Option Investor

Weekly Newsletter, Sunday, 07/13/2008

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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

Smoke and Mirrors

Condeleezza Rice launches into a tirade against Iran and Iran launches a new flurry of missiles as a warning that severe retaliation will fall upon any country stupid enough to attack Iran. Is that really what happened? More and more reports are surfacing suggesting those missiles may have been tested several years ago and those were just old videos.

Iran already admitted one of the videos had been altered to show four missiles being fired instead of three that actually took off. The fourth one was a dud but was added back into the picture later.

Missiles are expensive and even more so when a country is accumulating debt faster than blowing sand. Getting spare parts is another problem. Why waste several million dollars worth of missiles when you might actually need them for a future war? U.S. intelligence experts claim these were old and outdated missiles and did not have the range Iran was claiming. Obviously this is just speculation on my part and others on why Iran chose to release those videos. Whatever the reason oil prices benefited.

I have been speculating all week that Iran was more concerned about jacking up the price of oil than deterring anyone from attacking them. I have listened to several retired generals this week who claim there will be no attack. First because the distance and logistics are too far and too tough for Israel and second because the U.S. will not let them attack. The U.S. is trying to wind down violence in Iraq and an attack on Iran by Israel or the U.S. would increase the intensity of Iran's involvement in Iraq exponentially. Iran has threatened the U.S. with this escalation and this is not an idle threat. Bush may not want Iran to have a nuclear weapon but there have been some recent discrepancies come to light on the Israeli intelligence claiming Iran will have weapons capability as early as 2009. If the intelligence was credible Dick Cheney would be leading the attack himself.

While the U.S. is not cooling its vocal attack on Iran as evidenced by the Rice speech this week they are still trying to use peaceful means to shutdown Iran's nuclear ambitions. That does not include allowing Israeli planes to use Iraq as a staging area for an attack as the Jerusalem Post claimed on Thursday.

The post said Israeli planes were using an airbase in Iraq to stage supplies and for Israeli pilots to practice tactical missions in identical terrain as they would find in Iran. The Israeli government, Iraq government and the U.S. government said this claim was utterly baseless. It was however another strong psychological attack aimed at keeping Iran off guard regardless of who actually planted the story. The rumors sent oil prices soaring to a new high on Friday at $147.27 before multiple denials ended the rally.

I believe all the thrust and parry maneuvers by the U.S. and Israel are meant to keep Iran guessing. Iran's propaganda is meant to push oil prices higher. Do you really think anyone is going to be scared off from attacking Iran just because of video of some outdated missiles that didn't even launch reliably? I doubt it. If they wanted to scare off attackers they would have shown their jets with the new high technology missiles they got from Russia or the extremely high tech antiaircraft missiles they have ringing the nuclear installations. If you want to threaten someone you need to have something they would be afraid of. It is all smoke and mirrors and I doubt they will have anything to do for an encore next week.

A more important problem for oil supplies is the cancellation of the cease-fire in Nigeria as of midnight on Friday. The cease-fire lasted only about three weeks before the MEND rebels became upset about Britain's backing of the government in the conflict. You can expect some more violence directed at the energy infrastructure next week just to prove they are back on the attack. The MEND rebels have kept over one-third of Nigeria's crude off the market for most of the last year. Nigeria's crude is the light sweet variety and the kind in high demand.

Petrobras said their workers on 42 offshore platforms in the Campos region were going to strike for five days next week. The workers are trying to get an extra day off every work cycle. Currently they work two weeks on and three weeks off. What a deal and they are whining about another day. Get a life! The workers said they would let a minimal amount of oil through as long as Petrobras did not try to replace them with alternate crews. If Petrobras brings in new crews the striking workers said they would disable the system. This area produces 1.8 mbpd for Petrobras. The actual impact on the world demand will be minimal as long as the strike is peaceful.

The following paragraph is reprinted from this weekend's Option Investor commentary.

Matthew Simmons was interviewed on CNBC again on Friday and was again adamant that this price hike was just another step higher towards $200 oil and higher. He said as long as so many people continue to expect a return to lower prices nothing will really change. Consumers will drive less in the short term but not really change their consumption habits. He thinks the government should be worried about how to limit consumption and increase production rather than focusing on a witch-hunt for whatever demon caused the problem. He believes the U.S. is on a dangerous spiral where inventory levels continue to decline until some geopolitical event causes a severe shortfall in imports. When that happens there will be a shortage of gasoline and diesel and the country will see severe civil unrest from the lack of fuel and food. I know this sounds dire but I have been preaching this for several years. All of my predictions have come true as many of our readers know. This is just another step in the process of peak oil and while we have not seen the top in production yet it is expected to be in 2009. Once that occurs there will be a serious downward economic spiral not just in the U.S. but around the world. Peak oil does not mean the end of oil, just the end of cheap oil. Every barrel from that point forward will be fought over either by bidding or shooting or both.

