Option Investor

Weekly Newsletter, Saturday, 11/24/2007

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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

Year End Volatility Ahead

Crude futures rose on Friday to close at $98.30 and are showing no signs of weakness. Every dip is bought and even news of rising shipments failed to produce selling. Oil tracking firm Petrologistics said on Thursday that OPEC shipments for November have risen to 31.573 million barrels per day from 31.249 mbpd in October. This jump of 324,000 bpd was fueled by a strong recovery in production in Iraq. Iraq exports have reached 2.605 mbpd compared to 2.146 mbpd in October. Using my math that is an increase of 459,000 bpd from Iraq alone.

Does this strike anyone else strange that OPEC agreed to raise production by 500,000 bpd on November 1st and even with 459,000 bpd coming from Iraq, which does not even have a quota at present, they could only manage an overall gain of 324,000 bpd? That means the rest of OPEC actually lost 135,000 bpd instead of increasing 500,000 bpd. This is not an encouraging trend especially with prices at $98. You would think cheating would be rampant and OPEC would be dumping oil on the market. That is not happening according to the numbers.

Upon further research I found that the United Arab Emirates (UAE) suffered a drop in production of 452,000 bpd due to maintenance problems at three major offshore fields. Angola also saw production fall 101,000 bpd.

According to Petrologistics Saudi is coming to the rescue of OPEC's lagging shipments and is boosting production by 720,000 bpd for the four weeks ending Dec-8th. This will offset the production drops in Angola and the UAE as well as some minor declines from some other OPEC members. The majority of this Saudi oil is destined for the U.S. and that should solve the declines in our inventory levels.

The market is quick to realize OPEC is not shipping as promised and outages and falling production from OPEC members is more transparent then in previous years with multiple oil trackers using every available means to clarify actual shipments.

This boost in shipments from Saudi Arabia headed for the U.S. suggests there will be some volatility in oil prices very soon. It takes several weeks for Saudi oil to reach the U.S. but reportedly those increased shipments began on the 12th. That means oil inventories should jump sharply around Dec-12th and continue for four weeks. That is almost exactly when refiners, pipelines and storage facilities will want to be reducing inventories to avoid taxes on inventories that are charged on Dec-31st. Prices paid for crude in mid December will have to reflect the potential taxes that will be charged to whoever is holding on Dec-31st.

The next saga in the OPEC story will happen on Dec-5th when OPEC meets to discuss production levels in Abu Dhabi. You can rest assured that Saudi Arabia is going to be even more forceful than before in lobbying for another production increase to slow the price of oil. I will be shocked if we don't see $100 before the meeting but after the meeting I would be looking for prices to drop ahead of tax time regardless of any production decision other than a cut. I would not be surprised to see prices drop like a rock once $100 has been hit but some analysts are now predicting $110 or even $120 before the year is out. Analysts are expecting OPEC to agree to another 500,000 bpd increase in production on Jan-1st but given their recent history of failing to follow through on the Nov-1st 500,000 bpd I doubt there will be many believers until it starts backing up in the pipelines at Cushing Oklahoma.

Crude demand is expected to rise to 87.6 mbpd in Q4, up from 85.5 mbpd in Q3. Many analysts and investors including Boone Pickens feel we will never see 88 mbpd of production. The decline rate being discussed for current production at the recent oil conference in Houston was over 5% per year and that is as sure as the tick of a clock. That is 4.3 mbpd in declining production every year without fail. This also means 4.3 mbpd of new production must be brought online every year to offset that drop. We are simply not seeing that kind of new production brought online and surely not enough new production to continue to supply growing demand. $100 oil, bet on it but I do expect an eventual decline as demand slows in Q1.

On the portfolio side we only had two casualties last week and that was the FXI and CCJ. Thursday's big drop triggered the stop loss on the FXI and it rebounded 9 on Friday. Some of the Asian indexes are down well over 10% and even though we caught this on a dramatic dip there was still some selling to come. CCJ continued its four-week slide and hit the stop at $40 on no news.

Transocean (RIG) is scheduled to complete its merger with Global Sante Fe (GSF) on Tuesday. We will be entering a position on RIG once the merger is completed and the stock is repriced. S&P said on Friday RIG will remain in the S&P but the weighting will change. I will update RIG next weekend with entry levels.

