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Weekly Newsletter, Saturday, 05/10/2008

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Table of Contents

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

Leaps Trader Commentary

Running Out of Adjectives

What do you say about oil when it continues week after week to astound and amaze with almost zero fundamental support? Amazing, incredible, astounding? It is all of those things and more. The Goldman Sachs forecast last week built a fire under crude that was still burning at the $126 close on Friday.

There were two news items credited with some of the hysteria. The Iran backed Hezbollah takeover in Lebanon created fears of reprisals against Iran and Syria and a threat to oil supplies.

The Wall Street Journal printed an article saying they had reviewed computer files captured in Columbia that implicated Hugo Chavez in a terrorism for hire scheme in that country.

Chavez reportedly offered the FARC terrorists in Columbia rocket-propelled grenades and ground to air missiles to shoot down U.S. and Columbian aircraft. That kind of rockets enabled Afghan tribesmen to chase Soviet troops out of their country in 1989. Chavez also offered port access for Russian arms shipments in Maracaibo for FARC's jungle bases. He offered FARC rest and recreational bases in Venezuela and state medical care. He offered the terrorists a $250 million loan payable upon the overthrow of Columbia's government. There were also records of payments of nearly $300 million to the rebels from Chavez.

Mexico and Peru are also coming under attack by FARC terrorists. In Mexico City the chief of Mexico's national police was gunned down on Thursday by FARC terrorists. The raid where the computer files were captured also provided evidence that Mexican's were being trained in Columbia to blow up oil pipelines which supply oil to America.

The goal by Chavez is to control the southern hemisphere and as long as he has nearly unlimited oil money to use as his personal piggy bank he can eventually make his dream come true.

The U.S. will likely be forced to declare Venezuela a state sponsor of terrorism and impose trade restrictions that will prevent him from exporting oil to America. Venezuela currently accounts for 12% of our imported oil. That oil would probably end up being sold to middlemen who would attempt to resell it to U.S. refiners. It is unclear if that would be allowed. It is not a choice the U.S. is going to want to make but given the more than 10,000 pages of evidence it is not one the U.S. can likely avoid. The U.S. must kill his cash cow and so he can no longer fund terror outside his borders. A side benefit could be an internal revolution that takes him out of power when he can't fund his social giveaways. Interpol is going to publish its official findings next week so time is growing short for action.

The press has been calling for Bush to quit adding oil to the strategic petroleum reserve and to start using the oil in the reserve to bring down prices. This is utter lunacy if you take the time to think through the process. The SPR is just that, a "strategic reserve" and not an oil deposit that can be tapped at will. With the potential for a stop in Venezuelan imports and a military strike on Iran there is every possibility that oil supplies could be cut drastically at some point. Bush knows this and is continuing to add to the reserve even at these high prices because NOT having oil in a time of war is worse than paying high gasoline prices. There are simply too many global powder kegs with smoldering fuses to be draining our strategic reserve. The current fill rate of 70,000 bpd is a trickle compared to the 22 million barrels per day we consume. The oil going into the reserve is a payment in kind transaction where offshore production companies allocate a fraction of the oil they produce to the SPR in lieu of royalties they would normally have to pay in cash. The government is not exactly paying $125 per barrel but giving those companies credit against their taxes.

The oil inventories this week showed a gain of 5.7 million barrels for the week ended May-2nd. This was more than three times what analysts had expected. It was the third consecutive weekly gain. You would have thought this would have slowed the spike in prices but traders ignored it.

Crude Inventories

National gasoline prices hit $3.67 on Friday and you can bet that $3.75 is not far away. Reports of gasoline over $4 are filtering in from all over the country as prices continue to rise.

As I mentioned in the Option Investor commentary this weekend you would expect oil stocks to be exploding given the high price of crude. With only a few exceptions that is not happening. Apparently investors are in shock over the spike in crude and don't want to buy the top with a "correction" due any day. Quite a few people have been in that correction camp for weeks and it never arrives.