Crude oil inventories dropped -5.8 million barrels last week making the combined drop for the last eight weeks nearly 32 million barrels. There was a substantial decline in crude imports and refiner consumption rose slightly ahead of the July-4th weekend. Analysts believe the emergence of Hurricane Bertha off the coast of Africa and progressing towards the U.S. disrupted the flow of oil from that direction. This suggests we could see a large jump in inventories in two weeks now that Bertha has moved north and out of the tanker path. I also believe refiners and pipeline companies are reluctant to buy oil for inventory at these high prices. With the crack spread at $5 a barrel the risk is too great. With crude prices swinging $5 a day it could be significantly lower by the time you actually got delivery and it would be impossible to refine it for a profit.

Oil and Gas Inventories

The $9 drop in oil prices on Mon/Tue knocked us out of four positions (NE, NOV, PDE, PBR) but gave us entry points in four new positions. (ANR, MOS, FLR, TS, SD) If the bear market continues or we get another swoon in oil prices we could lose some more. It is amazing to me that oil can be trading within reach of $150 but many of the oil stocks are at multi month lows. Actually quite a few of the S&P-500 are at new lows simply because investors are moving to the sidelines rather than fight the market volatility. It is not just energy but almost every sector. Heck, RIMM hit $109 on Friday and well off the $148 high just a couple weeks ago. Their business model did not change and they received several high profile upgrades over the last couple weeks. It is just a bear market and all stocks go down. I am actually rather pleased that many of our positions this posted gains.

Jim Brown

August Crude Futures Chart - Daily

August Natural Gas Futures Chart - Daily

August Gasoline Futures Chart - RBOB Daily


Changes in Portfolio

New Energy Plays

See watch list

New Non-Energy Plays


Dropped Plays
NE Noble Corp *** Stopped ***
NOV National Oilwell *** Stopped ***
PBR Petrobras *** Stopped ***
PDE Pride International *** Stopped ***

New Watch List Plays Triggered
SD $61.41 SandRidge Energy
MOS $141.56 Mosiac Industries
FLR $173.78 Fluor
ANR $96.87 Alpha Natural Resources
TS $68.05 Tenaris

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

SD $61.41 - SandRidge Energy

A sudden three-day collapse in natural gas stocks on no news gave is an entry in SD. This company is on fire and we saw an $8 bounce from the week's lows.

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 Hit 7/07
Position: 2010 $70 LEAP LWE-AN @ $13.00


MOS $141.56 - Mosaic Industries

We have played this one before but were stopped out several weeks ago. I believe we got a perfect entry at the long-term support of the 100-day average. Thank you Mr. Bear market. Canaccord Adams issued a buy on the pullback.

Earnings July 28th

Company info:

The Mosaic Company (Mosaic) is a producer of phosphate and potash combined, as well as nitrogen and animal feed ingredients. The Company operates its business through four business segments: phosphates, potash, offshore and nitrogen. The Phosphates segment operates mines and concentrates plants in Florida that produce phosphate fertilizer and feed phosphate, and concentrates plants in Louisiana that produce phosphate fertilizer. The Potash segment mines ad processes potash in Canada and the United States and sells potash in North America and internationally. The Offshore segment produces and markets fertilizer products and provides other ancillary services to wholesalers, cooperatives, independent retailers, and farmers in South America and the Asia-Pacific regions. The Nitrogen segment consists of its equity investment in Saskferco and Mosaics nitrogen sales and distribution activities

Breakdown trigger: $125 hit 7/08

Position: 2010 $160 LEAP Call KCA-AL @ $27.45


FLR $173.78 - Fluor

The drop back to fill the gap from May-12th gave us our entry at support and all we need the market to do is cooperate. This is an expensive position but Shaw's earnings and spike last week give us hope of a similar fate for Fluor.

Earnings August 11th

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: $175 hit 7/07

Position: 2010 $200 LEAP Call LLF-AZ @ $35


ANR $96.87 - Alpha Natural Resources

This was another near perfect entry at support at $80 where ANR spent only one day before blasting off again for a $16 rebound. ANR was the best performing coal stock on the rebound from last week's correction lows.

