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Weekly Newsletter, Saturday, 06/14/2008

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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

Ready To Expire

It was another crazy week in the energy pits with intraday volatility making it almost impossible to trade. $5 moves are common with major reversals appearing daily. You can tell we are closing in on expiration. The crude options expire on Tuesday and July crude futures cease trading next Friday. That alone would be enough to create volatility without the weekly inventory reports.

Wednesday's inventory report showed crude inventories falling another -4.6 million barrels to extend the decline to four weeks and -23.6 million barrels. This pushed inventory levels to 13.5% below 2007 and a -7% drop in only four weeks. Imports were relatively unchanged which suggests the current level is too low to support current demand. Refinery utilization fell a point to 88.6% from the prior week's 89.7%. I believe the refiners are reluctant to add to inventories at the current price. They don't want to be stuck holding millions of barrels of high priced oil if a correction suddenly appears. They want to be able to buy any dips rather than inventory at the top.

Weekly Inventory Table

Prices close the week at $135 with gasoline prices at a new record of $4.07. It will take at least $4.15 to compensate for $135 oil and possibly $4.25 by July 4th. Ironically the EIA report showed that gasoline demand rose to its highest level since Dec-21st, 2007. This number was skewed by the Memorial day traffic patterns but suffice to say there has not been as much demand destruction due to price as everyone thought.

The weekly MasterCard Spending Pulse Survey has been pegging gasoline sales at about 4.5% below the same period in 2007 but I believe that is due to more cash purchases of gasoline. Consumer credit cards are maxed out and $75 fill ups are causing many to resort to paying cash.

Nigeria took control of the joint venture with Shell in hopes of avoiding some of the anti-oil violence. Analysts said this could cause a further drop in supply since Nigerian workers did not have the same skill level as the displaced Shell workers. Also providing volatility to prices were fears of a strike on June 18th by Nigerian workers. If the Pengassan workers walked out it could cut production by another 350,000 bpd.

The Financial Times ran an article on June 12th suggesting that speculators were not to blame for high prices. Refiners are paying record prices for the high quality oil they use to produce diesel and gasoline. This is a sign of strong demand in the physical oil market and calls into question the claims that speculators are causing the problem.

Refiners are paying a premium of up to $5-$6 per barrel on top of the current price to secure high-grade oil. This is double the premium from a year ago. The price of physical oil has gone largely untracked since reporters typically report on the futures. While refiners are paying a high premium for light crude they are also getting a huge discount for low-grade oil.

The premium for Nigeria's high-grade Bonny light oil has surged to $4 per barrel, up from $2.50 a year ago. In the same period the discount for low-grade Iranian heavy oil has widened to $13 from $7 last year.

The split in actual price for light compared to heavy explains OPEC's reluctance to boost production since most of the OPEC oil is the low-quality oil. It also highlights the lack of refinery capacity for heavy oil, low-quality oil. It is tougher to refine into low sulfur products like gasoline and diesel. The shortfall in Nigerian production over the last year has complicated the refining market. Nigeria oil is light crude and is in high demand. Unfortunately rising amounts have been taken off the market due to MEND violence.

I have given this example many times but for the sake of new readers I will repeat it. Different refineries gear up for different types of oil. Some can only process the light sweet crude and some can process the heavier grades. Refining the heavy crude from Venezuela requires a different process than the heavy crude from Saudi Arabia. Each field has a specific characteristic and the refiners must create a process for that specific oil. This means they need to have a steady supply of that oil before they are willing to make the investment.

A refinery that can only process light crude physically can't use a heavy sour crude. They simply do not have the proper equipment to process it. It is the equivalent of pulling into a filling station for unleaded and all they have is diesel. Your car simple cannot use diesel regardless of the quantity and price. It could be 20-cents a gallon and you could not use it. This is the same way with the different refiners and different grades of crude.

This is also why there is such a premium on light crude. This is the lowest common denominator for oil. Almost any can process light crude but very few can process heavy crude. Light sells at a premium and heavy at a big discount. If the global price of oil was set by the cost of Arabian heavy crude we would be talking an entirely different price range because there is plenty of extra heavy crude. There is a shortage of light crude and unfortunately that is the benchmark product.

