Option Investor

Weekly Newsletter, Saturday, 02/09/2008

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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

Shorts Squeezed

A flurry of news events caused a monster short squeeze on Friday. Traders heavily short ahead of the normal March decline in demand and prices were handed the perfect storm of oil supply worries. The result was a +3.78 single day spike to close at $91.89. From a low of $86.24 on Thursday to $91.97 on Friday was nearly a $6 gain.

The biggest new story was only partially reported in the press. Shell said it was declaring force majeure on Bonny light crude from Nigeria for February and March deliveries. They halted production of 130,000 bpd due to pipeline repair problems. The press release said production could drop as much as one million barrels per day due to continued violence and maintenance problems. That sounds like a major problem and the 1 mbpd number was the number the press kept repeating. In reality production has already been cut by over 500,000 bpd for those same reasons over the last 18 months. We have seen spikes to as high as 800,000 bpd in lost production as flurries of violence caused intermittent halts. By halting 130,000 bpd that brings the current total to only 630,000 bpd but the attention getting headline was still the million-barrel claim. That would occur only if violence continued to rise. The government of Nigeria has ordered the various oil companies back to work or risk losing their leases in Nigeria.

The second problem came from a Total announcement about a shutdown of 280,000 bpd of Brent, Forties, Oseberg and Ekofisk oil grades produced in the North Sea. The shutdown will not occur until March when Total will attempt to correct a technical problem affecting that production. The news reports failed to mention that it was a planned shutdown in March and traders were left with the assumption it was happening today.

Other news impacting the shorts was a rising call by OPEC members to cut production at the March 5th meeting. Other OPEC members besides Iran and Venezuela are taking up the call after inventory levels in the U.S. jumped by 7-million barrels last week and 17 million barrels over the last four weeks. OPEC members fear that the combination of a recession in the U.S. and the March demand decline would allow inventories to build to the point that prices would decline sharply. OPEC needs to maintain the high prices in order to continue funding new exploration.

On another topic Total said it was pulling out of a Saudi exploration venture after three exploration wells turned out to be dry holes. Total will surrender its 30% stake to the other partners, Saudi Aramco and Shell. The area covered by the joint venture is 210,000 square kilometers or roughly the size of Great Britain. You would think that owning 30% of any exploration effort in Saudi Arabia would be a prize almost any oil company would sell its soul to get. Could this be a sign that we have passed the peak in Saudi and the future is one of increasing exploration failures rather than success? The EIA website showing global daily production by country shows Saudi Arabia peaked at 9.6 mbpd in Sept 2005. The same EIA website shows the global production of conventional oil peaked in May 2005 at 74.298 mbpd.  Increased liquids production since May 2005 has come from oil sands, NGLs, ethanol and bio-diesel.

There was news that a Russian field was depleting faster than originally thought and exports from Russia could drop sharply in 2008. That report was rather nonspecific and just added to the fog on Friday.

Lastly there was news that the Exxon noose around Venezuela was tightening. Exxon was kicked out of Venezuela when it refused to give up its facilities in the Orinoco oil belt in 2006. Chavez nationalized the oil fields in 2006 and Exxon chose to exit VZ and take the matter to court rather than take a minority position and let PDVSA collect all the money. Exxon has won a series of court battles and is systematically squeezing VZ for payment. Courts in England, the Netherlands and the Netherlands Antilles each froze assets worth up to $12 billion each in their respective jurisdictions. A U.S. court froze $300 million in assets in the U.S. with more to come. Venezuela claims Exxon acted improperly and resorted to judicial blackmail in pursuing the claims in the various courts. Venezuela knew the verdicts were coming and changed the way it required payment for oil. VZ now requires payment in advance rather than normal terms used by the oil industry. As an oil buyer I would be really hesitant to fork over $75-$90 million in advance for a tanker load of crude that I may never get. Chavez is losing favor at home because of mounting internal problems with the biggest a shortage of cash for social programs. He has already nationalized oil, telecoms, banks, insurance companies, television and utilities and confiscated their cash for those programs. Without the operating cash those companies are producing less revenue and it appears Chavez is choking the geese laying his golden eggs. The groups supporting the various Chavez watch sites on the Internet are giving him less than 18 months left in office before being thrown out.

The Mexican Energy Secretariat said last week that Mexico's oil production problems are going to increase in 2010 when the Ku-Maloob-Zaap (KMZ) field will begin to decline. The giant Cantarell decline is accelerating and expected to continue to lose production at more than 14% per year. Production from Cantarell fell by 101,000 bpd in 2005, 234,000 bpd in 2006 and 304,000 bpd in 2007. Pemex officials expect KMZ to peak in 2010 at 800,000 bpd and then begin a decline similar to Cantarell. Officials said a more pronounced decline is expected in fields in the northeast marine region with reductions of 40% and 20% drops in the southwest regions. The next decade is not going to be fun for Mexico.

