and natural gas worldwide. The Company operates in three segments: Exploration and Production (E&P), which explores for, produces and markets crude oil and natural gas on a worldwide basis; Refining, Marketing and Transportation (RM&T), which refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States, and Integrated Gas (IG), which markets and transports products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, on a worldwide basis, and is developing other projects. During the year ended December 31, 2006, Marathon completed leasehold acquisitions totaling approximately 200,000 acres in the Bakken Shale oil play. In July 2006, it completed a natural gas leasehold acquisition in the Piceance Basin of Colorado, in Garfield County in the Greater Grand Valley field complex.
Breakdown target: $45
Buy 2010 $60 LEAP Call WXM-AL
SLB - Schlumberger
SLB posted blowout earnings on its global services business and had only good things to say about the future.
Schlumberger Limited (Schlumberger) is an oilfield service company supplying a range of technology services and solutions to the international petroleum industry. It consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. WesternGeco, owned by Schlumberger and Baker Hughes, is an advanced surface seismic company. Schlumberger's products and services include the evaluation and development of oil reservoirs (controlled digging, pumping and testing services), well construction and production consulting, and sale of software programs. The Company also offers storage tank and seismic monitoring services. Schlumberger Limited is headquartered in Paris, France.
Breakdown target: $77.50
Buy 2010 $90 LEAP Call WUB-AR
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