Volatility is telling. I believe that the current volatility is telling us that we may be near the top in price without some news event to power us higher like a gulf hurricane. When prices swing so much intraday it is because there is a wide difference of opinion and major players are entering/exiting the market. However, the chart is showing us a pennant continuation pattern that fits in very well with the Morgan Stanley $150 by July 4th prediction. A breakout of the pennant to the upside targets $148.

With all the commentary about futures regulation for speculators and putting rules in place on the ICE futures exchange and the Saudi Arabia meeting on crude there is plenty of reason to find another commodity to trade. If you are just a trader then corn or gold is just as profitable as oil. Granted the fundamental basis for oil was a market mover but we are moving into an 18-month period where there will be a lot of new production coming to market. It is after 2009 when serious shortages are going to develop.

There are no hurricanes on the horizon and we still have a week before the Saudi oil meeting. Unless there is a sudden news event next week it will be up to the options/futures expiration to provide motivation to trade. Remember Morgan Stanley predicted $150 by July 4th. It will be interesting to see if that comes true given the current calendar of events.

Don't forget the Association for the Study of Peak Oil (ASPO) is holding their annual conference in Sacramento on Sept 21-23rd. This is a full 2.5 days of intensive, as in 8:AM to 9:PM information overload from dozens of experts from around the world on the status of Peak Oil. The cost is minimal at $325 because they are a non-profit and make no money on the event. Follow the link below to register and join me there. We can discuss each presentation and plan trades for the coming year. Put my name in the "how did you hear" box so they can group us together for the meetings. Go here to register:
http://www.aspo-usa.org/aspousa4/

I am removing the Apple/RIMM covered calls from the newsletter after today. We are at max profits on both and baring a complete meltdown on Apple due to Steve Jobs health we should stay that way until expiration. There is no reason to continue the coverage for the few people who own the position.

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

See watch list


New Non-Energy Plays
TRA Terra Industries

Dropped Plays
VLO Valero ** Stopped **

New Watch List Plays Triggered
BTU $77.59 Peabody Energy

Portfolio Listing & Top Picks

***********
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

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New Watch List Plays Triggered
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BTU $77.59 - Peabody Energy

That was not exactly how I wanted to enter Peabody. The breakout to $81 triggered our entry just before the market weakness knocked $5 off the price for the week. Support is $72 and the rest of the sector is still hot. I am putting the stop a $70 to start.

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 Hit 6/09

Position: 2010 $90 LEAP Call LLW-AR @ $19.92


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New Non-Energy Plays
********************

TRA - Terra Inds

I wanted to get back into Mosaic after we were stopped out in May but the stock simply won't slow down. Rather than miss the entire fertilizer sector I found a stock that has been lagging but appears about ready to break out to new highs as well and the LEAPs are still cheap. TRA has resistance at $50-$51 but over that level could catch fire.

Company Info:

Terra Industries Inc. (Terra) is a producer and marketer of nitrogen products, serving agricultural and industrial markets. The Companys business is organized into two segments: Nitrogen Products and Methanol. The Nitrogen Products business produces and distributes ammonia, urea, urea ammonium nitrate solutions, ammonium nitrate and other nitrogen products to agricultural and industrial users. The Methanol business manufactures methanol, which is principally used as a raw material in the production of a variety of chemical derivatives, and in the production of methyl tertiary butyl ether (MTBE). Terra owns a 75.3% interest in Terra Nitrogen Company, L.P. (TNCLP), which, through its subsidiary, Terra Nitrogen, Limited Partnership, operates Terras manufacturing facility at Verdigris, Oklahoma. The Company is the sole general partner and the majority limited partner of TNCLP. On September 14, 2007, the Company formed GrowHow UK Limited, a joint venture with Kemira GrowHow Oyj.

Buy 2010 $60 LEAP Call KMK-AL *** at $8.00 or less ***

Currently the bid/ask on the $55 call is 8.00/8.50 but the
bid/ask on the $60 is 11.60/12.10. The quote is an error that should correct on Monday. I would just buy the $55 but I like to have an even number strike in case of a stock split.

