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Weekly Newsletter, Sunday, 02/17/2008

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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

Expiring Futures Produces Short Covering

March crude futures cease trading on Wednesday and it appears traders did not want to go into the 3-day weekend short. The various news events prompted traders to begin to cover their spring shorts and crude hit $96.67 intraday on Friday. End of day profit taking knocked a buck off the price to close at $95.59.

The OPEC games have begun with comments out of OPEC on Friday that global demand is expected to grow by 1.23 mbpd in 2008 and that is 73,000 bpd lower than their last estimate. They refine their estimate each month so they could be off 500,000 bpd and still be dead on by year-end. The key here was a comment from OPEC that despite the rising demand the current production levels would be enough to satisfy that demand and build inventory levels at the same time. That suggests OPEC is setting us up for "no change" in production at the March 5th meeting. Iran, Venezuela and a couple other states had made comments about cutting production at the March meeting but the OPEC comments on Friday appeared designed to short circuit that production cut request. It was only a week ago that OPEC was hinting they would cut at that March meeting.

Not to be outdone the IEA lowered its global growth forecast to 1.67 mbpd or -310,000 bpd below their last estimate. The drop in demand was mainly due to a possible recession in the USA and its impact on other world economies.

Venezuela is still sticking to its claims it will not sell oil to Exxon but nobody seems to care. OPEC has said it will make up any shortfall caused by Venezuela and Secretary of Energy, Sam Bodman said the strategic petroleum was available to Exxon if they needed it. To me this sounds like OPEC is tired of putting up with Chavez and welcomes the opportunity to look like they are the good guys coming to the aid of the U.S. in the Chavez squabble. By making a public statement about covering any Chavez produced shortfall they are slapping him across the face in front of his peers. This could be one more step out on the proverbial limb for Chavez as he moves farther off the reservation. Eventually his limb is going to break and it appears there will be nobody around to catch him.

Exxon said on Friday they added 1.6 billion barrels of oil equivalent to their reserves in 2007. That would be 101% of its production for 2007 and a nice trick if they can keep it up. According to Exxon their ten-year average of reserve replacement is 112%. Were it not for confiscations by Venezuela and several divestitures it would have been 500 Mboe higher. Current proved reserves for Exxon are now quoted as 22.7 billion boe. If you add probable and possible (3P) that number rises to 72 BBOE.

There are no fundamentals supporting oil prices at this level in late February. Oil inventories have now risen for five straight weeks with more than 18 million barrels added. That comes after a downtrend in inventory that lasted from early July to the first week in January. You may remember my comments back in December that refineries would not want to inventory oil going into year-end because of the tax consequences of owning it on Dec-31st. That ten-week decline ahead of Dec-31st reduced inventories by nearly 40 million barrels from local inventories or roughly $3.5 billion in oil. Without that inventory reduction refineries would have paid property taxes on that $3.5 billion. Beginning with the very next inventory report on Jan-11th covering the first full week of the year those inventory levels began to build by an average of 3.6 million barrels per week. Coincidence? I don't think so and the inventory rebuilding is simply bringing us back into balance with normal levels. Demand for heating oil has slowed and that also increases crude levels since refiners don't want to produce a product they can't sell. The percentage of refiner runs has fallen off a cliff to only 85% utilization and nearly 10% below a normal level during the peak of the season. There is nothing in these numbers or trends that supports higher oil prices as we head into March.

At the CERA conference in Houston last week John Hess, chairman and CEO of Hess Corp, told the crowd an oil crisis was coming much sooner than people thought. "It is not only a matter of demand. It is not only a matter of supply. We need to take steps on both fronts and we need to start today," Hess told an overflow crowd on Feb-12th. "Given the long lead times of 5-10 years from discovery to production, an oil crisis is coming and sooner than most people think. Unfortunately we are behaving in ways that suggest we do not know there is a serious problem," Hess said. Hess believes the oil crisis will begin within the next ten years and the U.S. is not prepared in any way for the "calamity" ahead.

Goldman Sachs believes that the number of cars on the road will soar to 500 million in China and 600 million in India by 2050. That is an addition of 1.1 billion vehicles in two countries that had less than 20 million cars total just 5 years ago. Hess said, "global population is expected to grow from the current 6.6 billion to more than 9 billion by 2050." That will more than double the demand for oil but increasing production today by more than 10% appears to be impossible. Hess said, "Since 1980 discoveries have not replaced annual production. We need to find a new field the size of Angola every year and it is not happening. OPEC alone has the resources to increase capacity but they are not spending enough to insure sufficient capacity to meet oil needs in the next 10 years. Global demand is growing 1.5 mbpd annually. The IEA predicts global demand to average 98.5 mbpd by 2015. Based on current behavior, I do not see how we will meet this projection." Current global demand is 87.6 mbpd of which 4.5% or 3.9 mbpd is lost each year to depletion. That requires 5.4 mbpd of new production to be added each year to meet new demand.