The oil sector appears to have firmed although further drops in the broader market could continue to create weakness in the individual stocks. Fortunately crude has remained in the high $90s but I fear we are going to see that support tested soon. Do not be afraid to close a losing position. It is not an admission of failure but simply a retreat until support reappears. If we do get a sharp downdraft in December I would use it as a buying opportunity rather than an excuse to dump stocks.

January Crude Futures Chart - Daily

December Natural Gas Futures Chart - Daily

December Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Energy Plays


New Non-Energy Plays


Dropped Plays
$172.79 -6.08 FTSE/Xinhua China 25 *** Stopped $165 ***
CCJ $40.95 -1.33 Cameco *** Stopped @ $40 ***

New Watch List Plays Triggered


Portfolio Listing & Top Picks

New Plays

Most Recent Plays

None this week.

Play Updates

Existing Plays

Energy Play Updates

JEC $77.61 -0.29 Jacobs Engineering Group *** Stop Loss $70 ***

Nothing material in the news for JEC other than their analyst meeting that went off without a hitch. You can read the transcript at the link below. Still holding over support at $75.

Transcript of last week's analyst meeting


Breakdown target: $80.00 Hit 11/12

Position: APR 2008 $90 Call JEC-DR @ $6.50


VLO $65.96 -1.70 Valero Energy *** Stop Loss $64.00 **

Valero took a hit when its cat cracker failed at the Memphis refinery. It will be offline until Nov-29th for unplanned maintenance. They will lose 65,000 bpd of gasoline and 35,000 bpd of distillate production until it is repaired. We will likely be stopped out on any further weakness since the news hit took them to within 67 cents of the stop. They would need to get well really quick to stay as an active play.

Breakdown target: $67.50 Hit 11/12

Position: 2009 $75 LEAP Call VHB-AO @ $10.00


COP $79.12 .19 Conoco Phillips *** Stop Loss $74.00 ***

The only news for Conoco was the cancellation of a sale of an Irish refinery that processes 71,000 bpd. They took it off the market saying they had decided it was worth more to continue to operate it than sell it. Major refiners have been liquidating European refineries where gasoline demand has stagnated in favor of Asian locations where demand is exploding.

Breakdown target: $80 hit 11/12

Position: 2009 $90 LEAP Call OJP-AR @ $8.60


MRO $56.37 -1.14 Marathon Oil *** Stop Loss $53.50 ***

No material news for Marathon. It is stuck in the slump with all the refiners waiting for the crack spreads to widen.

Breakdown target: $57 Hit 11/13

Position: 2009 $65 LEAP Call VXM-AM @ $7.50


CNQ $72.79 .06 Canadian Natural Resources

CNQ still holding support at the 100-day average and only about a buck under our entry point. So far, so good. No news.

Breakdown Trigger: $75.50 11/12 email alert

Position: 2009 $90 LEAP Call OKR-AR @ $9.10


CLB $126.63 -5.88 Core Labs

The headline here looks really grim but Core is really only trading about $3.40 below our entry. Given its rock star status in the sector we are in good shape. No news.

Breakdown Trigger: $130 11/12

Position: 2009 $140 LEAP Call ZYM-AH @ $21.30


FTI $55.76 1.22 FMC Technologies *** Stop Loss $49 ***

Only $1 below our entry and holding on support. No news and no change in play.

Breakdown Trigger: $57 hit 11/12

Position: APR $65 Call FTI-DM @ $4.75


PBR $100.78 -4.99 Petrobras *** Stop Loss $87 ***

PBR continues to hold on support at $100 and above our entry point. They said production dipped slightly in October to 1.73 mbpd due to rig maintenance. PBR estimates production will increase by 7% annually through 2012. That is far better than any other major oil company trading today.

LEAPs Alert Entry 11/12 @ $95

Position: 2009 $90 LEAP Call VDW-AR @ $17.10


SGR $58.95 -3.95 Shaw Group *** Stop Loss $55 ***

Still holding above support at the 100-day average of $58. No news and no change in play.

LEAPs Alert Entry 11/12 @ $61

Position: 2010 $70 LEAP Call YCW-AN @ $20.40


FWLT $135.00 -5.50 - Foster Wheeler

Still holding over support at the 100-day average and exactly at our entry point of $135. Once the market quits selling the momentum stocks we should be in business. No news.