We are a little more than a week away from the March futures expiration on Feb-20th. I think it is safe to say that volatility is going to be high over the coming week. Resistance is strong at $92 and support is strong at $86.50. Unless some new event makes the news I would expect resistance to hold ahead of the March demand decline and the massive build in U.S. inventories. We are out of all but a couple pure oil stocks and will look to reenter the sector on any March lows. Until then I am refraining from adding many new positions until the broader market finds a bottom.

The U.S. markets posted an average loss of 4.5% last week and the worst week since March 2003. Any long positions in an environment like that are going to loose ground. We have the cream of the crop in our current portfolio and as soon as the market recovers I expect to reclaim lost ground at an astounding pace. The keyword there was "recovers." We may have some more pain before any new gains.

Jim Brown

March Crude Futures Chart - Daily

March Natural Gas Futures Chart - Weekly

March Natural Gas Futures Chart - Daily

March Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Energy Plays

None - We need to wait for the seasonal weakness in March

New Non-Energy Plays
ATI $76.62 Allegheny Technology

Dropped Plays
XOM Exxon Mobil *** Stopped $82.00 ***
JEC Jacobs Engineering Group *** Stopped $70 ***

New Watch List Plays Triggered
UNT $51.45 Unit Corp

Portfolio Listing & Top Picks

New Plays

Most Recent Plays

UNT $51.45 - Unit Corp

Unit formed a nice base at $45 and finally broke over resistance at $50 last week. It appears that resistance has now turned into support with $50 as a bottom on Thr/Fri.

Company Info:

Unit Corporation (Unit), through its three principal wholly owned subsidiaries, Unit Drilling Company, Unit Petroleum Company and Superior Pipeline Company, L.L.C., contracts to drill onshore oil and natural gas wells for its own account and for others (land contract drilling); explores, develops, acquires and produces oil and natural gas properties for its own account (oil and natural gas exploration), and buys, sells, gathers, processes and treats natural gas for its own account and for third parties (mid-stream). Units existing contract drilling operations are focused primarily in the natural gas producing provinces of the Oklahoma and Texas areas of the Anadarko and Arkoma Basins, the Texas Gulf Coast, the North Texas Barnett Shale and the Rocky Mountain regions. Units primary exploration and production operations are also conducted in the Anadarko and Arkoma Basins and in the Texas Gulf Coast area with additional properties in the Permian Basin.

Breakout trigger: $52.00 hit 02/04

Position: Sept $55 Call UNT-IK @ $3.80

New Non-Energy Plays

ATI $76.62 - Allegheny Technology

ATI is rebounding strongly out of the January lows and overcame some earnings challenges two weeks ago. The outlook from ATI was strong and the specialty metals business is fairly recession proof. There is far more demand than the few vendors can supply and products are on allocation in many sectors. ATI is approaching resistance at $80 but the strength of the rally in the face of an ugly market is encouraging.

Company Info:

Allegheny Technologies Incorporated (ATI) is a diversified specialty metals producer. The Company operates in three segments: High Performance Metals, Flat-Rolled Products and Engineered Products. The High Performance Metals segment produces, converts and distributes a range of high-performance alloys, including nickel and cobalt-based alloys and superalloys, titanium and titanium-based alloys, zirconium, hafnium, niobium, nickel-titanium and their related alloys. The Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys. The Engineered Products segment produces tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. ATIs products are used in various markets. These markets include aerospace, defense, chemical process industry, oil and gas, electrical energy and medical.

Buy: 2009 $90 LEAP Call OYG-AR currently $8.90


Play Updates

Existing Plays

PBR $111.57 -1.49 Petrobras *** Stop Loss $88 ***

British Gas, a 25% owner in the Tupi discovery offshore Brazil, raised the estimates on the fields potential to between 12 and 30 billion BOE. This is an increase from the original Petrobras claim of 1.7 to 10 BBOE. British Gas expects production to begin in 2009 in a range of 680,000 to 710,000 BOEPD with production rising 6-8% per year through 2012. Petrobras holds a 65% interest and Portugal's Galp Energia owns 10%. Petrobras is probably being more conservative because they are listed on the NYSE and have the more stringent SEC rules on reserves holding them back. Either way this field is going to provide some major bucks to Petrobras in the not too distant future.

