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Weekly Newsletter, Saturday, 12/01/2007

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Table of Contents

  1. Commentary
  2. Changes in Portfolio
  3. Portfolio Listing
  4. Top Ten List
  5. Existing Plays
  6. Watch List

Leaps Trader Commentary

Volatility With A Capital V

Wow, what a whipsaw ride! Crude fell from 99.10 on Monday to close at 88.65 on Friday. It was far from a straight drop. On Wednesday there was spike in the downtrend to 95.22 followed by a $5 dip to 90.34 and a quick spike back to 95.17. Yes, -5, +5 in the same day only to be followed by a gut-wrenching drop from 95.17 to 88.52 (-6.65) by the next morning. The loss for the week was the largest single week drop in over two years.

The comments out of OPEC early in the week about discussing new production hikes got the ball rolling. That meeting is next Wednesday and with an $11 drop in crude prices that production hike is probably just wishful thinking today. The price hawks Iran and Venezuela will be screaming for production to stay the same and no self-respecting OPEC minister is going to vote to push prices lower. I expect plenty of whining about plenty of oil in the market and speculators causing the volatility in prices. Surely they will not want us to believe it is OPEC's fault!

The Saudi Oil Minister Ali Al-Nuaimi was adamant on Wednesday that the world oil market was well supplied and that high prices did not properly reflect the supply-demand situation. "There is no relationship between the fundamentals today and the high price of oil. Fundamentals do not support high oil prices," he said in a speech. He refused to discuss the potential for a production hike saying the ministers would first have to look at the data. The Libyan minister said no increase was necessary and the Kuwait minister said they would vote for a hike only if the data required it. I would not hold my breath. If Saudi does not want an increase it probably will not happen.

OPEC president, Mohammad al-Hamli said on Wednesday the cartel would invest more than $150 billion by 2012 on more than 120 projects including large refineries to expand output. This should be a clue they are stressing at current production levels. Would you invest $150 billion over the next five years if you had plenty of production available? You would probably invest the money but probably not in a crash program.

On Thursday that big price spike was due to an explosion and fire at the main Enbridge Canada-to-U.S. pipeline in Minnesota. The pipeline system can carry about 1.8 mbpd of Canadian crude into the U.S. market. The explosion in the largest line killed two workers and shutdown three lines for some time. Originally it was expected to take weeks to restore production but Enbridge was quick to jump on the problem and 80% of production was already restored by Friday. The rest was expected to be restored over the weekend or early next week at the latest. As John Kilduff said we went from losing all the Canadian production for weeks to having it fixed in a day. That produced the $5 spike and drop on Thursday.

Hurricane season is officially over with only one hurricane hitting U.S. shores. That hurricane was Humberto, which hit Texas and Louisiana with peak winds of 90 mph. Damage was light and estimated at $50 million. There were 14 named storms of which six became hurricanes. Only two, Dean and Felix, rose to category 3 or higher. That is two years in a row without a major hurricane making landfall or worse ripping through the oil patch. What are the odds of stretching that to three?

Alaska got five proposals to build a massive natural gas pipeline from Alaska's north slope to the U.S. markets. The proposals were submitted under the Alaska Gasline Inducement Act passed by the legislature earlier this year. Friday was the deadline for submissions. The cost of the pipeline has been rising yearly as various companies and state agencies argued on how and where to build it. Conoco submitted a plan calling for a $42 billion investment to build it. Alaska has had problems getting oil companies to want to build it given the volatility in gas prices. At $4 it would not be profitable in our lifetime and nobody wanted to take that risk. The North Slope reportedly has over 35 tcf of gas reserves and most analysts think that number will grow once actual production begins and reserves can be more accurately determined. Some believe the additional reserves could be several times bigger than the 35 tcf estimate. The pipeline is expected to transport around 4 bcf to the U.S. every day or roughly $28 million in gas every day.

When OPEC met to discuss goals in November they issued a statement that said many things but most of all they want to maintain stabilized prices. When oil prices go up demand goes down. Some analysts expect the current high prices to depress demand by 3 mbpd by next summer. I am not in that camp but I do expect prices to slow demand growth. OPEC is focused on increasing spare capacity so short-term problems in any one or two OPEC members can be made up by the rest. They are reportedly trying to raise capacity by 1 mbpd every year for the next five years. I wish them luck. The table below compares capacity and production from just 5-years ago with capacity and production today. Overall capacity has fallen roughly 500,000 bpd. Production has increased 3.245 mbpd and spare capacity, the component that matters most, fell by 3.74 mbpd. The squeeze is on and OPEC is struggling to maintain its outward appearances while racing to try and create more capacity. By the table below it looks like they are losing the race. The spare capacity total for July 2007 is 2.395 mbpd but we have seen in recent months that OPEC could not even meet its scheduled production goals do to problems in multiple countries.