The board just approved a 2:1 split subject to shareholder approval around January 8th.

Breakdown trigger: $135 hit 11/06

Position: 2009 $150 LEAP Call ZHF-AW @ $29.10


FXI $172.79 -6.08 FTSE/Xinhua China 25 *** Stopped $165 ***

The Asian markets continued to correct and the falling knife we caught at $190 continued to fall to stop us out at $165. This was a major hit and very painful.

Breakdown trigger: $190 hit 11/05

2009 $210 LEAP Call VHF-AA @ $32.50, exit @ $17.00 11/21


PTR $184.80 -5.10 - PetroChina *** Stop Loss $170 ***

PTR is holding near our entry point of $190 and waiting for the Chinese markets to recover. Bear Stearns upgraded PTR from Sell to Hold on Friday saying the sell off had corrected the over valuation in price. No change in play.

Breakdown trigger $194.32 Entered on rebound from $190 on 11/08

Position: 2009 $220 LEAP Call ZJK-AZ @ $32.20


XOM - $88.29 3.19 Exxon Mobil

Exxon benefited from an upgrade by UBS on Tuesday to a BUY. The analyst said the 10% sell off in Exxon provided investors with a buying opportunity on the worlds best oil company. XOM jumped 4 on the news.

Breakdown trigger: $88 Hit 11/01

Position: 2009 $100 LEAP Call ODU-AT @ $7.90


CAM - $94.23 $4.90 Cameron International *** Stop Loss $83 ***

CAM has begun its rebound from the depths of despair see the prior week at $86. The support of the 100-day average at $86.50 held and was tested for about a week before buyers finally appeared. No news and no change in play.

Breakdown target: $95 Hit 10/30

Position: 2009 $100 LEAP Call OKA-AT @ $18


SLB $94.11 .65 - Schlumberger

SLB appears to be edging higher with a peek over $94 on Friday. Maybe the gloom and doom is over here as well. SLB said it increased its stake in Framo Engineering to 52.75% from 47.75% giving it a majority ownership position. Framo is a Norwegian based company that makes pumps and metering systems. No other specific news.

Breakdown target: $95.00 hit Oct-22nd

Position: 2009 $100 LEAP Call VWY-AT @ $15.60


CVX $86.67 .69 - Chevron

No news and no movement. Still holding at our entry point of $87. Still no stop.

Breakdown trigger: $87 hit Oct-22nd

Position: 2009 $100 LEAP Call VCH-AT @ $6.40


OII $66.06 .05 Oceaneering International

No news and no movement. It did close at the high of the week where it is forming a wedge at $66 that could have the potential for a breakout.

Earnings Nov-1st: 40%

Breakdown trigger: $72 hit on Oct-22nd

Position: APR $80 Call OII-DP @ $5.40


NOV $68.06 3.62 - National Oilwell Varco

No news but NOV is definitely on the recovery road. The resistance at $68 is being tested and any positive news from the sector could produce a breakout.

Breakout Trigger: $80, hit 10/11/07

Position: 2008 May $90 Call NON-ER @ $7.20


MDR - $47.25 -2.76 McDermott Intl *** Stop Loss $45 ***

MDR is still sliding and fell to support at $47. Any further drops should take us out of the play. The services sector has been hammered but some of the stocks are starting to find buyers. Let's hope that happens to MDR next week.

Earnings: Nov 8th, 37%

Breakout trigger: $53, hit 9/20

Position: 2009 $60 LEAP Call OYZ-AL @ $9.00


UPL $66.35 -0.35 - Ultra Petroleum *** Stop Loss $62 ***

Still consolidating and holding the high ground. Currently only $5 off its highs. No complaints. No news.

Breakdown target: $52.50 Hit 8/30

Position: Jan 2009 $60 LEAP Call OZH-AL @ $8.00


CHK $38.13 -.05 Chesapeake Energy

CHK is still sliding but it is not going quietly. The consolidation appears to be easing but still no uptrend. No news.

Earnings: Nov 7th -34%, beat by 3 cents.

Position: 2010 $35 LEAP Call WZY-AG @ $6.60
10/28 Price update: Expired Oct Put 90 cents, $7.50

Insurance put:
Oct $30 Put CHK-VF @ 90 cents. Expired


HP $34.83 .75 Helmerich & Payne *** Stop Loss $29.50 ***

HP continues to hold near 4-month highs after beating earnings the prior week. If we could get 3 days of positive oil movement I think the entire service sector would begin moving higher.

