Option Investor

Weekly Newsletter, Saturday, 06/28/2008

Printer friendly version

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

$143, Do I Hear $150

Crude hit a low of $131.95 on Wednesday on a "surprising" 800,000-barrel build in inventory levels. Sure, and the dog ate my homework. By afternoon on Friday crude had risen to $142.99. Let's just call it $143 and ignore that penny. Another week and another $10+ spike in crude. The shorts are probably still licking their wounds.

The rebound was reportedly on the comments from the OPEC president that oil prices could go to $150 or even $170 this summer and that OPEC was not going to increase production. Libya's oil minister even threatened to cut production because of the glut in the market. That would be a cold day in hell for cash strapped Libya to cut production at $140 per barrel. It is all talk and no action. Anybody with oil is producing it as fast as they can. Saudi even went the extra mile to appear to be caving into market pressures with their two announced increases but you never hear them offer to sell it at a discount. It is all smoke and mirrors and we know it but the rest of the world is blind to the games.

Next week could be volatile. Duh! How would we know the difference? Every week has been volatile lately even though oil has been stuck in a range over $132. The volatility I am expecting could come on Tuesday. That is the first day of July and fund that got long oil to beef up their end of quarter statements is free to bail on Tuesday. We have inventories on Wednesday then an ECB meeting on Thursday. The ECB is expected to raise interest rates and that will strengthen European currencies and weaken the dollar. That would put upward pressure on oil as a hedge against the dollar if you believe in that scenario as laid out by dozens of analysts. I believe it has some credibility but nowhere near the impact it is given in the press.

I checked the hurricane map again Friday night and nothing on the horizon. So far the season has been very quiet and our run of luck will eventually run out.

The coal sector benefited from the window dressing crowd late in the week. The early week decline ended Wednesday morning and it was all up hill from there. Walter (WLT) gained $10 on Friday, Alpha Natural (ANR) +8, MEE, PCX and BTU +$3. Coal itself hit a historic high on Friday.

Natural gas hit $13.48 again and sure looks a lot like a potential top but I am not brave enough to short it. When the first hurricane appears on the radar the shorts will be crushed.

Gasoline prices had declined to 4.06 nationwide but the spike over $140 is going to pump it up again. Most analysts expect $4.25 as a probable high later this summer.

I added the weekly natural gas injections and storage to the oil inventory graphic. Weekly production is not large enough to meet demand throughout the winter. Therefore we have to inject gas into storage over the summer months to supplement winter production. If we have a hot summer and more gas is needed to produce electricity it impacts the amount left to be injected into storage and that impacts prices. If we have a hurricane that shuts production in the gulf that also impacts injection rates. Peak storage is just over 3,500 bcf and when winters are cold it is barely enough.

Oil/Gas Inventory Table

Look for window undressing on Tuesday to send prices lower and a rate hike from the ECB on Thursday to send crude higher. Very light volume could cause some wild swings throughout the week.

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:

Jim Brown

August Crude Futures Chart - Daily

August Natural Gas Futures Chart - Daily

July Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Plays

See watch list

Dropped Plays
FWLT Foster Wheeler *** Stopped ***
JEC Jacobs *** Stopped ***
SGR Shaw Group *** Stopped ***

New Watch List Plays Triggered
TRN $34.76 Trinity Industries
GDP $75.68 Goodrich Petroleum
HK $42.96 Petrohawk Energy
CHK $64.09 Chesapeake 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

TRN $34.76 - Trinity Industries

We finally got the dip to $35 for our entry so let's hope that initial support sticks.

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.

Breakdown trigger: $35 Hit 6/26

Position: 2010 $40 LEAP Call YJS-AH @ $6.90 6/26


GDP $75.68 - Goodrich Petroleum

When I said last week Goodrich was primed to explode I did not expect it on Monday morning. The company announced acquisition of 5,800 more acres in the Haynesville Shale and raised guidance for the quarter. That was good for a $14 gain for the week.

Prior commentary:

This company is primed to explode. It quietly collected a huge acreage position in the Haynesville Shale natural gas field before it was widely known as a monster discovery. Last Monday Chesapeake agreed to pay Goodrich $178 million for a 50% ownership in a portion of the acreage. Chesapeake is planning on drilling 440 horizontal gas wells on the property. This is a monster win for Goodrich and it has been somewhat of a secret until last Monday.

