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Weekly Newsletter, Saturday, 12/15/2007

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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

Beginning of the End?

Wednesday's +$4 spike in crude may have been the beginning of the end. Support at $88 held for over a week before the rebound appeared but I suspect it will be tested again. The spike was caused by a continued fall in crude inventories, news that the Houston ship channel had been closed for several days due to fog, shutdowns at two refineries due to fire and a dozen other minor news events. None of these factors have any long-term impact on crude prices. They are just transient events on a slow news week for the energy sector.

The biggest factor in the increased volatility is next Tuesday's expiration of the current January futures contract. Volume in the contract is slowing as institutional traders clear the decks for the holidays. They don't want to be worried about watching tens of millions in open crude positions while they are sitting with their family around Christmas dinner. With no major crude movers like OPEC meetings or other geopolitical events currently making waves the interest level crude trades is waning. Once the holidays are over that will probably change as momentum traders move back into the market. However, this move out of crude for the holidays and the resulting low volume could make any unexpected event even more volatile than normal.

There are some bearish events headed our way for oil prices. The UAE has had 600,000 bpd of production shut in due to maintenance problems for over a month and that is coming back online this week. You may remember that Saudi Arabia bumped production up by +600,000 bpd for six weeks. That was supposedly to offset the maintenance by the UAE. The real question now is whether or not Saudi continues to produce at that level or takes it back offline. Saudi reportedly argued (although weakly) to boost production by 500,000 bpd at the last OPEC meeting. Whether that was a political event meant to calm the U.S. or a real desire to boost production we will never know. They are in position to continue to produce at that higher level on an unofficial basis. It remains to be seen if they will do it in defiance of their quota.

The New York Times had an article last week warning that several major oil exporting countries would turn into importers within a decade. This is not new data and I wrote about it in my year-end oil report. Mexico is the number two source for U.S. oil imports and they could stop exporting within five years. The Times also said rising Saudi demand could consume all the 40% increase in production they feverishly working to add by 2010. The Times pointed out that internal consumption by the five biggest oil exporters, Saudi, Russia, Norway, Iran and UAE, grew by 5.9% in 2006 and are on track for a similar boost in 2007. The Times went on to say that this change in demand and production was not going to be critical since expanding production from places like Canadian oil sands and new exploration in places like Iran, Iraq and Venezuela could offset the drop. Unfortunately they did not pickup on the fact that Iran was probably going to cease being an exporter within a decade due to rapidly rising internal consumption and serious declines in their aging fields. If they did start a major drilling and infrastructure upgrade program they could bring more oil to market in 5-7 years but nobody wants to invest money in Iran until the current nuclear sanctions are removed. Venezuela has lost 500,000 bpd of production over the last three years from declines in production, equipment breakdowns and lack of money being devoted to exploration and maintenance. Chavez is taking all the cash flow to pay for social programs so he can stay in power. They have not produced to quota in over five years and OPEC just reduced their quota to better match their falling production. Iraq is about the only country that could bring significant additional production online but they have to end the daily sabotage first then spend tens of billions to renovate the oil fields, combat damaged infrastructure and begin drilling again. All of that could probably happen by 2015 but with peak oil currently targeted for 2009-2011 it will be too little, too late.

China's booming economy is undergoing a serious fuel crisis. The government has ordered state owned oil companies Sinopec, Petrochina and CNOOC, to produce as much diesel as possible. They offered additional subsidies for refiners and scrapped oil import duties. Diesel imports were 2 mbpd in November and are expected to rise to 3 mbpd in December and 3.7 mbpd in January. These increases will only relieve the most immediate shortage because passenger car sales have risen by 23% in the first 11 months of 2007. Heavy-duty truck sales have increased 600% in the last 5-years alone. 10 years ago there was barely 5 million cars and trucks in all of China. Today there are over 50 million and that number is expected to hit 200 million by 2020.

Cuba has invited Russia to explore for oil in Cuban waters in the Gulf of Mexico. Is Castro ever going to die so Cuba can return to some kind of natural relations with the U.S? Letting American companies explore those waters makes so much more sense given the close proximity of U.S. infrastructure and density of firms willing to explore.

A key rebel leader in Darfur has targeted oil installations as military targets. He especially targeted those run by Chinese oil companies.

The WSJ reported that Nigeria, Africa's largest oil producing country is planning an overhaul of its petroleum industry. The president of Nigeria proposed creating a national oil company to manage the country's oil and gas resources and limiting the influence of foreign oil companies. This is yet another nationalism move that will limit Nigeria's ability to increase production if the move comes to pass. We have seen this in country after country. Nationalized oil companies simply don't have the same goal to raise production. They take the cash out of the sector to fund social programs. Nigeria has halted about 900,000 bpd of crude production due to continuing violence in the region.

Exxon and BP agreed to comply with production restrictions imposed on Angola after OPEC set a production cap on its output.

I am looking for activity in the energy stocks to calm down over the next two weeks as holiday trading goes dormant. Without a new geopolitical event the move from the January contract to February on Tuesday could be the last major bit of volatility until the new-year. As such I do not expect anything newsworthy for the individual stocks in the portfolio. We did return to contango in the futures and that could be another indication of the decline in volatility over the next two weeks.