Earnings: Nov-15th, 18%, beat street by 6 cents at 93 cents

Position: Jan 2009 $35 LEAP Call ZQA-AG @ $4.50

Insurance put:
Position: Nov $30 HP-WF. @ .50, Stop $28.50


HERO $26.36 -.36 Hercules Offshore ** Stop Loss $24.00 **

Insider buying in HERO keeping it over $25 on no news. Maintain the stop at $24.

Earnings Oct-30th. 63%

Position: 2008 April $30 Call HIQ-DF @ $3.00


BHP - $72.82 -1.91 BHP Billiton ** Stop Loss $60.00 **

BHP may be starting to firm after the news appears to be suggesting it could be successful in its Rio Tinto offer. BHP is rumored to be considering a higher offer that Rio may be hinting they would accept assuming the management terms are to their liking. The combined companies would be huge with a market cap larger than Microsoft. With mines around the world the management would be a real challenge but so would be their footprint in mining circles. There would be real savings and real profits. Analysts are beginning to warm to the idea and that could be the first step towards the finish line.

Breakdown target: $55 hit 8/15/07

Position: 2010 $70 LEAP Call LPH-AN @ $9.00


CCJ - $40.95 -1.33 Cameco ** Stopped @ $40 **

The unexplained decline in CCJ continued to stop us out at $40.

Earnings: Oct-31st

Breakdown target: $35 Hit 8/16/07

2010 $50 LEAP Call LTA-AJ @ $7.20, exit $8.80, 11/21

Non-Energy Positions

CSCO $28.69 -1.25 Cisco Systems *** Stop Loss $27 ***

Lots of news but nothing material. Even HPQ's good news could not break Cisco out of its rut. Maintain the stop and hope big cap techs come back into favor.

Alert entry 11/12 @ $29.111

PPosition: 2009 $30 LEAP Call VYC-AF @ $5.00

Covered LEAP Calls

RIMM $113.85 6.28 Research in Motion *** Covered Call ***

RIMM is showing bullish signs again and resistance at $115 looks like it is about to be broken. Blackberry phones were said to be flying off shelves on black Friday and I see nothing to change this trend.

Alert entry 11/12 @ $29

Covered LEAP Call:

LONG RIMM currently $102.60
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50


LVS - $111.13 -7.46 Las Vegas Sands

The Sands fell sharply on Monday after Barrons did another of their famous hatchet jobs on WYNN and LVS. The analyst quoted in the story says he did not say the negative things Barrons printed. Barrons says they stand by the story and will print o retraction. Basically Barrons said to "Fold Em" when referring to holdig LVS and WYNN in your portfolio. Reportedly the analyst said the Macau casinos could be in trouble after the Olympics passes. The analyst claims he did not say that and still maintains a hold rating on both stocks. This will blow over. Barrons is famous for printing biased viewpoints based on half-truths. Evidently they believe that bad news still sells papers. No change in play.

Covered LEAP Call

LONG: 100 Shares LVS currently $117
SHORT: 2009 $140 LEAP Call ZAU-AY @ $20.00 No Stop

Leaps Trader Watch List

Dropped Entries


New Watch List Entries


Current Watch List

BHI - Baker Hughes

Cratered with the service sector despite a good outlook from the company.

Company Info:

Baker Hughes Incorporated supplies products and technology services, and systems to the oil and natural gas industries worldwide. It operates in two segments, Drilling and Evaluation and Completion and Production. The Drilling and Evaluation segment provides products and services used to drill and evaluate oil and natural gas wells. Its products include drilling fluids, completion fluids, drill bits, and fixed-cutter polycrystalline diamond compact bits. This segment also offers fluids environmental services; drilling and evaluation services, which include directional drilling, measurement-while-drilling, and logging-while-drilling services; and formation evaluation and wireline completion, and production services. The Completion and Production segment provides wellbore construction, cased-hole completions, sand control and wellbore intervention solutions, as well as offers oilfield chemical programs for drilling, well stimulation, production, pipeline transportation, and maintenance programs. The segment also provides electrical submersible pump systems and progressing cavity pump systems. In addition, the company offers permanent monitoring systems and chemical automation systems. Baker Hughes offers its products primarily through its sales organizations, as well as through supply stores, independent distributors, agents, licensees, or sales representatives. The company was founded in 1972 and is headquartered in Houston, Texas.