OPEC Capacity Table

According to Baker Hughes (BHI) the number of active rigs in the U.S. rose by 50 last week to 1,823. Of the rigs actively drilling nationwide 1,463 were exploring for natural gas and 354 for oil. Six were listed as miscellaneous. The rig count for the same period in 2006 was 1,171. The all time high was 4,530 in 1981 during the post OPEC embargo oil boom. The record lows were 488 in 1999 when oil declined to $10 a barrel on Saudi Arabia's glut play. Rigs were being cut up for scrap steel rather than pay storage on them. Amazing how times change from one decade to the next.

Last week we were stopped out on several plays and one was Canadian Natural Resources (CNQ). I did not have a stop on the play description but there was one listed on the portfolio listing. That was a bookkeeping error on my part and I took the exit even though it was in error. I also sent an email alert suggesting a reentry the following day.

The refiners were hit hard and that took us out of VLO and MRO. Ironically cheaper oil will help return them to profitability by increasing the crack spread. The last two days they have risen on that prospect.

Transocean (RIG) completed its merger with Global SanteFe (GSF) on Tuesday and the stock did not sell off as expected. The RIG symbol was retained and the merged company was forced to sell to overseas rigs to comply with EU terms. RIG is now the dominant offshore driller worldwide and should be able to raise its rates in the absence of credible competition. I want to be in RIG but with oil correcting I am still hoping for a lower price.

I am looking for crude to test $85 but if OPEC fails to hike production I think it will rally again. The normal price cycle is broken this year and the winter demand months are already upon us in terms of buying oil to produce heating oil. The next cycle would normally be a drop in price in March/April then a rebound into summer. December and January have historical volatility due to the tax window on Dec-31st. The ideal scenario for us today would be for OPEC to not raise production and put a floor under prices into the pre-summer rally.

I am adding a new feature this weekend. I continually get requests for my top three stocks or the best five to enter on a dip or if I could only buy 10 who would they be. Those are good questions and I know it is a daunting task to pick out a handful of plays from the current list of more than 20 recommended positions. To make this easier I am going to add a top ten list and potential entry prices. If you are looking to add a position that would be the best place to look. You need to pick a LEAP strike that corresponds with the entry point you choose. The newsletter will continue to track its initial position and not any subsequent top ten entry points.

Jim Brown


January Crude Futures Chart - Daily

January Natural Gas Futures Chart - Daily

December Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays
CNQ Canadian Natural Resources
Reentry of a stopped position. See update list for details.

New Non-Energy Plays

None


Dropped Plays
CSCO Cisco Systems *** Stopped $27.00 ***
VLO Valero Energy *** Stopped $64.00 ***
MRO Marathon Oil *** Stopped $53.50 ***
HERO Hercules Offshore *** Dropped ***
CNQ Canadian Natural Resources *** Stopped $70 ***

New Watch List Plays Triggered

None


Portfolio Listing & Top Picks


Top Ten List


New Plays

Most Recent Plays

If you are looking to add another position this is my top ten list for this week. The target prices listed would be the ideal entry points for these stocks today. There is no assurance any stock will ever return to these support levels and you will need to make your own decision about an entry point above these levels. I believe these stocks have the best potential this week. The list will change from week to week based on technicals, fundamentals, crude prices and market action. The list is not sorted in any particular order.


Play Updates

Existing Plays

JEC $83.77 +6.16 Jacobs Engineering Group *** Stop Loss $73 ***

Outstanding week for JEC. A +$6 gain on a crash in oil prices. Definitely no complaint here. Support at $75 held and JEC was a favorite in the Fed bounce. Another normal week in the news with JEC winning four major contracts.

No LEAPS

Breakdown target: $80.00 Hit 11/12

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

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

VLO $65.10 -.86 Valero Energy *** Stopped $64.00 ***

Valero may have only lost 86 cents for the week but that Mon/Tue drop of more than $5 killed us. We were stopped out at $64 on its way to $60.80 and the rebound put it right back into congestion. We have so many positions we will pass adding a refiner back to the list and wait for crack spreads to improve before doing it again.