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
VLO $66.63 Valero Energy

New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered
FLR $143.85 Fluor Corp

Portfolio Listing & Top Picks


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Top Ten List
****************

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.

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I booted Conoco from the list to bring it back down to ten. I added the color coding with yellow meaning they are very close to those entry levels and green meaning they are at the target level.


 


New Plays

Most Recent Plays

VLO $66.63 - Valero Energy

The outlook for refiners has changed since we were stopped out of the Valero position several weeks ago. Goldman upgraded Tesoro (TSO) and Holly (HOC) to their America's Buy List last week. Both are great little companies but HOC does not have LEAPS and TSO only refines 600,000 bpd. Valero should always be our pick in a positive refining scenario since they are the largest in the U.S. but also have the largest capability to refine heavy sour crude. They buy this oil for $10-$12 less than the light sweet crude currently in heavy demand. This gives them a guaranteed profit when other refiners are just breaking even. They also have 5,800 of their own service stations giving them a retail component as well.

Company Info:

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.

Buy 2009 $70 LEAP Call VHB-AN currently $9.20


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New Watch List Plays Triggered
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FLR - $143.85 Fluor Corp

We saw a decline in FLR from the $160 high on Monday to trigger our $145 entry on a breakdown on Thursday. This is just above strong support of the 100-Day average at 139 and decent support from the November dip lows. If the market continues lower it would provide an excellent opportunity to average down.

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 Hit 12/13

Position: 2009 $160 LEAP Call XOB-AL @ $22.30


 


Play Updates

Existing Plays

RIG $136.00 +0.93 - Transocean Inc

Transocean hit a new historic high on Tuesday and that kept them from posting a loss for the week after they declined with the market into Friday's close.

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

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JEC $95.31 +1.23 Jacobs Engineering Group

Not another stellar week for JEC but they did notch a new high on Friday and after +$20 gains over the last three weeks we are not going to complain.

No LEAPS

Breakdown target: $80.00 Hit 11/12

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

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COP $83.29 -.01 Conoco Phillips *** Stop Loss $74.00 ***

Still holding at 3-week highs on no news.

Breakdown target: $80 hit 11/12

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

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CNQ $68.38 +1.08 Canadian Natural Resources

Still holding at 3-week highs on no news. Encana reported it was going to focus more on U.S. gas production instead of Canadian. CNQ and ECA had previously said they would reduce drilling in Canada after the government sharply raised taxes a couple months ago.

Entry 11/29: $66

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

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CLB $123.32 +3.80 Core Labs

CLB posted a decent gain for the week despite a -$4 post Fed drop. CLB appears to have found a bottom from its recent slide and hopefully that $120 level will be a base to launch a new rally in January.

Breakdown Trigger: $130 11/12

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

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

FMC won a new Statoil contract for subsea gas compression. It was small potatoes at $35 million but every little bit helps. FTI is still maintaining upward momentum out of the November dip.

Breakdown Trigger: $57 hit 11/12

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

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PBR $107.33 +.62 Petrobras *** Stop Loss $92 ***

After spiking to $114 on Wednesday on news of yet another discovery the weak market brought it back down to what is becoming support at $105. After a $20 spike over the last two weeks we have no complaints.

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.

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SGR $59.29 -7.90 Shaw Group *** Stop Loss $55 ***

This was a rough week for Shaw with investors knocking $10 off the stock from last week's highs. The only news was a notice of sales by the companies three top officers totaling 320,000 shares. I suspect this was more profit taking and tax selling rather than some new unknown event. $58 should be support.

LEAPs Alert Entry 11/12 @ $61

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

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FWLT $159.80 -5.68 - Foster Wheeler

After +35 in the prior two weeks we are perfectly happy with a -5 drop. There was no news.

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

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PTR $181.81 -21.12 - PetroChina *** Stop Loss $170 ***

Now that was really painful. There was no news specific to PetroChina and the brunt of the selling was due mostly to the nearly 300-point decline in the Chinese market. The Shanghai Index fell from 5209 on the 11th to 4964 on the 13th. The drop from 6200 to 4800 since Oct 16th has Chinese investors spooked. There was a two-week rebound after the bottom at 4800 on Nov-28th and it appeared investors sold the bounce when the inflation numbers roiled the market. $180 should be support for PTR.

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

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

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XOM - $91.18 -.32 Exxon Mobil

Exxon still holding near a 6-week high even with the Dow tanking. No specific news.

Breakdown trigger: $88 Hit 11/01

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

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CAM - $95.71 -2.97 Cameron International *** Stop Loss $90 ***

CAM eased off its highs as profit taking gripped the market. There was no news of note other than shareholder approval of a 2:1 split for the end of December. No change in play.

2:1 Stock split 12/28 to holders of record on 12/17

Breakdown target: $95 Hit 10/30

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

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SLB $94.57 -2.62 - Schlumberger

SLB announced their earnings schedule for Jan-18th. No other specific news as the stock declined with the post Fed markets.