Breakdown target: $75

Buy 2009 $80 LEAP Call VBH-AP


DNR - Denbury Resources

Company Info:

Denbury Resources, Inc. engages in the acquisition, development, operation, and exploration of oil and natural gas properties in the Gulf Coast region of the United States, primarily in Louisiana, Mississippi, Alabama, and Texas. It holds interests in the Barnett Shale area in north central Texas; land and marshes of south Louisiana; and carbon dioxide reserves in the east of the Mississippi river. As of December 31, 2006, the company had 721 gross oil producing wells and 402 gross natural gas producing wells; and approximately 126,185 MBbls of proved oil reserves and 288,826 MMcf of proved natural gas reserves. Denbury Resources was founded in 1951 and is headquartered in Plano, Texas.

Breakdown trigger: $50

Buy June $60 Call DNR-FL


FLR - Fluor Corp

Company Info:

Fluor Corporation, through its subsidiaries, provides engineering, procurement, and construction and maintenance (EPCM) services worldwide. It has five segments: Oil & Gas, Industrial & Infrastructure, Government, Global Services, and Power. The Oil & Gas segment offers design, EPCM, and project management services to upstream oil and gas production, downstream refining, and integrated petrochemicals industries. It also provides consulting services ranging from feasibility studies to process assessment to project finance structuring and studies. The Industrial & Infrastructure segment provides design and EPCM, as well as consulting, planning, structuring, engineering, and construction management services to the transportation, mining, life sciences, telecommunications, manufacturing, commercial and institutional, microelectronics, and healthcare sectors with respect to new construction and refurbishment of existing facilities. The Government segment provides project management services to the United States government, focusing on the departments of energy, homeland security, and defense. The Global Services segment offers operations and maintenance, small capital project execution, site equipment and tool services, industrial fleet outsourcing, plant turnaround services, temporary staffing, materials and subcontract procurement, and construction-related support services. The Power segment provides EPCM, program management, start-up, and commissioning services to the gas, solid fuel, nuclear, and plant betterment markets. The company also operates independently and as a subcontractor, providing unionized management and construction services in the United States and Canada. Fluor Corporation was founded in 1912 and is headquartered in Irving, Texas.

Breakdown trigger: $125

Buy 2009 $140 LEAP Call XOB-AH


APA - Apache Corporation

Apache was upgraded to 5 stars by Morningstar in late August.

Company Info:

Apache Corporation is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. In North America, the Company's exploration and production interests are focused in the Gulf of Mexico, the Gulf Coast, East Texas, the Permian Basin, the Anadarko Basin and the Western Sedimentary Basin of Canada. It has interests in onshore Egypt, offshore Western Australia, offshore the United Kingdom in the North Sea (North Sea), and onshore Argentina. Its segments are the United States, Canada, Egypt, Australia, the North Sea and Other International. The Company also holds interests in many of its United States, Canadian and other international properties through operating subsidiaries, such as Apache Canada Ltd., DEK Energy Company (DEKALB), Apache Energy Limited (AEL), Apache International, Inc. and Apache Overseas, Inc. On January 6, 2006, the Company completed the sale of its 55% interest in the deepwater section of Egypt's West Mediterranean.

Breakdown trigger: $90

Buy 2009 $90 LEAP Call OWF-AT


RIG - Transocean Inc

Transocean is merging with Global Sante Fe (GSF), The merger is planned to be completed on Tuesday. This will be a much larger and more diverse company and something we should own.

Company Info:

Transocean Inc. (Transocean) is an international provider of offshore contract drilling services for oil and gas wells. As of February 2, 2007, the Company owned/had partial ownership interests in, or operated 89 mobile offshore and barge drilling units. Its fleet included 32 high-specification semisubmersibles and drillships (high-specification floaters), 20 other floaters, 25 jackups and four other rigs as of February 2, 2007. As of February 2, 2007, Transocean also had three high-specification floaters under construction. The Company s primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. Transocean also provides additional services, including integrated services.

No trigger until the RIG/GSF merger is done. The stock symbol will stay the same but the price will be materially different. We will enter after the deal closes.

Scheduled closing date it Nov-27th.


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