Breakout trigger: $101.50, hit 1/24

Position: 2009 $110 LEAP Call XVQ-AB @ $12.70


VLO $58.89 -1.28 Valero *** Stop Loss $47 ***

VLO turned in the strongest earnings of the group as expected. The rest of the refiners suffered from higher crude prices shrinking margins and caused a decline in the sector as a whole. VLO recovered from that decline over the last 2-days and is inching back to resistance at $61. Call activity in Frontier rocketed high on Thursday to 28,000 calls compared to 2464 puts as speculation grew that VLO would acquire FTO. Moody's said it was reviewing VLO for an upgrade due to its conservative debt levels and the potential to sell off more non core assets.

Breakdown trigger: $50.00, hit 1/23

Position: 2009 $60 LEAP Call VHB-AL @ $5.00


FLS $94.57 -1.83 Flowserv *** Stop loss $74 ***

No news on FLS and despite the market drop it remained within $3 of its recent highs. No complaints here.

Breakdown trigger: $77.50, hit 1/22

Position: July $90 Call FLS-GR @ $6.00


FLR $111.65 -14.52 - Fluor Corp *** New Stop $105 ***

FLR has been massively volatile on no news. The market drop knocked another $14 off FLR and pushed it back to support at $110. I am adding a stop loss at $105 to stop the bleeding. Even with the remediation plan in place it will not do us any good if FLR does not establish a positive trend very soon.

Earnings schedule: Feb 28th

Breakdown trigger: $145 Hit 12/13

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

Remediation plan: 1/20
LONG: April $110 Put FLR-PB @ $9.20
SHORT: Jan $170 LEAP Put XOB-MN @ $58.40


RIG $125.18 -.26 - Transocean Inc

RIG is still holding its ground above support at $120 while we await earnings on the 20th. Their recent fleet update report (www.deepwater.com) shows the majority of their day rates are still climbing and contracts are being extended.

Earnings schedule: Feb 20th

Breakdown trigger: Hit 12/4 @ $130

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


JEC $71.84 -7.38 Jacobs Engineering Group *** Stopped $70 ***

JEC was dropped for a $10 loss on no news and fell to hit our $70 stop loss exactly to the penny on Thursday. I still like it and I would have no problem putting it back into the portfolio once the market recovers.

Earnings: Jan 22nd, +61%

Breakdown target: $80.00 Hit 11/12

Jan-2009 $90 LEAP Call VJE-AR @ $10.40, exit $7.50 2/7

Closed: APR 2008 $90 Call JEC-DR @ $6.50, exit 1/20 @ $3.10


CLB $109.56 -4.98 Core Labs

No news but CLB made another round trip from two week highs at $117 to support at $105 as the market beat traders without mercy. Hopefully earnings next week will give traders in CLB something to cheer about.

Earnings schedule: Feb 14th

Breakdown Trigger: $130 hit 11/12

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

Remediation addition:
Position: June $130 Call CLB-FF @ $6.10


FWLT $65.23 -6.52 - Foster Wheeler

Back to back weeks of nearly identical gains and losses of +6.23, -6.52 continues to drive traders nuts. No specific news and like other stocks it was beaten back from four week highs to support at $63. Earnings on the 26th remain the hope for traders caught in this volatility web.

Earnings schedule: Feb-26th

2:1 split on Jan-22nd.

Breakdown trigger: $67.50 hit 11/06 (post split)

Position: (2) 2009 $75 LEAP Call ZHF-AO @ $14.55


XOM - $81.71 -4.24 Exxon Mobil *** Stopped $82.00 ***

Even $11 billion in quarterly earnings cannot protect XOM from a drop with the market.

Breakdown trigger: $88 Hit 11/01

Position: 2009 $100 LEAP Call ODU-AT @ $7.90, exit $3.70 2/6


NOV $57.27 -5.42 - National Oilwell Varco *** Stop $52 ***

NOV reported earnings that rose +57% and a $9 billion backlog but the market weakness still knocked it back close to support. Orders increased over $1 billion from the previous quarter. Margins narrowed slightly as drilling slowed in North America. Nobody had anything negative to say about NOV earnings and their guidance was strong. Read the entire earnings call transcript here.

NOV and GSF are merging to create an even larger company with even more opportunities. The Justice Dept still had questions at the end of the investigation period so NOV refilled the application to give them more time to get their questions answered.

I am still very positive on NOV but I did add a stop in case the market is still in punishment mode.

Earnings: Feb 6th +57%

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

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


HP $41.32 +1.00 Helmerich & Payne *** Stop Loss $33 ***

HP is continuing to rebound from the January lows and is very close to a new high just over $42. This is the most bullish chart in the portfolio. No specific news.

Earnings: Jan-31st $1.02

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

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

Non-Energy Positions

TEX $60.50 -5.64 Terex Corp

Terex fell from a new 4-week high on Monday to initial support at $54 on market weakness and recession fears. Also, some of the weakness could be attributed to an acquisition approval for ASVI for $480 million. The waiting period expired clearing the acquisition. This could have added pressure to the stock price although the acquisition was announced several weeks ago.

