Option Investor

Weekly Newsletter, Saturday, 12/08/2007

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Table of Contents

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

Leaps Trader Commentary

Never a Dull Moment

The volatility in the expiring January contract has been huge and there are still six trading days before the contract expires. With $3 to $5 intraday moves this has been a moneymaker for traders and a heart breaker for those users trying to hedge their future crude purchases.

The OPEC meeting went about as expected with no change in output after prices fell -$12 in the week before the meeting. OPEC continues to claim there is plenty of oil and for the time being they are right. Prices on the January contract have support at $88 and again at $85 but some traders believe year-end volatility could see a retest of the $77-$80 range.

We need to remember that this is the heavy demand season in the northern hemisphere and that demand will begin to fade in early March. As that demand fades the refineries will begin to switch over to summer fuels and away from heating oil and winter blends. This is normally a price lull period before summer.

Personally I believe we had a great week even though crude prices were all over the map. We had four positions that gained more than $10 each and quite a few that gained several dollars each.

Changes for the week

The big news was the announcement by several companies of increased capex spending plans for 2008. This helped the service companies like FWLT and JEC but the good news rubbed off on almost everyone.

You would think with an 8 million barrel drop in inventory levels for the week we would be testing $100 once again. That massive drop was the 6th drop in 7-weeks for crude inventories and the largest drop in a year. Inventories are now 8.8% lower than the same period last year and at their lowest level since March 2005. Crude imports fell by 1 mbpd to 9.4 mbpd and that was the contributing factor in the inventory decline. The extreme fluctuations in imports suggests some challenge in shipping and that is likely to be reflected in a strong rebound next week as that supply chain overcomes the challenge.

Helping keep a lid on prices was a sharp spike in gasoline inventories by 4 million barrels. Gasoline demand is remarkably weak and 211,000 bpd below the same period in 2006. This is due to higher prices putting a crimp in driving habits. U.S. crude demand for September was 0.8% below year ago levels at 20.385 mbpd and the lowest month since April 2006. September was the 4th consecutive month of year over year declines.

Crude levels at Cushing OK rose by 2.5 million barrels over the last 3-weeks. This is the delivery point for WTI futures and that suggest purchases are weak.

On the geopolitical front Hugo Chavez was defeated in his dictator for life quest and that may signify the beginning of the end for his reign. He can remain in office until 2012 but with his ego bruised and opposition mounting he is not likely to be an additional threat to U.S. crude supplies any time soon. Inflation is running at 21% and crude production is down 1 mbpd since 2002. Given his recent nationalism of the oil fields and projects odds are slim that any outside firm will be willing invest time and money in the near future. Chavez is trying to get China, Russia and Iran to help him develop the Oronco heavy oil projects without much luck.

A highly controversial report claiming Iran dropped their nuclear weapon plans in 2003 removed some of the concern that the U.S. would move to attack Iran before the end of President Bush's term. This cooled tensions in the area and took some support away from oil. The report was major news on all the wires but the background is very unsettling. Turns out the author and his sources actually had no inside information and the details were gleaned from one high ranking Iranian defector that many think was a plant to focus attention away from Iran. The report has been labeled fictitious by many who have access to the background material..

OPEC officially assigned a quota to Angola and Ecuador, both newcomers to OPEC. Both had been operating without a quota since their entry. Angola was assigned 1.9 mbpd and just slightly over their current production of 1.8 mbpd. Angola said it had plans to increase production to 2.0 mbpd in 2008. Angola had said it would be happy with a quota of 2.5 mbpd but officials said that was 500,000 bpd more than expected real capacity. Ecuador was assigned 520,000 bpd and crimping that countries plans for expansion. Reportedly Ecuador plans on increasing capacity to 530,000 bpd by 2009 but private estimates say that is doubtful. Since Ecuador took over Occidental's operations in May-2006 output from those fields has dropped 15,000-20,000 bpd. They will find it difficult to obtain new investment in their fields after kicking OXY out of the country.