I read a really good but very long article on Peak Oil this week that contained dozens of point why peak oil may be sooner than we think. The article documented numerous converging lines of discussion and points of reference and scared the hell out of me. I am a believer in the coming peak but this collection of facts accelerated my belief into near panic mode. I am going to try and upload it this weekend and I will send everyone a link if I am successful. Basically the world view according to peak oil experts is changing to a "peak plateau" rather than a sharp peak and sharp decline. With the benefit of hindsight and projections from the megaprojects database there is a large and growing contingent of experts that believe the actual peak will occur in 2008 and a slow decline in production of 3% per year begin in 2009. If this is true and there is a lot of evidence to suggest it is then the impacts of higher oil prices are just ahead. In the chart below the red line is the global production, black line demand and green line the price of oil. If the red/black lines are right then the green price line is too low. Once demand exceeds supply by even as little as 50,000 bpd that price line is going vertical. Based on the evidence in the article this could happen by the end of 2008 or early 2009.

Peak Oil Plateau Chart

It may sound crazy after that last paragraph but I am going to recommend we short some oil this week. I believe the rally last week was short covering on various news events that have nothing to do with reality. Inventories are rising and demand is slowing as it always does in Feb/Mar. This is just a temporary hedge against a potential decline while we maintain our long-term bias towards higher prices.

You may have noticed that natural gas prices spiked to a 3-month high last week at $8.84. This was not due to a major consumption binge or shortage of gas supplies. The hedge fund Saracen Energy got caught shorting the spread between the March and April 2009 futures and betting that spread would narrow. That spread jumped more than 50% in the prior week and Saracen was forced to cover their shorts rather than watching their position go further into the loss column. Reportedly they lost over $500 million or roughly one third of their fund value. They probably had vivid memories of Amaranth losing $6 billion in natural gas in 2006 and did not want to repeat that loss. There were rumors Saracen was forced to sell its trading book to Goldman to cover its margin calls. Goldman was also rumored to be the prime broker for Saracen. As the prime broker they would have the margin exposure for the positions and could have forced the sales if Saracen was over leveraged. We may never know the real scenario but we do know it moved the market nearly a dollar as the positions were closed.

Jim Brown


March Crude Futures Chart - Daily

March Natural Gas Futures Chart - Daily

March Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays
USO Oil Fund Short

New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered

None


Portfolio Listing & Top Picks

****************
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.

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

The Top Ten list expanded to seven from five. Earnings and resistance levels kept me from adding a couple more. If the market cooperates we could get back to ten next weekend.

The yellow means they are very close to those entry levels and green means they are at the target level.



New Plays

Most Recent Plays

USO - Oil Fund - Short

I believe the spike in oil prices is going to fail at current resistance and decline towards the end of March. I am using the USO as a direct reaction to the price of oil rather than the XLE or equivalent index, which contains oil service stocks and could soften the drop.

I want to enter the April $73 puts if the USO trades at 74.50. That would be a breakdown below the intraday support from Thr/Fri. If the USO continues higher I will raise the entry point and strike. Aggressive traders could enter at resistance at $77.50.

Buy April $73 PUT UNA-PU if the USO trades at $74.50

Target $68.50 for an exit.


 


Play Updates

Existing Plays

UNT $52.36 +0.91 - Unit Corp

No news and Unit hit a new six-month high at $54.20 on Thursday before giving up $2 on the broad market weakness. Unit still has one of the most bullish charts in the sector.

Breakout trigger: $52.00 hit 02/04

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

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PBR $114.45 +2.88 Petrobras *** Stop Loss $88 ***

No material news but Petrobras came very close to a new all time high on Thursday at $118.43 before giving up $4 on the broad market weakness. This is still my favorite oil stock and I think the eventual breakout will be strong. We just have to get past the potential for a March decline in oil prices.

Breakout trigger: $101.50, hit 1/24

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

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

VLO $58.37 -0.52 Valero *** Stop Loss $47 ***

VLO is going nowhere fast after that big gain three weeks ago. VLO is stuck in a range from $56-$60 as we await summer demand to begin. Historically refiners rise from late Feb to May.

Breakdown trigger: $50.00, hit 1/23

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

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

FLS $94.57 +1.60 Flowserv *** Stop loss $90 ***

No news on FLS and it knocked on the $100 resistance door twice last week. There appears to be no interest in selling it but buyers still lack conviction. No complaints here. I raised the stop to $90.