I received an email this week with a very good analysis of oil prices based on current demand curves and future supply coming to market. This is not going to be a pleasant commentary so skip to the plays if you don't want to be depressed. This gentleman is an engineer in the energy sector. In 2006 when oil was $60 he predicted oil would cross $100 in early 2008. Numerous people told him he was crazy because an oil shock like that would cripple the economy similar to the oil shock of the 1970s. As we all know now oil hit $100 in Jan-2008. With an additional two years of data and several hundred people feeding him reservoir data and flow rates he has produced a long-term oil price forecast. He has allowed for things like demand destruction due to price. For instance a Chinese consumer cannot afford to pay as much per gallon as an American consumer so as prices rise demand in those lower income countries will slow or even decline. He has also taken into account the greater potential for governments to exercise greater control over oil reserves once the full impact of peak oil is realized. Governments will try to hoard and lockup supplies once they realize there is a limited supply. All things I have been preaching for years. He calculated that all remaining oil reserves would be locked up by country by 2030. That means very little if any remaining exports. I personally believe it will happen by 2020.

He broke down demand by sector and by country covering things like personal transport, public transportation, heating, industry, shipping, air transport, military use, power generation and crude products. Obviously he had a lot of time on his hands. It has taken him two years to develop this model. The bottom line for all these calculations is the chart below.

Oil Price Forecast Chart

I actually think he is being too optimistic. I expect $200 oil in 2010 but he is the one with all the data. I believe the hysteria factor will appear once it becomes apparent that peak oil was not a myth and has become a reality. This should produce a sharper ascent from 2010 forward and level off somewhat in the 2015 range after the government confiscation events begin to unfold. The average consumer regardless of country will not be using $10 gasoline like they do $3.67 gasoline today. Driving habits are going to change dramatically. Economies are going to fall into a global recession and that will depress demand and prices. All the data in the world today will not tell us how irrationally mankind will act in just a couple years when peak oil arrives. That chart is just a guesstimate based on reams of data but a very good guess in my opinion. Sure makes me want to sell everything I own and buy some long-term crude futures on every dip.

Speaking of futures the options on the June contract expire on Thursday and the June contract expires on the following Monday.

There was some amazing news late Friday. Petrobras is expected to issue letters of intent to acquire as many as 17 new offshore rigs. These will be new drillships and semisubmersibles. The news came from investment bankers, Simmons and Co. UBS estimated last week that it would take $600 billion, that is BILLION, to develop the Tupi and Carioca fields. This is a massive windfall for service companies. Petrobras received 35 bids for the rigs. Norway's SeaDrill (SDRL.OL) won a $4.1 billion contract last month and Noble (NE) also won a $4 billion deal. These are in addition to the 17 rigs discussed above.

Jim Brown


Sign of the times cartoon


June Crude Futures Chart - Daily

June Natural Gas Futures Chart - Daily

June Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

Sorry, I am not buying $126 oil. We had five new plays last week and one triggered this week. See the watch list for new targets.


New Non-Energy Plays

None


Dropped Plays
USO Short out by a $10 spike in crude
SPWR SunPower *** Stopped ***

New Watch List Plays Triggered
JEC $86.76 -3.24 Jacobs Engineering

Portfolio Listing & Top Picks

If you are looking to add another position these are my top picks 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.

I like all of these this week. Try to buy them on a dip!


 


New Plays

Most Recent Plays

JEC $86.76 -3.24 Jacobs Engineering

A little post earnings depression in a weak market. So far no harm, no foul and no material news.

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: $90 Hit May 5th

Buy 2010 $100 LEAP Call WEU-AT @ $16


 


Play Updates

Existing Plays

PBR $64.60 +2.39 Petrobras

I have to admit that was a shock when my stop loss alarm went off on Thursday. I went back three months in Petrobras news and never saw an announcement for the 2:1 split. That is one of the problems with non-USA companies. They are not big on timely press releases.

I am glad they split because that will allow more people to buy shares. It is a proven fact that most companies that split return to the pre-split price within 12-18 months. Let's hope Petrobras maintains that trend.

There was some amazing news late Friday. Petrobras is expected to issue letters of intent to acquire as many as 17 new offshore rigs. These will be new drillships and semisubmersibles. The news came from investment bankers, Simmons and Co. UBS estimated last week that it would take $600 billion, that is BILLION, to develop the Tupi and Carioca fields. This is a massive windfall for service companies. Petrobras received 35 bids for the rigs.

Norway's SeaDrill (SDRL.OL) won a $4.1 billion contract last month and Noble (NE) also won a $4 billion deal. These are in addition to the 17 rigs discussed above.

We can expect a massive pop in the drillers when these bids are announced.

** See portfolio listing for any stop loss **

Breakout trigger: $125.50 hit 4/28

Position: 2010 $150 LEAP Call YMO-AV @ $22.10

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

NE $62.62 +4.54 - Noble Corp

That was a near perfect entry on Noble the prior week and the market weakness had zero impact on NE shares this week.

Noble recently won a $4 billion contract to drill for Petrobras off the coast of Brazil. This is a monster payday and just one area of exploration for Noble.

** See portfolio listing for any stop loss **

Breakdown trigger $56.00 hit 4/29

Position: 2010 $70 LEAP Call YVJ-AN @ $8.10

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

RIG $153.66 +1.74 - Transocean

RIG hit a new historic high at $162.28 on Wednesday and then declined about $10 on market weakness. They reported earnings on Wednesday and profits topped $1 billion for the quarter for the first time. Earnings were $3.71 per share compared to estimates for $3.34 per share. Gross margins jumped 10% for the first full quarter of results after the Global SanteFe acquisition.

RIG is the premier deep-water driller and there is no scenario where they don't continue to move higher.

** See portfolio listing for any stop loss **

Breakdown trigger: $150 Hit 4/29

Position:
Long 2010 $170 LEAP Call YDR-AN @ $24.00
Shrt 2010 $230 LEAP Call YDR-AW @ $8.50

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

NOV $77.41 +10.21 - National Oilwell Varco

NOV kicked some major butt last week to close at a new 6-month high on Friday and post a major gain for the week. There was no specific news that I could find but something definitely kicked it into race mode at Thursday's open.

** See portfolio listing for any stop loss **

Breakdown trigger: $67 Hit 4/30

Position: NOV $80 Call NOV-KP @ $5.40

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

USO $102.12 +8.72 - United States Oil Fund *** Closed ***

Unbelievable! A $13 spike in 7 days. This one is now worthless.

Depending on how the week goes I am anticipating entering another short on the day futures expire on May 19th.

Upside trigger: $90.00 Hit 4/15

Position: May $87 PUT UNA-QI @ $2.70

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

FLS $121.26 -1.36 - Flowserve

After a monster prior week a $1 loss of no big deal. A competitor entered the market last week via IPO. The company was Colfax (CFX) and it rose +20% from the IPO price. Nothing really changed in the sector other than Colfax is now a public company. No other news.

** See portfolio listing for any stop loss **

Breakout trigger: $110 Hit 4/16

Position: OCT $120 Call FLS-JD @ $10.40

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

SPWR $82.30 +.20 - SunPower *** Stopped $80.00 ***

The Monday decline in SunPower hit our stop and took us out with a small profit. Solar stocks have been in the shade for the last 3 weeks.

** See portfolio listing for any stop loss **

Breakout trigger: $66 (hit 3/24)

LEAP Call Spread
Long 2010 $80 LEAP Call LMO-AP @ $20.00, exit $27.40
Shrt 2010 $130 LEAP Call LMO-AW @ $8.70, exit $13.70, +2.40

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

TS $53.35 -.56 - Tenaris *** Closed ***

Tenaris posted earnings on Tuesday that fell by -1.8% on higher costs for steel and lower shipments to the Middle East. They cautioned that although drilling was proceeding at a rapid pace the need to control costs was squeezing prices. Citigroup downgraded them on Friday.