BBP and Husky Energy signed a $6 billion deal to partner in developing the Sunrise oil sands field in Alberta Canada. BP will gain 50% interest in Sunrise and Husky will gain a 50% interest in BP's Toledo oil refinery. The Sunrise field is expected to begin production in 2012 and build to 200,000 bpd by 2020 with a 40 year production plateau. This is a steam assisted gravity drainage (SAGD) operation. Pairs of wells are drilled with steam pumped into one thereby heating up the oil underground, which then flows into the second well for withdrawal. It is a slow and complicated method but oil will be $200 a bbl before they achieve full production so it is worth the effort.

The house passed an energy bill last week but it will be DOA in the Senate in its present form and Bush has vowed to veto it if it does make it out of the Senate. The bill changes the mileage standards to 35 MPG by 2020 and expands the biofuels mandate substantially but limit the amount that could be made from corn. It would also require utilities nationwide to produce 15% of their power from renewable sources. It includes new taxes on oil companies of more than $20 billion. Legislators just don't understand that higher taxes on energy companies will lead to less domestic exploration and higher prices at the pump. We need more exploration not less.

Jim Brown

January Crude Futures Chart - Daily

January Natural Gas Futures Chart - Daily

January Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Energy Plays

None - Full portfolio and potential oil weakness ahead

New Non-Energy Plays
ETFC E*Trade Financial *** Covered Call ***

Dropped Plays


New Watch List Plays Triggered
RIG $135.07 Transocean Inc

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

ETFC - E*Trade Financial *** Covered Call ***

E*Trade was crushed by news that they had a huge exposure to subprime loans and were taking a monster write-down. We all know E*Trade is not going out of business and will more than likely be eventually acquired by another broker. This is a smaller trade than I would normally profile but a reader brought it to my attention. Odds are very good this will end in better than a 86% profit and the cost of entry is minimal.

Buy ETFC currently $4.13
Sell Jan-2009 $5 LEAP Call OYN-AA currently $1.45

Profit if called: Premium 1.45 + appreciation .87 = $2.32
Cost of entry: $4.13 - 1.45 or $2.68
Profit = $2.32 / $2.68 or 86%

New Watch List Plays Triggered

RIG $135.07 - Transocean Inc

Transocean was declining so nicely into Wednesday's close I thought sure we would get the second half of our ideal entry at $120. Unfortunately it was not to be and the +$7 gain on Thursday squashed that idea. I am going to leave it as an open order but we should probably not expect it to happen.

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.

Transocean completed its merger with Global SanteFe (GSF) in late November and nearly doubled the size of the company and made it an even larger force to deal with when it comes to rig availability and pricing.

Initial breakdown trigger: Hit 12/4 @ $130

Position: 2009 $140 LEAP Call VOI-AH @ $15.80

Secondary trigger: $120

Buy 2009 $140 LEAP Call VOI-AH to average down


Play Updates

Existing Plays

JEC $94.08 +10.31 Jacobs Engineering Group

Another outstanding week for JEC. Business is breaking out all over and so is JEC with a new high. Another normal week in the news with JEC winning major contracts worth $160 million in India and lead vendor on a 360 million Euro development in Belgium.


Breakdown target: $80.00 Hit 11/12

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


COP $83.30 +3.26 Conoco Phillips *** Stop Loss $74.00 ***

Conoco broke out of initial resistance on favorable crack spreads and lots of news in the oil sector. The OPEC decision not to hike production suggested oil prices will go higher and that is always good for Conoco. Also, the current attempt at an energy bill has a carbon sequestration component that would make coal less desirable and natural gas more valuable. Conoco has the largest reserves of natural gas in North America much of which they got with the Burlington acquisition two years ago. $85 will be the next resistance test.