Breakdown trigger: $77.50, hit 1/22

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

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

FLR $111.65 +9.13 - Fluor Corp *** Stop $105 ***

FLR posted a monster rebound from the prior Friday's low at $106. Earnings are not until Feb 28th and resistance remains $125. No specific news other than a UBS upgrade to a buy.

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 $129.07 +3.89 - Transocean Inc

RIG announced a sale of three shallow water rigs to Hercules for $320 million and officially exited the shallow water drilling business. Earnings are Wednesday and it could produce some serious volatility. Current resistance is $132.50.

Earnings schedule: Feb 20th

Breakdown trigger: Hit 12/4 @ $130

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

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CLB $118.55 +8.99 Core Labs

Core Labs posted a 39% increase in earnings to $1.36 per share and a 15% rise in revenue to $176 million. This was the 11th consecutive quarter that CLB has posted record highs in revenue. It was the 8th consecutive quarter for record earnings. Margins increased 375 basis points to 28% and a new record. Guidance for Q1 was for an increase in revenue of 16% and earnings of 30%. Traders liked the news and pushed CLB back to resistance at $120 despite the end of week swoon in the markets.

Earnings: $1.36, +39%.

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 $71.93 +6.65 - Foster Wheeler

This is becoming ridiculous. The back-to-back weeks of alternating $6 gains and losses increased to 3 with a $6.65 gain. Fortunately the gain pushed FWLT back to resistance at $73 ahead of their earnings on the 26th. A breakout here would be strongly positive.

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

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

NOV $57.27 +4.77 - National Oilwell Varco *** Stop $52 ***

NOV did pretty well for the week after earnings and returned to test resistance at $65. NOV failed the test as the market weakened but remains poised to try again if the market turns positive.

Earnings: Feb 6th +57%

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

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

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

HP $41.95 +.63 Helmerich & Payne *** Stop Loss $33 ***

Still hitting new highs on no news. This is the most bullish chart in the portfolio.

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

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

ATI $82.46 +5.86 - Allegheny Technology

Definitely no complaints here. ATI continues to extend its gains and resistance at $85 will likely be tested again next week. S&P raised its credit rating to BBB-, the lowest investment grade from the prior BB+ and junk status. S&P said strong demand for its key products and improved cost structure was improving performance.

Entry: ATI 76.60 02/10

Position: 2009 $90 LEAP Call OYG-AR @ $8.90

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

TEX $59.80 +4.94 Terex Corp

Terex rebounded strongly from the prior week's drop and is positioned for earnings on Thursday. No specific news and you can bet there will be volatility surrounding the earnings report.

Earnings schedule: Feb 21st

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

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

SGR $59.82 +3.71 Shaw Group

A new six-week high on Thursday and a minimal gain on Friday when the rest of the market was weak. S&P said they may upgrade Shaw's credit rating if the current solid performance continues. No complaints.

Breakdown trigger: $55 Hit Jan-16th

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

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

MOS $103.37 +7.55 - Mosaic Co

No specific news but Mosaic appears to be breaking out of congestion and starting to move towards new highs. Definitely no complaints!

Breakdown trigger: $85 Hit Jan-10th

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

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

AAPL $124.63 -.85 Apple Inc *** Covered LEAP Call ***

Just shoot me now. Every time I look at AAPL I get more frustrated. Buyers are still boycotting Apple while their products continue to be top sellers. $130 is becoming stronger resistance and I fear any weakness by HPQ when they report earnings next week will rub off on Apple. No change.

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.

Position:
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 $95.19 +5.48 Research in Motion - Covered Call Stop Loss $80

New life starting to appear in RIMM and current resistance at $95 could be about to break. It would be the end of a long dry spell on RIMM but it is time. We saw two tests of the low $80 range over the last two months and that could be seen as a strong bottom. Let's hope it sticks and moves up from here. I would be a buyer of shorter term calls on a more over $98.

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

None


New Watch List Entries
OII Oceaneering Intl

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

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

OII - Oceaneering Intl

Company Info:

Oceaneering International, Inc. is a global oilfield provider of engineered services and products primarily to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology capabilities, the Company also serves the defense and aerospace industries. The services and products the Company provides to the oil and gas industry include remotely operated vehicles, mobile offshore production systems, built-to-order specialty hardware, engineering and project management, subsea intervention services, nondestructive testing and inspection, and manned diving. Oceaneering International, Incs business segments are contained within two businesses: services and products provided to the oil and gas industry (Oil and Gas) and all other services and products (Advanced Technologies). In July 2007, the Company announced the acquisition of Ifokus Engineering AS, a Norwegian designer and manufacturer of specialty sub-sea products.

Breakout trigger: $65.50

Sell July $75 PUT OII-SO currently $13.80

If you don't have naked put capability turn it into a spread by purchasing a lower put.


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