Earnings schedule: Feb 21st

Position: Jan 2009 $70 LEAP Call VXQ-AN @ $8.60


SGR $56.11 -2.73 Shaw Group

Shaw gave up a couple bucks for the week but only because it was at a two week high the previous Friday. It is still showing a steady chart in a crappy market. No complaints.

Breakdown trigger: $55 Hit Jan-16th

Position: 2009 $60 LEAP Call OWA-AL @ 11.50


MOS $96.22 +2.75 - Mosaic Co

Mosaic was upgraded to a buy at Citigroup and continues to hold very close to its 4-week highs. The record wheat prices last week should also contribute to bullish sentiment on Mosaic. No complaints and no other news.

Breakdown trigger: $85 Hit Jan-10th

Position: 2010 $100 LEAP Call LXW-AT @ $24.20

Covered LEAP Calls

AAPL $125.48 -8.27 Apple Inc *** Covered LEAP Call ***

I don't know how much of this pain I can take. However, we just experienced the worst week in the markets since March 2003. Apple's strong attempt to cling to support at $130 was torpedoed by the Cisco earnings meltdown. Friday may be an omen with a +$4 gain but we need to string a lot more days together to get whole again.

When Apple starts to post a new positive trend we will do a put spread to recover some more money. First we wait for the trend.

Long: AAPL @ open of $177.52 (Jan-14th open)
Short: 2009 $150 LEAP Call VAA-AW @ $20.80
Breakeven: AAPL @ $136.12

Position changes:
Closed $200 LEAP Short @ $9.40 ($30.00 - 9.40 = gain +20.60)
Replaced with $150 LEAP short @ $20.80
AAPL cost basis $177.52 - $41.40 (20.60 + 20.80) = 136.12
Breakeven: AAPL @ $136.12


RIMM $89.71 -2.53 Research in Motion - Covered Call Stop Loss $80

Actually it was a decent week for RIMM. The -$13 intraweek drop was erased to give up only $2.53. It appears on the chart that RIMM could have made a nice double bottom at the January lows with its dip back to $82 last week. Time will tell!

See the Jan-13th LEAPs newsletter for the description of the change in the options.

Alert entry 11/12 @ $102.60

Covered LEAP Call:

LONG RIMM @ $102.60 (cost $102.60 -9.10 $150 LEAP = 93.50)
SHORT 2009 $110 LEAP Call VHO-AB @ $18.30 on 1/14/08

Closed: 1/14
SHORT 2009 $150 LEAP Call XTB-AJ @ $18.50, close $9.40 +9.10

Leaps Trader Watch List

Dropped Entries


New Watch List Entries
Jacobs Engineering

Current Watch List

CAM - Cameron

CAM posted excellent earnings but disappointed on guidance to stop us out of the last position. I am going to reinstate CAM on a trade at $45.

Company Info:

Cameron International Corp., formerly Cooper Cameron Corporation, is an international manufacturer of oil and gas pressure control and separation equipment, including valves, wellheads, controls, chokes, blowout preventers and assembled systems for oil and gas drilling, production and transmission used in onshore, offshore and subsea applications and provides oil and gas separation, metering and flow measurement equipment. It is also a manufacturer of centrifugal air compressors, integral and separable gas compressors and turbochargers. The Company's operations are organized into three separate business segments: Drilling & Production Systems (DPS), formerly the Cameron segment; Valves & Measurement (V&M), formerly the Cooper Cameron Valves segment, and Compression Systems (CS), formerly the Cooper Compression segment. In January 2006, the Company acquired the assets and liabilities of Caldon Company.

Breakout trigger: $45.00

Buy: 2009 $50 LEAP Call OKA-AJ


JEC - Jacobs Engineering

JEC stopped us out on a dip to $70 and appears to have decent resistance at $80. I am going to reenter the position on a breakout over that $80 resistance.

Company Info:

Jacobs Engineering Group Inc. (Jacobs) is a professional services firm in the United States. The Companys business focuses on providing a range of technical, professional and construction services to industrial, commercial, and governmental clients around the world. Jacobs provides four categories of services: Project Services (which include engineering, design, architectural, and similar services); Process, Scientific and Systems Consulting services (which includes services performed in connection with a variety of scientific testing, analysis and consulting activities); Construction services (which encompasses traditional field construction services, as well as modular construction activities, and includes direct-hire construction and construction management services), and Operations and Maintenance services (which includes services performed in connection with operating large, complex facilities on behalf of clients, as well as services involving process plant maintenance).

Breakout trigger: $82.50

Buy: 2009 $90 LEAP Call VJE-AR


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