 


Play Updates

Existing Plays

BP $68.40 -0.49 - BP PLC

The battle continues between BP and their Russian partners but the stock price continues to hold at support at $68. If there is a breakthrough I expect BP to rocket higher. If it goes against them then we will be stopped out at $66.

See the June-8th newsletter for news about Russia.

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.

Breakdown trigger: $68. Hit June 4th.

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

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

VLO $44.84 -$1.49 - Valero *** Stopped ***

That was a quick exit. VLO dropped $10 in just six days. The decline was caused by the monster spike in oil the prior week.
Breakout trigger: $51 hit 5/19
Position: 2010 $60 LEAP YPY-AL @ $7.20, exit $5.75 6/09

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PDE $45.80 +1.02 Pride International

A three-week high close on Friday. No complaints here. Jesup & Lamont initiated coverage with a buy on Thursday.

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 $73.57 -2.19 Foster Wheeler

That was REALLY close. FWLT dropped -$8 on market weakness to $70.10 and skillfully avoided our $70 stop. US Global Investors said FWLT was one of two companies you must have.

Breakout trigger: $71 Hit 5/13

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

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

CRR $55.71 +1.51 - Carbo Ceramics

No news but the trend is still higher. CRR is a major take over target.

Breakout trigger: $48 Hit 5/12

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

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JEC $90.01 +1.34 Jacobs Engineering

Strong $4 gain on Friday put them back into the green for the week. All the engineering groups were down on the early weak market drop but Friday was a big gainer. No news.

Breakout trigger: $90 Hit May 5th

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

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

PBR $67.94 -.13 Petrobras

Petrobras reportedly made another light oil discovery offshore in block BM-S-9. This is an ultra-deep field like the rest and reportedly it is a large discovery. The government officials continue to get in trouble for spilling confidential data before Petrobras does and that happened again last week. Petrobras said the Tupi field will be operational by 2010 with 100,000 bpd and will be producing 500,000 bpd by 2020. The first actual production test is set for Q1-2009. Lifting costs are expected to be $8.20 per barrel. Tupi reserves are expected to be between 5-8 billion barrels. They have only drilled two wells at Tupi and the first one took 14 months and $240 million. Now they are drilling wells in 2-3 months at $60-$80 million each. Petrobras is going out for bids on the construction of 28 new drilling rigs. They will be Brazilian made and delivered between 2013-2017.

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

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NE $65.19 +2.00 - Noble Corp

Jesup & Lamont initiated coverage with a buy rating. No other news and Noble is holding near its historic highs. 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

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

NOV $83.16 -.41 - National Oilwell Varco

Same drop on Thursday as the rest of the sector but an equal recovery on Friday. No news.

** See portfolio listing for any stop loss **

Breakdown trigger: $67 Hit 4/30

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

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

FLS $134.73 +.39 - Flowserve

$5 gain on Friday erased losses fro earlier in the week. Still holding just below its high at $138.50 with no news.

** See portfolio listing for any stop loss **

Breakout trigger: $110 Hit 4/16

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


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

None


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

AAPL $172.37 -13.27 Apple Inc *** Covered LEAP Call ***

This is the last update on Apple. It will be dropped from the portfolio after today. We are at max profits over $150.

Fears over Steve Jobs cancer returning is crushing AAPL stock. The decline has been so severe that Apple has got to say something next week. If it is positive I expect a giant rebound. If his cancer has returned then look out below.

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 $132.96 +1.55 Research in Motion

This is the last update on RIMM. We are at max profits over $110 and there is no reason to carry it in the portfolio until expiration.

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

I hesitate to add new plays when the potential is great that prices will fall over the next couple weeks. However, we should use that as an entry point for new positions.

I was going to add AMSC - American Semiconductor, as a wind play until I read this.
 