** See portfolio listing for any stop loss **

Breakdown trigger: $46.00 hit 3/19

Position: SEP $50 Call TSW-IJ @ $3.40, exit $6.70, +3.30


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

MOS $126.42 +1.79 Mosaic

No specific news on the fertilizer group and all held their ground in the face of a declining market.

** See portfolio listing for any stop loss **

Breakdown trigger: $120 Hit 4/29

Long: 2010 $140 LEAP Call LXW-AX @ $35.10
Short: 2010 $240 LEAP Call KCA-AH @ $13.90

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

EBAY $30.00 -1.11 - Ebay Inc *** Earnings Short ***

Is that closing price an omen? We have a $30 strike and a week to go and Ebay closed at $30. That could be a bad sign. However, Ebay traded lower all last week so maybe the trend is our friend. Target $28 as an exit.

** See portfolio listing for any stop loss **

Entry 4/14 @ 30.87

Position: May $30 PUT XBA-QF @ $1.10


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

AAPL $183.45 +2.51 Apple Inc *** Covered LEAP Call ***

No change. Over $150 we are at max profits.

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 $132.27 +.85 Research in Motion

No change. We are at max profits over $110.

If we continue holding the position until January and let it get called away your profit will be $34.80 when the stock is called away for $110.

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
USO Long

New Watch List Entries
PH Parker Hannifin
CRR Carbo Ceramics

Current Watch List

BP - BP PLC

Based on the recent announcements by BP it may be time to take another run at this stock. When Thunderhorse comes online in Q3 it should get a lot of press due to the high volume of oil they expect to produce. Maybe BP's troubles are over.

Company Info:

BP p.l.c. (BP) is a holding company. The Company three business segments: Exploration and Production, Refining and Marketing and Gas, Power and Renewables. Exploration and Productions activities include oil and natural gas exploration, development and production (upstream activities), together with related pipeline, transportation and processing activities (midstream activities). The activities of Refining and Marketing include the supply and trading, refining, marketing and transportation of crude oil, petroleum and chemicals products. Gas, Power and Renewables activities included marketing and trading of gas and power, marketing of liquefied natural gas (LNG), natural gas liquids (NGLs) and low-carbon power generation through its Alternative Energy business. During the year ended December 31, 2007, BP acquired Chevrons Netherlands manufacturing company, Texaco Raffiniderij Pernis B.V. In April 2008, BP registered in Russia its subsidiary BP Exploration Services.

Breakdown trigger: $68. *** New trigger ***

Buy 2010 $70 LEAP Call WAO-AN

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

COP - ConocoPhillips

COP is still running and I am not going to chase them. I am going to raise the trigger slightly but just to support.

Company Info:

ConocoPhillips is an international, integrated energy company. It has six operating segments. Exploration and Production segment explores for, produces and markets crude oil, natural gas and natural gas liquids. Midstream segment gathers, processes and markets natural gas, and fractionates and markets natural gas liquids, primarily in the United States and Trinidad. Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products. LUKOIL Investment segment consists of its equity investment in the ordinary shares of OAO LUKOIL. The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. Emerging Businesses segment includes the development of new technologies and businesses outside the Companys normal scope of operations. In October 2007, American Electric Power Company, Inc. sold its 50% interest in the Sweeny Cogeneration plant in Texas to ConocoPhillips.

Breakdown trigger: $84 *** New Trigger ***

BUY 2010 $90 LEAP Call YRO-AR

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

FLR - Fluor

Earnings are the 12th. Maybe we can catch a dip back to support.