Company Info:

Goodrich Petroleum Corporation is an independent oil and gas company engaged in the exploration, exploitation, development and production of oil and natural gas properties primarily in the Cotton Valley trend of East Texas and Northwest Louisiana. As of December 31, 2007, the Company owned working interests in 301 active oil and gas wells located in 26 fields in five states. At December 31, 2007, Goodrich had estimated proved reserves of approximately 346.9 billion cubic feet (Bcf) of natural gas and 1.8 million barrels (MMBbls) of oil and condensate, or an aggregate of 357.8 billion cubic feet equivalent (Bcfe). On March 20, 2007, the Company completed the sale of substantially all of its assets in South Louisiana to a private company. The remaining fields held for sale are St. Gabriel, Bayou Bouillon and Plumb Bob. During the year ended December 31, 2007, Goodrich acquired drilling and development rights to acreage located in the Angelina River play.

Breakout trigger: $66 Hit 6/23

Position: 2010 $80 LEAP Call LP-AP @ $21.00


HK $42.96 - Petrohawk Energy

We saw a breakout on Monday to trigger the play but it was mostly driven by the GDP news. After the obligatory profit taking HK returned to close right at a historic high. Their margins at $7.00 gas are 73% and 81% at $12. Those are huge numbers when their production is growing so quickly.

Petrohawk has been in the news a lot last week based on their Haynesville Shale acreage. They are making a career out of drilling horizontal wells in the Haynesville.

Company Info:

Petrohawk Energy Corporation (Petrohawk) is an independent oil and natural gas company engaged in the acquisition, development, production and exploration of oil and natural gas properties located onshore in North America. The Companys properties are primarily located in the Mid-Continent region, including North Louisiana, the Fayetteville Shale in the Arkoma basin of Arkansas and in the Western region, including the Permian Basin of West Texas and southeastern New Mexico. At December 31, 2007, the Companys estimated total proved oil and natural gas reserves were approximately 1,062 billion cubic feet of natural gas equivalent, consisting of 18 million barrels of oil, and 955 billion cubic feet of natural gas and natural gas liquids.

Breakout trigger: $40.75 Hit 6/23

Position: DEC $50 Call HK-LJ @ $4.50


CHK $64.09 - Chesapeake Energy

CHK sprinted higher with GDP and crashed on Wednesday with the oil market. Fortunately support held and Friday saw a nice gain. CHK is a major gas player and the Haynesville Shale is going to be a big play for them.

Previous commentary:

This is another stock that refuses to pull back but the news is too good to let it continue to run away from us. As I mentioned in the GDP lead CHK paid $178 million to Goodrich for a 50% working interest in some Haynesville Shale acreage. As I read further CHK said the Haynesville Shale could end up being the biggest asset they own and produce more gas than any other CHK property. That is a huge statement given CHK's massive footprint in places like the Barnett Shale in the DFW area. Encana (ECA) is the largest gas producer in North America and they said the Haynesville Shale could be the biggest deposit in North America.

Company info:

Chesapeake Energy Corporation is a producer of natural gas in the United States (first among independents). It owns interests in approximately 38,500 producing oil and natural gas wells that are producing approximately 2.2 billion cubic feet equivalent (bcfe), per day, 92% of which is natural gas. Its operations are located in the Mid-Continent region, which includes Oklahoma, Arkansas, southwestern Kansas and the Texas Panhandle; the Forth Worth Basin in north-central Texas; the Appalachian Basin, principally in West Virginia, eastern Kentucky, eastern Ohio and southern New York; the Permian and Delaware Basins of West Texas and eastern New Mexico; the Ark-La-Tex area of East Texas and northern Louisiana, and the South Texas and Texas Gulf Coast regions. In July 2007, the Company announced the acquisition of Kerr-McGee Tower from Anadarko Petroleum Corporation and subsequent sale of the tower to SandRidge Energy, Inc.

