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Weekly Newsletter, Saturday, 06/07/2008

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Table of Contents

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

Leaps Trader Commentary

Oil Up, Stocks Down

It was a very volatile week in the crude markets with the low on Wednesday of $121.61 and a rocket rebound to close the week at $138.50. I watched it happen and I still can't believe it when I type that sentence. There was some big money made and lost last week by the major players. If you were on the right side of the trade it was a grand slam homerun. On the wrong side and you could be working at McDonalds next week trying to make ends meet.

It was a perfect storm for the crude markets with about eight things hitting the news wires on Friday morning. I am not going to repeat everything here because I wrote a long article in the Option Investor weekend commentary. If by chance you don't get that just email me (Jim at OptionInvestor.com) and I will send it to you.

The crude inventories fell again on Wednesday by -4.8 million barrels but nobody seemed to care with all the testimony in Washington and CFTC comments every hour or so. However, when everything wrapped up on Thursday and traders realized it could be months before any changes were made it was back to trading once again.

Crude Inventory Table

Crude inventories have fallen -19 million barrels over the last three weeks. If there is so much oil in the market where is it? Gasoline rose +2.9 million barrels on a +2% spike in refinery utilization. Demand fell -1.4% for gasoline over the last four weeks according to the EIA. That is much better than the -4.7% drop MasterCard was claiming in their Spending Pulse report.

The spike in crude is going to send gasoline prices to the moon. AAA said they were $3.989 on Thursday and analysts are expecting another 10-15 cent bounce by Wednesday. If Morgan Stanley's $150 by July 4th prediction comes true then we can expect to be paying $4.25 to $4.35 per gallon before the fireworks fly. Remember about two months ago when the $4 by Memorial Day prediction was made? How many really believed it would happen?

The spike on Friday was a record dollar gain for the Nymex. It was the second largest percentage gain after the Iraq invasion of Kuwait.

II was surprised to see the oil stocks falling so hard with oil prices up +$17 in two days. The -390 drop in the Dow and -75 on the Nasdaq definitely soured sentiment and traders were taking profits everywhere but in crude.

We are still two weeks away from the June 20th expiration of the July contracts so anything is possible. 50% of the volume on Friday's spike was in the front month contracts so it was definitely momentum players jumping back into the market.

I suggested last week that buying a dip to the 30-day average at $122.50 would be a good entry point for longs ahead of the summer hurricane season. I did not realize so many people would act on it. (grin) Wednesday's close was $122.30.

Another puzzle was the $20 drop in Transocean over the last three weeks. With the majority of unexplored territory in deepwater why is RIG falling out of favor? The drop was enough to take us out of our position.

We are also close on a couple others and will probably be stopped next week unless Monday opens higher. I mentioned last week that I was growing frustrated with Carbo (CRR) going dormant for three weeks and would give it another week before dropping the play. Sure glad I did. CRR closed Monday at $48 and hit $55 on Friday. The spike came after Smith International bought W-H Energy Services for $3.2 billion. CRR was mentioned as a potential takeover target as well. Also mentioned was TESO, TTES, FTK, SPN, KEG and PKD.

Important - Important - Important

OK, this is the important stuff. The Association for the Study of Peak Oil (ASPO) is holding their annual three-day conference in Sacramento on September 21-23. This is 2.5 full days of up to date information on the current status of peak oil, how to invest for it, live with it and what the future holds. There will be dozens of speakers from all over the world whose names you would recognize instantly on the news. For me this is the most important conference I go to every year. Our readers are always asking questions about what the future holds and how we should plan for it. This seminar covers all the bases from the current status of production, reserves and declines to where the problems are starting to appear. I can't emphasize enough how informative and educational this conference will be. I have attended for the last three years and I would not miss it for the world. The cost is $375 and that is actually the cost of the food, speakers and meeting rooms. ASPO is non-profit with a goal to spread the word about Peak Oil and Gas. They don't make a dime on the event.

There is only seating for 250 people and it always fills up fast.

Plan on meeting me there and we can spend three days discussing what we are learning and planning on how to profit from it. Follow this link to register. Be sure to put my name in the "How did you hear box" so we can all be grouped together. Send me an email after you register (Jim at OptionInvestor.com) so I can put you on my mailing list for updates and discussion plans. I cannot stress how important this conference is. The general public has no clue about what is coming. I have been educating you for 4 years and this is where I go to learn. Go here to register: http://www.aspo-usa.org/aspousa4/

Jim Brown


July Crude Futures Chart - Daily

July Natural Gas Futures Chart - Daily

July Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None


New Non-Energy Plays

None


Dropped Plays
RIG Transocean *** Stopped ***

New Watch List Plays Triggered
BP $68.87 BP PLC

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.