Company info:

Alpha Natural Resources, Inc. is an Appalachian coal supplier. The Company produces, processes and sells steam and metallurgical coal from eight regional business units, which, as of December 31, 2007, are supported by 32 active underground mines, 26 active surface mines and 11 preparation plants located throughout Virginia, West Virginia, Kentucky, and Pennsylvania, as well as a road construction business in West Virginia and Virginia that recovers coal. The Company is also involved in the purchase and resale of coal mined by others. In 2007, the Company sold a total of 28.5 million tons of steam and metallurgical coal. It owned or leased 617.5 million tons of coal reserves. On December 28, 2006, the Companys subsidiary, Palladian Lime, LLC (Palladian) acquired a 94% ownership interest in Gallatin Materials LLC (Gallatin). On June 29, 2007, it acquired certain coal mining assets in western West Virginia from Arch Coal, Inc. known as Mingo Logan.

Breakdown trigger: $80 hit 7/08

Buy 2010 $100 LEAP Call WDB-AT @ $23.40


TS $68.05 - Tenaris

Near perfect entry on uptrend support and with oil exploding the amount of drilling in progress increases every day. The weakness was due to a sell off in the Latin American markets. Tenaris is an Argentine stock.

There were rumors making the rounds last week about a pipe shortage. Crews on several rigs in western Colorado were sent home last week because of a shortage of casing. Reportedly there is a 30-day delay in getting steel pipe and drillers are being put on allocation for future orders.

Company info:

Tenaris S.A. (Tenaris) is a global manufacturer and supplier of steel pipe products and related services for the energy industry, as well as for other industrial applications. Its customers include oil and gas companies, as well as engineering companies engaged in constructing oil and gas gathering, transportation, and processing facilities. Its principal products include casing, tubing, line pipe, and mechanical and structural pipes. It operates an integrated worldwide network of steel pipe manufacturing, research, finishing and service facilities with industrial operations in North and South America, Europe, Asia and Africa, and a direct presence in major oil and gas markets. Tenaris is organized in three major business segments: Tubes, Projects and Other. In May 2007, the Company acquired Hydril Corporation (Hydril), a manufacturer of premium connections for steel pipe products. On April 1, 2008, it sold Hydrils pressure control business to General Electric Company.

Breakdown trigger: $65 Hit 7/08

Position: Dec $70 Call TSW-LN @ $6.00


Play Updates

Existing Plays

COP $88.13 -$3.71 - ConocoPhillips

It was a heck o a week to announce your production fell by 60,000 barrels per day. The drop was due to planned maintenance but income was boosted by higher crude prices. Conoco preannounced expected results for their earnings two weeks from now. Conoco's market price received for oil was up +$26 from the first quarter and nearly double the same period in 2007. COP actually said refining margins improved in Q2 and that was a surprise given the slaughter in the refining sector. COP repurchased $2.5 billion in shares in Q2.

Earnings are July 23rd

Breakdown trigger: $90

Position: 2010 $100 LEAP Call YRO-AT @ $11.70


TRN $31.33 -.57 - Trinity Industries

No news but support at $31 is holding. Stop is at $30.

Breakdown trigger: $35 Hit 6/26

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


GDP $74.18 +.88 Goodrich Petroleum

Excellent two day rebound gaining +6 on Friday alone. Even more surprising GDP announced they were offering 3 million shares at $64 on Wednesday to close on Monday. Obviously the offering will be grossly oversubscribed. Proceeds will be used to payoff its senior revolving credit line. No changes.

Good article on Goodrich here

Prior commentary:

This company is rocking on its newfound fame. It quietly collected a huge acreage position in the Haynesville Shale natural gas field before it was widely known as a monster discovery. In late June 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 recently.

Breakout trigger: $66 Hit 6/23

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


HK $47.90 +.98 Petrohawk Energy

Petrohawk released some production information on its wells in the Haynesville shale. They had a tested flow rate of 16.8 million cubic feet per day. This was double prior data from Penn Virginia (PVA) on similar wells in the area. The geology and well history is now projecting 30-40 trillion cubic feet in the Haynesville putting it on par with the Barnett Shale in Texas.

Prior commentary:

Chesapeake said it had sold 110,000 acres of its Haynesville Shale acreage to Plains Exploration for $25,600 an acre plus development concessions of $1.65 billion. This price tag on land means HK's current holdings are worth more than $7.4 billion in this play. HK only has a market cap of $9 billion meaning all the other assets are seriously undervalued. It may take several weeks for the news on HK to sink in but it should be going a lot higher even at its current valuation. Revenues are exploding.

Breakout trigger: $40.75 Hit 6/23

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


CHK $63.52 -3.26 Chesapeake Energy

CHK lost some ground this week after announcing a secondary offering priced at $57.25 per share on July 8th. This covered 25 million shares with an option for 3.75 million more. The offering will close on July 15th and proceeds will be used to payoff outstanding indebtedness under its revolving bank facility. That is a lot of shares and CHK dropped $6 on the news to $58. That ground was quickly recovered and the offering is expected to be fully subscribed.