Breakdown target: $80 hit 11/12

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


CNQ $67.30 +1.83 Canadian Natural Resources

CNQ is finally starting to recover from the Canada tax news and their announcement they would drill far fewer wells in Canada because of the new taxes. $65 appears to have formed as decent support but we need a few positive days to show some conviction.

Entry 11/29: $66

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


CLB $119.52 +2.27 Core Labs

Oppenheimer initiated coverage of CLB on Wednesday with a buy rating. CORE is still clinging to the 100-day although from the bottom. We need to see a move back over $122 and the 90-day average for buyers to return. Core is not tied directly to the price of oil. The selling by funds appears to have ended but caution prevails.

Breakdown Trigger: $130 11/12

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


FTI $58.21 +2.63 FMC Technologies *** Stop Loss $49 ***

FMC finally starting to gain momentum after news broke on Wednesday that they had been picked to supply 15 deepwater subsea trees for Petrobras. The single order was worth more than $34 million. That tells you how expensive deepwater development really is. Each tree, named for all the various pipes splitting off of it, is worth more than $2 million. This is very high tech stuff that must not only operate but survive under 10,000 feet of water.

Breakdown Trigger: $57 hit 11/12

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


PBR $106.71 +10.41 Petrobras *** Stop Loss $92 ***

PBR announced a light crude and natural gas find off the coast of Espirito Santo in 2500 feet of water and about 10,000 feet under the ocean floor. The news broke PBR out of its consolidation phase and propelled it back to recent resistance. With things looking up for PBR in almost every exploration effort this could be the start of the next big move.

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 $67.19 +3.77 Shaw Group *** Stop Loss $55 ***

Shaw reported a troubled quarter where they took a non cash currency loss of $52 million for an investment in Westinghouse. Without the charge revenue rose +40% and the backlog now up +57% from the same period last year to $14.3 billion is nearly triple the $5 billion market cap of the company. The charge knocked the stock for a -$3 loss at the open on Thursday but it rebounded to gain +$2. Now we need to see those gains extended. We had a nice positive trend for the last seven days so lets hope that continues.

LEAPs Alert Entry 11/12 @ $61

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


FWLT $165.48 +16.48 - Foster Wheeler

FWLT has soared +35 in the last two weeks and hit a new all time high this week. There was no specific news but we are definitely not complaining.

The board 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 $202.93 +11.19 - PetroChina *** Stop Loss $170 ***

PTR finally broke out of its consolidation phase and back over $200 once again. With fuel shortages in China the government is considering letting prices rise to current market levels. That would end current subsidies and help to promote conservation. China is still reluctant to do it ahead of the Olympics for fear it will cause civil unrest. It seems certain that PTR will benefit from the rise in fuel prices and with the Asian markets rebounding we could move higher from here.

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

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


XOM - $91.50 +2.34 Exxon Mobil

Exxon hit a new 4-week high last week and is approaching its all time high of $95. Most of the gain was due to rising crack spreads but Exxon is also seen as a must own Dow stock and with the Dow spiking traders go for the relative safety of Exxon.

Breakdown trigger: $88 Hit 11/01

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


CAM - $98.68 +5.45 Cameron International *** Stop Loss $90 ***

CAM broke resistance at $96 and is knocking on the new resistance door at $100. If it were not for a couple insider sales reported this week I think it would have already broken out. The sales were trivial with two officers exercising options on a total of 8,333 shares but it still made the news. No change in play.

Breakdown target: $95 Hit 10/30

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


SLB $97.19 +3.74 - Schlumberger

SLB blew through 4-week resistance at $95 on Wednesday and $100 is likely to be the next stopping point. No other specific news.

Breakdown target: $95.00 hit Oct-22nd

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


CVX $90.96 +3.19 - Chevron

CVX spiked higher on news they would spend $3 billion more in capex in 2008 than originally planned. The total for 2008 is now expected to be $22.9 billion. Chevron said exploration is now much more expensive than in years past due to the harsher locations and higher cost of equipment and labor. Cambridge Energy Research Associates said exploration is now almost double the prices seen in 2005. Rigs are scarce and there is a rush to develop. Chevron said its Blind Faith field in the Gulf and its Agbami field in Nigeria will begin production in 2008.