Company Info:

Fluor Corporation is a holding company that, through its subsidiaries, provides engineering, procurement and construction management (EPCM) and project management services. Fluor serves a number of industries worldwide, including oil and gas, chemical and petrochemicals, transportation, mining and metals, power, life sciences and manufacturing. Fluor is also a primary service provider to the United States Federal Government. It performs operations and maintenance activities for major industrial clients, and also operates and maintains their equipment fleet. The Company is aligned into five principal operating segments: Oil and Gas, Industrial and Infrastructure, Government, Global Services and Power. Fluor Constructors International, Inc., which is organized and operates separately from its business segments, provides unionized management, construction and management services in the United States and Canada, both independently and as a subcontractor on projects to its segments

Breakdown trigger: $150 *** New Trigger ***

Buy 2010 $160 LEAP Call LLF-AL
Sell 2010 $230 LEAP Call LLF-AV

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

FWLT - Foster Wheeler

Company Info:

Foster Wheeler Limited operates through two business groups, the Global Engineering & Construction Group (Global E&C Group) and the Global Power Group. The Global E&C Group, which operates globally, designs, engineers and constructs onshore and offshore upstream oil and gas processing facilities, natural gas liquefaction facilities and receiving terminals, gas-to-liquids facilities, oil refining, chemical and petrochemical, pharmaceutical and biotechnology facilities and related infrastructure, including power generation and distribution facilities, and gasification facilities. The Global Power Group designs, manufactures and erects steam generating and auxiliary equipment for electric power generating stations and industrial facilities globally. In February 2008, the Company completed the acquisition of Biokinetics. On April 7, 2006, the Company completed the purchase of the remaining 51% interest in MF Power.


Breakout trigger: $71 *** New Trigger ***

Buy 2010 $80 LEAP Call LWM-AP

Breakdown trigger: $62 *** New Trigger ***

Buy 2010 $70 LEAP Call LWM-AN

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

PH - Parker Hannifin

I have been waiting for a pullback in PH since the April 22nd spike but the only direction appears to be up.

Company Info:

Parker-Hannifin Corporation is a full-line diversified manufacturer of motion control products, including fluid power systems, electromechanical controls and related components. In addition to motion control products, the Company also is a producer of fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems. Its manufacturing, service, distribution and administrative facilities are located in 35 states and in 42 foreign countries. Its motion control technology is used in the products of its three principal business segments: Industrial, Aerospace, and Climate & Industrial Controls. The products are sold as original and replacement equipment through product and distribution centers worldwide. Parker products are supplied to over 427,000 customers in manufacturing, transportation and processing industry. In April 2008, the Company acquired Vansco Electronics and Ventrex Inc.

Breakout trigger: $85

Buy 2010 $90 LEAP Call LWU-AR

Breakdown trigger $80

Buy 2010 $90 LEAP Call LWU-AR

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

CRR - Carbo Ceramics

I watched Carbo rally from $35 to $50 without a dip. Finally last week it appeared there was going to be a decline but it stopped at $45. I am afraid of the market next week but I don't want to miss this one if it starts moving higher again.

Company Info:

CARBO Ceramics Inc. is a producer and supplier of ceramic proppant and a provider of fracture and reservoir diagnostic services and fracture simulation software through its subsidiary, Pinnacle Technologies, Inc. (Pinnacle). The Company conducts its business within two operating segments: Proppant and Fracture and Reservoir Diagnostics. The Proppant segment consists of manufacturing and selling ceramic proppant for use primarily in the hydraulic fracturing of oil and natural gas wells. Through its Fracture and Reservoir Diagnostics segment, the Company provides fracture mapping and reservoir diagnostic services, sells fracture simulation software and provides engineering services to oil and gas companies worldwide. Sales outside the United States accounted for 34% of the Companys sales during the year ended December 31, 2007. The Companys largest customers for ceramic proppant are BJ Services Company, Halliburton Energy Services, Inc. and Schlumberger Limited.

Breakout trigger: $48

Buy Dec $50 Call CRR-LJ

Breakdown trigger: $45

Buy Dec $50 Call CRR-LJ
 


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