Breakdown target: $95.00 hit Oct-22nd

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

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CVX $92.02 +1.06 - Chevron

No specific news but Chevron rose as several of the refiners were upgraded. Chevron is holding near a 6-week high.

Breakdown trigger: $87 hit Oct-22nd

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

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OII $69.42 -2.10 Oceaneering International

+$7, -$2, I will take those alternating weeks for the rest of the year. OII is holding right on the 100-day at $69. Let's hope it stays there.

Earnings Nov-1st: +40%

Breakdown trigger: $72 hit on Oct-22nd

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

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NOV $77.37 +3.85 - National Oilwell Varco

National's trend continued for the third week and another 6-week high. A break over $80 should really trigger some buying interest. No news.

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

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

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MDR - $57.54 +1.94 McDermott Intl *** Stop Loss $45 ***

McDermott announced it won a contract with Pmex to build the Maloob-C Drilling Platform in 269 feet of water in the Bay of Campeche, Mexico. The platform will support 18 wells and weigh over 5,800 tons when completed in early 2009. 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 $69.44 +1.53 - Ultra Petroleum *** Stop Loss $62 ***

UPL spiked to more than $72 and a new high on Wednesday but declined with the market to only a minimal gain for the week. No news.

Breakdown target: $52.50 Hit 8/30

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

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CHK $38.21 -.16 Chesapeake Energy

No news and no move. Just holding its gains for the prior two weeks.

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 $36.36 -.07 Helmerich & Payne *** Stop Loss $29.50 ***

HP hit a new high on Wednesday before losing -$2 on the Friday swoon. There was a good article on companies using HP rigs to drill 20 wells per pad to cut down on costs.

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

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BHP - $71.07 -5.93 BHP Billiton ** Stop Loss $60.00 **

BHP refuses to let the Rio Tinto deal die and reiterated last Thursday that it is still in the fight to force RTP shareholders to take their 3:1 offer. Unfortunately worries that BHP could raise the offer of waste precious time and money in the battle caused shares to drop about $8 from the week's high.

Breakdown target: $55 hit 8/15/07

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


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Non-Energy Positions
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None


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

RIMM $105.98 +2.33 Research in Motion *** Covered Call ***

RIMM has earnings next Thursday so it is put up or shut up time for RIMM bears. 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

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LVS - $117.70 -1.18 Las Vegas Sands *** Covered Call ***

No material news on LVS but Monday saw a sharp spike to a new 2-week high. Resistance at $120 is proving tough to crack. Nevada gamblers lost $1.16 billion in October according to a recent report. That was nearly a 10% increase from the prior year. No change in play.

Covered LEAP Call

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

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ETFC $3.87 -0.26 E*Trade Financial *** Covered Call ***

No news and no movement. Still holding around $4 while the subprime mess ferments.

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%
 


Leaps Trader Watch List

Dropped Entries

None


New Watch List Entries
MTW
Manitowoc
CSR Security & Surveillance Technology

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 ***

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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

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

MTW - Manitowoc

MTW continues to raise estimates saying its crane division could see 20% growth in 2008. Nice rally already so we want to buy on a pullback.

Company info:

The Manitowoc Company, Inc. is a diversified industrial manufacturer in three principal markets: Cranes and Related Products, Foodservice Equipment and Marine. The Crane business designs, manufactures and markets a line of crawler cranes, mobile telescopic cranes, tower cranes and boom trucks. Foodservice business is a manufacturer of cold side commercial foodservice products. It designs, manufactures and markets product lines of ice making machines, walk-in and reach-in refrigerators and freezers, fountain beverage delivery systems and other foodservice refrigeration products. Marine segment provides new construction, shiprepair and maintenance services for freshwater and saltwater vessels from four shipyards. On January 3, 2006, The Manitowoc Company, Inc. acquired ExacTech, Inc. On May 26, 2006, it acquired McCanns Engineering & Mfg. Co. and McCanns de Mexico, S.A. de C.V. In July 2007, it acquired Shirke Construction Equipments Pvt. Ltd.

Breakdown trigger: $44

Buy 2009 $50 LEAP Call VMT-AJ

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

CSR - China Security & Surveillance Technology

This company got a lot of buzz when it came public but faded fast. That fade is rapidly disappearing and a break over $24 could be the beginning of a strong run.

Company Info

China Security & Surveillance Technology, Inc. (CSST), formerly known as Apex Wealth Enterprises Limited, is a holding company that owns two direct subsidiaries, China Safetech Holdings Limited and China Security & Surveillance Technology (PRC) Ltd. The Companys primary business operations are conducted through its indirect subsidiaries Golden Group Corporation (Shenzhen) Limited (Golden) and Shanghai Cheng Feng Digital Technology Co. Ltd. (Cheng Feng). Goldens business is focused on manufacturing, distributing, installing and maintaining security and surveillance systems in China. Cheng Fengs business is focused on the manufacturing, marketing and sales of security and surveillance related hardware, as well as the development and integration of software. CSST generates revenues primarily through the installation of security and surveillance systems, and sales of security and surveillance products.

Breakout trigger: $24.25
Breakdown trigger: $21.00

Buy Jun-08 $25.00 Call CSR-FE (no leaps)
 


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