 


New Plays

Most Recent Plays

******************************
New Watch List Plays Triggered
******************************

BP $68.87 - BP PLC

Our patience was rewarded. BP finally came back to trigger our entry at $68 on Wednesday. That is $10 off its high in May. Unfortunately it declined on news that the Russian TNK-BP partnership is about to breakup. Like Russia did with every other independent oil company over the last five years they have begun to wear BP down with red tape. In January Russia declared visas for 148 expatriate employees were invalid and would not let them work for several weeks. Later another Russian owned firm filed suit seeking to block BP's expat specialists from working for TNK-BP. The court has yet to deliver a judgment but has barred the employees from working in the meantime. Last week the CEO of the partnership was summoned to court on a tax probe covering the last 7 years. That is another Russian ploy to wear down the target. I had hoped BP would be spared the same fate as Shell, Exxon, etc, when each was reduced to a minority stake in their billion dollar projects and the ownership turned over to Gazprom. It is rumored that Gazprom is going to take ownership of the TNK-BP partnership. BP currently owns 50% and AAR, a Russian holding company owns the other 50%. BP derived 11% of its profits from the TNK-BP venture.

Recent progress announcements on the Thunder Horse platform in the Gulf suggested that BP was going to finally start producing. BP is on track to begin producing 250,000 bpd of oil and 200 million cubic feet of gas per day from Thunder Horse. The platform covers the area of three football fields and sleeps 185 workers. The gas-powered generator could power 80,000 homes. The project cost so far has been $3.5 billion. It will collect oil from 25 wells. I am hoping the Thunder Horse project will offset any further news from Russia.

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. Hit June 4th.

Position: 2010 $70 LEAP Call WAO-AN @ $7.30


 


Play Updates

Existing Plays

VLO $46.33 - Valero

That was an ugly week. Valero hit a new 4-week high on Tuesday at $54 and then collapsed to trade at $46.27 at Friday's close. The problem was the high price of oil. With prices that high the crack spreads go to zero because they can't raise the price of gasoline fast enough to compensate for the spike. I set the stop at $45.

Breakout trigger: $51 hit 5/19
Position: 2010 $60 LEAP YPY-AL @ $7.20

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

PDE $44.78 +0.84 Pride International

Merrill upgraded them on Friday to a buy with a $55 price target saying they were still not being valued as a deep-water play. They also mentioned the takeover potential.

Zacks recently reiterated a buy rating on PDE on Friday based on their $9.4 billion backlog and their emergence as a pure play deepwater driller. They have sold off their non-core assets to leverage the deepwater play. The market is still valuing them as a shallow water jackup play and they are no longer in that sector. They are a strong takeover target given their small size and sector.

Position: Jan 2009 $50 Call PDE-AJ @ $3.70

I went with a Jan call instead of a LEAP because an acquisition would limit LEAP appreciation. I wanted to be close to the current price with a cheap option.

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

FWLT $75.76 -.41 Foster Wheeler

Still holding the high ground on no news. No complaints!

Breakout trigger: $71 Hit 5/13

Position: 2010 $80 LEAP Call LWM-AP @ $16.80

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

CRR $54.20 +6.51 - Carbo Ceramics

Carbo rallied sharply on news that Smith industries (SII) was buying W-H Energy (WHQ) for $3.2 billion. CRR is a major take over target.

Breakout trigger: $48 Hit 5/12

Position: Dec $50 Call CRR-LJ @ $5.80

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

JEC $88.67 -6.11 Jacobs Engineering

The gains from the prior weeks have been reversed and JEC broke strong support at $90 on Friday. I am hoping it was just the market forces on a black Friday. I lowered the stop to $85 with support at $86.

Breakout trigger: $90 Hit May 5th

Position: 2010 $100 LEAP Call WEU-AT @ $16

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

PBR $68.07 -2.43 Petrobras

Petrobras declined early in the week after news broke that estimated the cost of drilling the Tupi field at between $100 billion and $250 billion. That is a monster expense but 33 billion barrels of recoverable oil would be worth $4.5 trillion at today's prices. Brazil is even going to acquire a $600 million nuclear submarine to protect the fields and drilling platforms.

I suspect that once the field is proven beyond a shadow of a doubt they will have no trouble raising the money.

Every dip is a buying opportunity.

** See portfolio listing for any stop loss **

Breakout trigger: $125.50 hit 4/28

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

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

NE $63.19 +.05 - Noble Corp

Noble rallied off the RBC conference presentation and was up strong on Friday morning before profit taking sent them fractionally negative. No complaints!

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 $143.50 -6.69 - Transocean *** Stopped ***

RIG has fallen $20 over the last 3 weeks on no news. Everybody is recommending them but the pain continues. Stopped at $145 on Tuesday.

Breakdown trigger: $150 Hit 4/29

Position:
Long 2010 $170 LEAP Call YDR-AN @ $24.00 exit 22.85, -1.15
Shrt 2010 $230 LEAP Call YDR-AW @ $8.50 exit 9.50, -1.00

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

NOV $83.57 +.25 - National Oilwell Varco

Down $2.34 on Friday but was up for the week giving us a breakeven. On a -400 point day that is good for me. Zacks reiterated their buy on NOV and raised their price target to $100.

** See portfolio listing for any stop loss **

Breakdown trigger: $67 Hit 4/30

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

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

FLS $134.34 -4.18 - Flowserve

No news and the -$4 for the week only put them at the bottom of recent support after their $15 gain back in May.