Dropped Entries

None


New Watch List Entries
SGR
Shaw Group
ENER Energy Conversion Devices
TRN Trinity Industries

Current Watch List

COP - ConocoPhillips

I raised the trigger again to $90 since that appears to be where it wants to find 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: $90 *** New trigger ***

BUY 2010 $100 LEAP Call YRO-AT

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

SD - Sandridge Energy

I wanted to buy a breakout here but the LEAPS are too expensive and SD is too extended.

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: $56 *** New trigger ***
Buy 2010 $70 LEAP LWE-AN *** New strike ***

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

FLR - Fluor

Nice dip to $175 but still $10 over our trigger. I hesitate to raise the entry until we see what the market is going to do.

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.

Breakout trigger: $21.00 *** New trigger ***

Buy 2010 $25 LEAP Call YVB-AE

Breakdown trigger: $17.00

Buy 2010 $20 LEAP Call YVB-AD

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

ENER - Energy Conversion Devices

ENER appears ready to break over resistance at $67 but a weak market could give us an opportunity for a lower entry.

Company Info:

Energy Conversion Devices, Inc. manufactures and sells thin-film solar laminates that convert sunlight to energy using proprietary technology. Distributed globally under the UNI-SOLAR brand, the company's products are ideally suited for cost-effective solutions for roofing applications because they are lightweight, durable, flexible, can be integrated directly with building materials, and generate more energy in real-world conditions. ECD also pioneers other alternative technologies, including a new type of nonvolatile digital memory technology that is significantly faster and less expensive, ideal for use in a variety of applications, including cell phones, digital cameras and personal computers.

Breakout trigger: $68.50

Buy 2010 $80 LEAP Call KYU-AP

Breakdown trigger: $60.00

Buy 2010 $70 LEAP Call KYU-AN

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

SGR - Shaw Group

Just awarded the contract to build two nuclear plants in South Carolina. Reading the news for SGR shows a strong pace of contract wins.

Company info:

The Shaw Group Inc. (Shaw) is a diverse engineering, technology, construction, fabrication, environmental and industrial services company. Shaw provides its services to a diverse customer base that includes multinational oil companies and industrial corporations, regulated utilities, independent and merchant power producers, government agencies and other equipment manufacturers. The Company delivers its services from more than 150 locations, including 22 international locations. On January 31, 2007, Shaw acquired all of the stock of Mid-States Pipe Fabrication, Inc. (MSPF). On June 29, 2007, the Company acquired all of the stock of EzeFlow (NJ) Inc., a manufacturer of pipe fittings for the power and process industries. The Company has six business segments: Fossil & Nuclear; Energy and Chemicals (E&C); Environmental and Infrastructure (E&I); Maintenance; Fabrication and Manufacturing (F&M), and Investment in Westinghouse.

Breakout trigger: $66

Buy 2010 $75 LEAP Call YCW-AO

Breakdown trigger: $60

Buy 2010 $70 LEAP Call YCW-AN

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

TRN - Trinity Industries

I know what you are thinking. Why a rail car manufacturer when there are 40,000 cars in storage at present? Because Trinity is rapidly remaking itself into a wind tower company. Last quarter the CEO said his wind business increased 42% and the backlog went from $200 million to $1.6 billion. They have many manufacturing lines and segments and when one is slack it can pick up for the other. I think the wind tower business is going to continue to explode.

Company Info:

Trinity Industries, Inc. (Trinity) is a multi-industry company that owns a range businesses, which provide products and services to the industrial, energy, transportation and construction sectors. Trinity has five business groups: Rail Group, Railcar Leasing and Management Services Group, Construction Products Group, Inland Barge Group and the Energy Equipment Group. The Company manufactures and sells railcars and railcar parts, inland barges, concrete and aggregates, highway products, beams and girders used in highway construction, tank containers, a range of steel parts, and structural wind towers. In addition, it leases railcars to its customers through a captive leasing business, Trinity Industries Leasing Company. In April 2007, its subsidiary, Transit Mix Concrete & Materials Company, acquired a combined group of East Texas asphalt, ready mix concrete and aggregates businesses operating under the name Armor Materials.

Breakout trigger: $41

Buy 2010 $50 LEAP Call YJS-AJ

Breakdown trigger: $35

Buy 2010 $40 LEAP Call YJS-AH
 


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