There was an error on the option symbol in the portfolio graphic that an astute reader pointed out to me. The symbols have been corrected.

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.

Breakout trigger: $67 Hit 6/23

Position: 2010 $80 LEAP Call WZY-AP @ $8.60


ENER - $67.22 +3.16 Energy Conversion Devices

ENER caught a bid this week after an upgrade to BUY from Broadpoint Capital. No other news but ENER gained the most of any stock in the portfolio this week.

Breakout trigger: $68.50 hit 6/16

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


BTU $76.85 -.77 - Peabody Energy

After the beating coal stocks took in the prior week anything approximating a gain would be appreciated. Unfortunately BTU did not respond as strongly as ANR but support at $72 held on two tests. Shipments of coal across the Midwest are still being delayed almost a month after the record-breaking floods. Parts of two rail lines owned by BNSF are still closed. UNP and NSC are back in service. How this will impact BTU earnings for the quarter is unknown.

Earnings July 23rd

Breakout target: $81 Hit 6/09

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


PDE $42.59 -.75 Pride International *** STOPPED ***

Pride hit our stop at $42 on Monday and held at that level all week. I heard two analysts recommending it on Friday so it is still a buy even if it is no longer in the portfolio.

Position: Jan 2009 $50 Call PDE-AJ @ $3.70, exit $2.70

Stop @ $42 hit 7/07


CRR $53.79 -.48 - Carbo Ceramics

Good solid bounce from support after missing our stop at $50 by 4-cents. No complaints!

Breakout trigger: $48 Hit 5/12

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


PBR $61.71 -4.01 Petrobras *** Stopped ***

Petrobras continued lower on news of the pending strike in Brazil next week. Our stop at $62 was triggered on Tuesday. Once the strike is over we will take another run at PBR.

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: $62.75 hit 4/28

Position: 2010 $150 LEAP Call YMO-AV @ $22.10, exit $24

Stop $62 hit 7/08


NE $58.91 -2.74 - Noble Corp *** Stopped ***

I believe this was just a bear market decline but NE had been dormant for several weeks. We will watch this for the next move higher.

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, exit $8.70

Stop $60 hit 7/08


NOV $83.12 -2.00 - National Oilwell Varco *** Stopped ***

No specific news but NOV declined to exactly our stop at $78 on Tuesday. We still escaped with a profit so no harm no foul.

Breakdown trigger: $67 Hit 4/30

Position: NOV $80 Call NOV-KP @ $5.40, exit 9.70

Stop $78 hit 7/08

Non-Energy Positions


Leaps Trader Watch List

Dropped Entries

New Watch List Entries
Foster Wheeler
HP Helmerich Payne

Current Watch List

FXI - Shanghai ETF

After getting pounded for weeks I feel the Chinese market may be in for a rebound as we head into the summer games next month.

Company info:

China ETF including SNP, CEO and PTR

List of companies

Breakdown trigger: $120

Buy 2010 $140 LEAP Call YOF-AY


FWLT - Foster Wheeler

We were stopped out on FWLT several weeks ago and I believe it may have found support at $60.

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.

Breakdown trigger: $60

Buy 2010 $70 LEAP Call LWM-AN

Breakout trigger: $68

Buy 2010 $80 LEAP Call LWM-AP


HP - Helmerich Payne

HP continues to build the best rigs in the business and they have a multiyear backlog. We were stopped out back in May on our last HP play and the stop went on to gain another $20. Time to try again thanks to the bear market.

Company Info:

Helmerich & Payne, Inc. is primarily engaged in contract drilling of oil and gas wells for others. The contract drilling business accounts for almost all of the Company's operating revenues. It is also engaged in the ownership, development and operation of commercial real estate. It is organized into two separate operating entities: contract drilling and real estate. The Company's contract drilling business consists of three business segments: U.S. land drilling, offshore platform drilling and international drilling. The Company's U.S. land drilling is conducted primarily in Oklahoma, California, Texas, Wyoming, Colorado, Louisiana, Mississippi, Alabama, Arkansas, New Mexico, and North Dakota, and offshore from platforms in the Gulf of Mexico, California, Trinidad and Equatorial Guinea. During the fiscal year ended September 30, 2007, the Company's international land segment operated in seven international locations: Venezuela, Ecuador, Colombia, Argentina, Bolivia, Tunisia and Chile.

Breakdown trigger: $62

Buy 2010 $70 LEAP Call LQB-AN

Breakout trigger: $71

Buy 2010 $80 LEAP Call LQB-AP


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