Breakdown target: $67.50 Hit 11/12

Position: 2009 $75 LEAP Call VHB-AO @ $10.00, exit $8.00 11/26

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

COP $80.75 +1.63 Conoco Phillips *** Stop Loss $74.00 ***

That was really close. Conoco declined to $74.21 and only missed our stop by 21 cents before rebounding to close at a new two week high. Conoco submitted a stand alone bid of $42 million to build the Alaskan pipeline. They stand to make a bundle if they can get it done. It would be a decade long endeavor.

Breakdown target: $80 hit 11/12

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

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

MRO $55.90 -.47 Marathon Oil *** Stopped $53.50 ***

Same story as Valero. Refiners were crushed early in the week and then rebounded on cheap oil.

Breakdown target: $57 Hit 11/13

Position: 2009 $65 LEAP Call VXM-AM @ $7.50, exit $5.75 11/27

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

CNQ $65.47 -7.32 Canadian Natural Resources *** Stopped $70 ***
Reentered at $66 on 11/29

CNQ dropped sharply on Tuesday in response to a new release saying they would cut natural gas drilling in Canada by 44% due to the harsh new tax laws recently enacted. They also said they would reduce capital expenditures from $6.47 billion to $4.5 billion due to the shutdown of drilling. Their oil forecast was significantly higher but traders ignored it. I believe the Canadian tax plan will be revised. Almost every energy company in Canada has slashed drilling plans and that is going to thwart Canada's plan to raise taxes by $1.6 billion per year in the energy sector. It appears that most companies are slashing exploration by about 50% and that has got to hurt not only future expected tax revenues for Canada but current revenues as well.

Breakdown Trigger: $75.50 11/12 email alert

Position: 2009 $90 LEAP Call OKR-AR @ $9.10, exit $6.50, 11/27

New entry 11/29: $66

New Position 11/29: 2009 $90 LEAP Call OKR-AR @ $6.50

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

CLB $117.25 -9.38 Core Labs

Now that was painful! On no news Core Labs collapsed by -9 to trade below its 100-day average at $120. Core was a favorite momentum stock and is paying the price as traders took profits from the +75 gain since April. CORE is still clinging to the 100-day although from the bottom. Core is not ties directly to the price of oil so once the funds quit their momentum selling we should see a rebound begin.

Breakdown Trigger: $130 11/12

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

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

FTI $55.58 -.18 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 $96.30 -4.48 Petrobras *** Stop Loss $87 ***

PBR support eroded to $95 from $100 but it is still holding the high ground and the majority of its gains from late October. It is still over our entry point so no harm, no foul. Petrobras announced plans to build 42 ships including tankers, gas transport and service ships. They already have 59 ships it owns and 56 chartered. The program will cost $2.5 billion and require 400,000 tonnes of steel. It has already been delayed for a year do to a lack of available steel.

LEAPs Alert Entry 11/12 @ $95

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

Position: 2009 $110 LEAP Call XVQ-AB @ $10.00

Alert on 11/2 recommending an immediate entry into the $110 LEAP. The prior recommendation had been calling for an entry into the $90 LEAP on a dip to $80. The correct LEAP for the current position is the $110 LEAP.

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

SGR $63.42 +3.57 Shaw Group *** Stop Loss $55 ***

Shaw is continuing to hold over the 100-day average and even managed to rebound $8 off the Monday drop. They will report earnings on the 4th so be warned.

LEAPs Alert Entry 11/12 @ $61

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

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

FWLT $149.00 +14.00 - Foster Wheeler

FWLT blasted off to a monster $14 gain on no news. The double test of the 100-day average was met with a monster rebound and that pushed FWLT to within $10 of its prior high. Definitely no complaints here.

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

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

PTR $191.74 +6.94 - PetroChina *** Stop Loss $170 ***

PTR continues to be range bound between $180-$200 and closed right in the middle of that range. No specific news and no change in play. PTR is still well above the 100-day average, which has appeared to be support on many of the other positions.

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

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

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

XOM - $89.16 +.87 Exxon Mobil

Exxon closed near a new 3-week high on Friday as refiners got a boost from cheap oil. Once over resistance at $90 we could see a new trend emerge.

Breakdown trigger: $88 Hit 11/01

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

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

CAM - $93.23 -1.00 Cameron International *** Stop Loss $83 ***

After a three week rebound CAM finally gave into some profit taking on Friday. Resistance has formed at $96 and it may take a rebound in oil to break it. No news and no change in play.