** See portfolio listing for any stop loss **

Breakout trigger: $110 Hit 4/16

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


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

AAPL $185.64 -3.11 Apple Inc *** Covered LEAP Call ***

Apple is expected to announce the 3G iPhone at 10:AM on Monday. The hype will be huge and we are so deep in the money it will not make any difference.

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 (APV-AJ) @ $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 $131.41 -7.46 Research in Motion

RIMM gained +7 last week and lost $7 this week. No problem, we are at max profits.

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

None


New Watch List Entries
FLR Fluor
FTK Flotek

Current Watch List

COP - ConocoPhillips

I raised the trigger again to $88 and that is only $4 under Friday's close.

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: $88 *** New trigger ***

BUY 2010 $100 LEAP Call YRO-AT *** New strike ***

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

SD - Sandridge Energy

CEO Tom Ward, co-founder of Chesapeake with Aubry McClendon bought 230,000 of his own shares at $50 over the last week. This kind of confidence gave Sandridge a $5 bounce to a new high. SD announced the prior week that Williams had acquired certain assets for $285 million giving Sandridge additional cash for growth. This company appears to be in high growth mode and I want to own it on a pullback.

Company info:

SandRidge Energy, Inc. (SandRidge) is an independent natural gas and oil company with its principal focus on exploration, development and production activities. The Company also owns and operates drilling rigs and a related oil field services company operating under the name Lariat Services, Inc.; gas gathering, marketing and processing facilities, and, through its wholly owned subsidiary PetroSource Energy Company, carbon dioxide (CO2) treating and transportation facilities and tertiary oil recovery operations. The Company is focused on exploration and exploitation of its significant holdings in West Texas that it refers to as the West Texas Overthrust (WTO), a natural gas prone geological region that includes the Pinon Field, and its South Sabino and Big Canyon prospects. SandRidge operates in four segments: exploration and production, drilling and oil field services, midstream gas services and other.
Breakdown trigger: $52
Buy 2010 $60 LEAP LWE-AL

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

BTU - Peabody Energy

Joy Global said in an interview last week that there could be a coal shortage this year of 70-100 million tons. Tony Blair said China was building coal fired plants so rapidly that they would out number all the electric generation in Europe within a few years. Coal remains the cheapest alternative for electricity and demand will continue to grow for years to come.

Company Info:

Peabody Energy Corporation (Peabody) is a coal company. During the year ended December 31, 2007, the Company sold 237.8 million tons of coal. It sells coal to over 340 electricity generating and industrial plants in 19 countries. At December 31, 2007, the Company had 9.3 billion tons of proven and probable coal reserves. The Company owns majority interests in 31 coal operations located throughout all the United States coal producing regions and in Australia. In addition, it owns a minority interest in one Venezuelan mine, through a joint venture arrangement. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. Peabody owns and operates six mines in Queensland, Australia, and five mines in New South Wales, Australia. During 2007, the Company generated 89% of its production from non-union mines. On October 31, 2007, Peabody spun-off portions of its Eastern United States Mining operations business segment to form Patriot Coal Corporation.

Breakout target: $81 *** New Trigger ***

Buy 2010 $90 LEAP Call LLW-AR *** New strike ***

Breakdown Trigger: $70.00

Buy 2010 $80 LEAP Call LLW-AP

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

FLR - Fluor

Looks like the bloom is fading with resistance solid at $190.

Company Info:
Fluor Corporation is one of the world's largest, publicly owned engineering, procurement, construction, and maintenance services companies. Over the past century, Fluor, through its operating subsidiaries, has become a trusted global business leader by providing exceptional services and technical knowledge across every phase of a project. Clients rely on Fluor to deliver world-class solutions that optimize their assets, improve their competitive position, and increase their long-term business success.
Consistently rated as one of the world's safest contractors, Fluor's primary objective is to develop, execute, and maintain capital projects on schedule, within budget, and with operational excellence. The individual and collective expertise of our global workforce of more than 46,000 provides cost-effective, intelligent solutions in a timely manner. In addition to project offices, Fluor maintains a network of offices in more than 25 countries across 6 continents. Our outstanding dependability, expertise, and safety distinguish Fluor as the preeminent leader in the global building services marketplace
Breakdown trigger: $165

Buy 2010 $180 LEAP Call LLF-AU

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

FTK - Flotek

FTK has been beaten senseless after missing earnings. The stock was $55 back in Q4 and then had a run of bad luck. It appears to have found a bottom at $17.

Company Info:

Flotek Industries, Inc. is a global supplier of drilling and production related products and services to the energy and mining industries. The Company's core focus is oilfield specialty chemicals and logistics, downhole drilling tools and downhole production tools. Flotek offers its products primarily through its sales organizations, as well as through independent distributors and agents. The customers for its products and services include oil and natural gas companies, independent oil and natural gas companies, pressure pumping service companies and state-owned national oil companies. Five customers accounted for approximately 34% of its consolidated revenue during the year ended December 31, 2007. The Company's reportable segments are Chemical and Logistics, Drilling Products and Artificial Lift. All three segments market products domestically and internationally.

Breakdown trigger: $17.00

Buy 2010 $20 LEAP Call YVB-AD
 


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