Breakdown trigger: $87 hit Oct-22nd

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


OII $71.52 +7.71 Oceaneering International

When I dropped HERO last week I made a decision about the two companies as both were going nowhere fast. There was no reason for the lackluster performance but after reviewing them both I decided to drop HERO and keep OII. Wow, was that the right decision! OII suddenly spiked +$8 and HERO broke support and fell -$2 on Tuesday. I wish I could say it was super human sleuthing on my part but it was more a judgment call based on the fundamentals and market cap of the two companies. I thought OII was the better choice and a strong possibility as an acquisition target. Let's hope this theory continues to hold true.

Earnings Nov-1st: +40%

Breakdown trigger: $72 hit on Oct-22nd

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


NOV $73.52 +5.37 - National Oilwell Varco

NOV finally developed a trend and that trend is up! The resistance at $68 was broken and then used again as support last Friday the resulting +$6 gain was on no news although I heard them mentioned several times on CNBC.

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

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


MDR - $55.60 +3.30 McDermott Intl *** Stop Loss $45 ***

McDermott announced it won the contract to build two steam generators for the 889 megawatt Davis-Besse nuclear power plant in Ohio. There was no other news.

Earnings: Nov 8th, +37%

Breakout trigger: $53, hit 9/20

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


UPL $67.91 +3.01 - Ultra Petroleum *** Stop Loss $62 ***

UPL spiked up on the -88 bcf drop in gas storage levels. This was twice what analysts had expected. They should also benefit from any future energy bill although that could be months away. They will also benefit from the completion of the Rockies Express pipeline that will take the Utah/Wyoming gas to the East Coast for consumption at higher prices than UPL currently is able to get. No complaints. No news.

Breakdown target: $52.50 Hit 8/30

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


CHK $38.37 +.52 Chesapeake Energy

CHK was named the Hydrocarbon Producer of the year at the 9th annual Platts Global Energy Awards program in New York. They were also named the 14th fastest growing energy company of the Platts Top 250 Global Energy Companies. Unfortunately all that positive press failed to push CHK over resistance at $38.50. In fact short interest climbed from 40 million shares to 50 million over the past week.

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 $36.43 +1.88 Helmerich & Payne *** Stop Loss $29.50 ***

HP finally began moving higher from the prior two weeks of consolidation from the mid-November spike. Hopefully this return to its recent highs will result in a new breakout into blue sky territory. No news.

Earnings: Nov-15th, +18%, beat 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


BHP - $77.00 +1.17 BHP Billiton ** Stop Loss $60.00 **

According to Rio-Tinto the BHP bid is dead in the water and they refuse to even discuss the deal with BHP. This may have been the impetus behind a rise to new 3-week highs on BHP. If the deal is dead then the implied confusion would evaporate.

Breakdown target: $55 hit 8/15/07

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

Non-Energy Positions


Covered LEAP Calls

RIMM $103.65 -10.17 Research in Motion *** Covered Call ***

RIMM has returned to where we entered the play but since this is a covered call there is no harm and we continue to bide our time. I believe the RIMM bashers will be proved wrong once again.

Alert entry 11/12 @ $102.60

Covered LEAP Call:

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


LVS - $118.88 +5.48 Las Vegas Sands *** Covered Call ***

No material news on LVS but Thursday saw a sharp spike to a new 2-week high. 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


New Watch List Entries
None - New triggers and strikes on existing 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: $80 *** New trigger ***

Buy 2009 $90 LEAP Call VBH-AR *** New Strike ***


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: $53 *** New trigger ***

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: $145 *** New Trigger ***

Buy 2009 $160 LEAP Call XOB-AL *** New Strike ***


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