Breakdown target: $95 Hit 10/30

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

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

SLB $93.45 -.66 - Schlumberger

SLB is still fighting resistance at $94. No other specific news.

Breakdown target: $95.00 hit Oct-22nd

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

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

CVX $87.77 +1.10 - Chevron

CVX like Exxon is moving towards resistance at $88 and a break here could end the two-month downtrend. No specific news. Still no stop.

Breakdown trigger: $87 hit Oct-22nd

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

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

OII $63.81 -2.25 Oceaneering International

No news and no movement. I am tempted to close OII but they are a takeover target and the lack of movement is working for both sides. This would be a good spot for somebody to make an offer.

Earnings Nov-1st: +40%

Breakdown trigger: $72 hit on Oct-22nd

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

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

NOV $68.15 +.09 - National Oilwell Varco

NOV benefited from a Citigroup upgrade to a buy on Thursday and found resistance at $70. Still holding over the 100-day average this is the new challenge for NOV.

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

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

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

MDR - $52.30 +5.05 McDermott Intl *** Stop Loss $45 ***

Nice rebound! The service sector stocks really found some buying interest in the Fed rally. Let's hope they keep it.

Earnings: Nov 8th, +37%

Breakout trigger: $53, hit 9/20

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

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

UPL $64.90 -1.63 - Ultra Petroleum *** Stop Loss $62 ***

$7 gas crushed the gas drillers on Thr/Fri. Still holding over support at $64 and the drop in gas prices should not be long. Cold weather is coming. No complaints. No news.

Breakdown target: $52.50 Hit 8/30

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

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

CHK $38.13 -.28 Chesapeake Energy

Stifel Nicholas initiated coverage on Thursday with a BUY rating. The CEO Aubrey McClendon was in the market buying shares again to the tune of 50,000 on Wednesday. We can't complain when the CEO is accumulating stock.

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 -.28 Helmerich & Payne *** Stop Loss $29.50 ***

HP continues to hold near 4-month highs after beating earnings in November. Big gains in other service stocks have failed to power HP this week but they are still consolidating from a 15% move in the prior week.

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 $25.02 -.99 Hercules Offshore ** Dropped **

No movement when other service companies were trending higher, some at a fast pace is causing me concern over HERO. I am dropping it today.

Earnings Oct-30th. +63%

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

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

BHP - $72.82 +3.01 BHP Billiton ** Stop Loss $60.00 **

Analysts are warming up to the Rio Tinto acquisition and BHP rebounded +6 from last week's lows. No specific news.

Breakdown target: $55 hit 8/15/07

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


****************************
Non-Energy Positions
****************************

CSCO $28.02 -.67 Cisco Systems *** Stopped $27 ***

Tech drop took us out and Cisco is not showing any positive trend.

Alert entry 11/12 @ $29.11

Position: 2009 $30 LEAP Call VYC-AF @ $5.00, exit $4.00 11/27


****************************
Covered LEAP Calls
****************************

RIMM $113.82 +0.03 Research in Motion *** Covered Call ***

RIMM lost $8 on a Friday downgrade but was still up +03 for the week. I am still a believer and I think support at $110 will hold unless the market implodes.

Alert entry 11/12 @ $29

Covered LEAP Call:

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

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

LVS - $113.40 +2.10 Las Vegas Sands

Still consolidating between $105-$120 for four straight weeks. No reason to fear here so we will stick with it. LVS announced a new high speed ferry service between Hong Kong and Macau. No change in play.

Covered LEAP Call

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


Leaps Trader Watch List

Dropped Entries
APA Apache Corporation

New Watch List Entries

None - I looked at several hundred possibles but none were worth the risk today. I added a trigger on RIG and changed the trigger on Fluor.

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: $135 *** New Trigger ***

Buy 2009 $150 LEAP Call XOB-AJ *** New Strike ***

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

RIG - Transocean Inc

Transocean completed its merger with GSF on Tuesday and now has an enterprise value of $53 billion and an order backlog of $33 billion. The combined company now has over 140 rigs and is the largest fleet in the industry.

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.

Ideally we would like to get an entry back at $120 but that may be only wishful thinking. I am going to stagger two entries to average cost in case we do get that big of a drop.

Initial breakdown trigger: $130

Buy 2009 $140 LEAP Call VOI-AH

Secondary trigger: $120

Buy 2009 $140 LEAP Call VOI-AH
 


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