Breakout trigger: $67 Hit 6/23

Position: 2010 $80 LEAP Call WZY-AP @ $17.40


Play Updates

Existing Plays

ENER - $71.32 -5.32 Energy Conversion Devices

ENER gave back a little more than half of the +$8 it gained the prior week. ENER announced that its share offering was oversubscribed and underwriter options were exercised in full. They issued the shares to raise $400 million to increase production capability of their thin film products.

Breakout trigger: $68.50 hit 6/16

Position: 2010 $80 LEAP Call KYU-AP @ 23.10


SGR - $61.01 Shaw Group *** Stopped ***

Shaw dipped ever so slightly to $60 at the open on Friday and that took us out of the play. The bear market last week was not kind to this sector.

Breakout trigger: $66 Hit 6/17

Position: 2010 $75 LEAP Call YCW-AO @ $14.10, exit $10.70


FTK $20.04 -1.79 Flotek

No specific news and FTK is trying to resist the market decline. Trend is still up.

Breakout trigger: $21.00 Hit 6/17

Position: 2010 $25 LEAP Call YVB-AE @ $5.20


BTU $84.05 +3.74 - Peabody Energy

Well off the high for the week at $87.70 but still a nice gain. Trend is still up and they opened a new mine in New Mexico on Tuesday.

Breakout target: $81 Hit 6/09

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


BP $67.35 +.43 - BP PLC

The battle still rages but Morgan Stanley upgraded them to a buy on Wednesday. BP also broke ground on a wind farm in Kansas this week.

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


PDE $47.79 +2.05 Pride International

A new all time high at Friday's close. No news and no complaints.

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 $72.49 -.41 Foster Wheeler *** Stopped ***

FWLT dipped on market weakness to our stop at $70 and took us out of the play. This sector was hard hit for the week despite a lot of good news.

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, exit $14.90


CRR $57.06 -0.47 - Carbo Ceramics

No news and CRR continues to cling to its highs.

Breakout trigger: $48 Hit 5/12

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


JEC $81.17 -6.18 Jacobs Engineering *** Stopped ***

Again, no specific news but the sector was crushed and we are out.

Breakout trigger: $90 Hit May 5th

Position: 2010 $100 LEAP Call WEU-AT @ $16, exit $13.20


PBR $69.23 +3.96 Petrobras

Solid support at $65 and a nice bounce after Ken Heebner pounded the table again on CNBC on the merits of PBR. Petrobras is being labeled this weekend as a stock to buy for a bounce next week. Let's hope they are right.

Prior commentary:

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.

Breakout trigger: $125.50 hit 4/28

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


NE $64.76 -0.79 - Noble Corp

The service companies and drillers are holding their own in the bear market but not really posting any gains. We need a big oil deal to get them moving again.

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.

Breakdown trigger $56.00 hit 4/29

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


NOV $88.41 +3.92 - National Oilwell Varco

RBC Capital upgraded NOV to an outperform on Monday and NOV hit a new high. Market weakness saw a pullback late in the week but still a nice gain. RBC price target is now $116.

Breakdown trigger: $67 Hit 4/30

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


FLS $138.14 +4.84 - Flowserve

Flowserve came within 68 cents of hitting the stop at $128 before rebounding to close the week with a nice gain. No news.

Breakout trigger: $110 Hit 4/16

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

Non-Energy Positions

TRA - $50.35 -3.81 Terra Inds

That was probably the worst entry ever. After going long last Sunday TRA peaked over $55 on Monday only to collapse with the sector on Tue/Wed. Support at $47 held and Friday saw a $2 gain. Let's hope it sticks in the bear market.

Entered 6/23

Position: 2010 $60 LEAP Call KMK-AL @ $14.80

Leaps Trader Watch List

Dropped Entries

New Watch List Entries


Current Watch List

COP - ConocoPhillips

Soooo close! COP dipped to $91.54 on Friday. Maybe next week we will be lucky and get our entry.

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

BUY 2010 $100 LEAP Call YRO-AT


SD - Sandridge Energy

SD came within 38 cents of out $60 entry on Thursday. Keep your fingers crossed.

CEO Tom Ward, co-founder of Chesapeake with Aubry McClendon bought 230,000 of his own shares at $50 in recent weeks. 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: $60

Buy 2010 $70 LEAP LWE-AN


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives