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Weekly Newsletter, Saturday, 08/30/2008

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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

Gustav Gets No Respect

Hurricane Gustav is heading straight for the oil patch and traders are in denial. Crude finished $1 higher for the week and disaster could be looming on the horizon. Gustav was not getting the respect he deserves.

The problem appears to be multifaceted. Private weather forecasters are projecting a turn in the track to hit Texas and miss the majority of the oil patch. Other predictions on Friday had Gustav blowing through the oil patch but at a category 1 or 2 level and leaving little damage in its wake.

The Accuweather.com Hurricane Center had predicted Gustav will enter the gulf as a cat-3 and increase to a cat-4 before hitting the oil patch.

By Saturday afternoon Gustav winds had already exceeded 145 mph pushing it to a category 4 level and NOAA was predicting it would become a category 5 hurricane after it enters the gulf.

The USGS Minerals Management spokesman was on CNBC saying that after Katrina and Rita they beefed up the standards and anchor requirements to reduce the damage from future storms. Several of the oil companies were also interviewed and all expressed extreme confidence that the new safety precautions put in place would keep a repeat of Katrina from happening. Confidence was busting out all over and I could not help but think there were some surprises coming.

I may be nave in my understanding of oil platforms and the forces generated by a category 3 hurricane, much less a category 5, but I saw lots of pictures of wrecked rigs after Katrina, Rita and Dennis in 2005. The picture below is the $1.6 billion Thunder Horse platform owned by BP and Exxon. This was after hurricane Dennis and it was on the verge of sinking. That would be an expensive artificial reef if it had sunk. The second picture is the Mars platform after Katrina.

Thunder Horse

Mars Platform after Katrina

Hurricanes are unpredictable. Nobody can say five days in advance with any degree of certainty if a hurricane will hit a certain spot or even what category it will be when it hits. To be so cocky that thrie rigs are hurricane proof is just asking for trouble. Remember, the Titanic was unsinkable.

NOAA Hurricane Track

Projected track of Gustav through the oil patch

Combined tracks of both Gustav and Hanna

There are two confirmed storms heading for the gulf this weekend and another stronger storm brewing farther east. This has suddenly become an active hurricane season and just dodging Fay does not make you a pro at surviving the season.

Gustav has a many higher dollar targets to damage than Katrina did. There were only two platforms producing more than 100,000 bpd in 2005 and there are more than six now. Since 2005 the majority of production has shifted to the deeper water with giant platforms now producing the same oil it took dozens to produce in 2005. However, even though the gulf has a lot of new high capacity platforms the overall production has fallen -7% since 2005 to about 1.4 mbpd. In 2005 17 rigs broke free of their moorings and dragged anchors for miles completely disrupting the undersea pipeline system. Production was offline for months in most cases.

Noble said they upgraded the number of mooring anchors on deepwater units from 9 to 12 and on one platform from 12 to 16 to prevent them from breaking loose. This will be the first test of the new mooring systems.

I looked at a lot of possible plays this weekend but based on the lack of rally ahead of Gustav I can't help but think oil is going to drop hard if Gustav does evaporate or turn into a dud. With it turning into a category 4 hurricane on Saturday that does not appear likely.

The Gulf of Mexico produces 20% of our oil and 15% of our gas. I see prices for both either falling hard or exploding next week and taking a position ahead of that event is just rolling the dice. If Gustav wrecks the oil patch any energy plays picked this weekend will gap open out of range. We don't want to be a buyer at Tuesday's open.

We are closing in on the OPEC meeting on September 9th. Based on all the sound bites it appears the general consensus is for production to stay the same but for quotas to be enforced. That will require Saudi Arabia to remove that last bump in production but based on the lack of sustainable rally I don't think it will be missed.

Another factor to add to the price volatility over the next three weeks will be the volatility in the weekly inventory reports. These storms are going to cause havoc with tanker traffic for at least the next two weeks and that will make the inventory levels fluctuate wildly. Add in the shutdown of all the gulf platforms for two days or more and that is another shortfall on inventory replacement. If any refineries are knocked offline that will also add volatility to the numbers. I suspect it will be late September before the weekly reports are back to normal.

You have probable hear by now that John McCain picked Alaska Governor Sarah Palin as his VP choice. I saw a survey on MSNBC late Friday and with 555,836 votes it was a dead heat at 50% on whether it was the right choice or the wrong choice. She is very strong on energy and believes we should drill here before fighting for it overseas. She has taken on the big oil companies in Alaska and so far has won the battles. The democrats are calling her a lightweight but you decide. Do you think it is more difficult to be a governor and run a state like Alaska with hundreds of departments, tens of thousands of employees, budgets, taxes, national guard, police, airports, hospitals, civil service, courts, etc, or sitting in Congress for three years listening to speeches and voting present instead of yes or no? It should be an interesting race. The DNC video on Obama's life should get an Oscar. I thought it was excellent even though I am not going to vote for him. I thought the DNC pulled off a major win with the presentation and his speech was outstanding. If I thought he could accomplish half of what he promised I would vote for him. Unfortunately he is extremely uneducated in the energy field and he is in for a rude awakening if he gets elected.

The price of crude settled at $115.46 on Friday after the government announced late in the day that the Strategic Petroleum Reserve would be available immediately for replacement of any lost production. They also emphasized that the draw rate was 4.4 mbpd and far in excess of the 1.4 mbpd of oil we get from the gulf. The announcement had the desired effect of keeping a lid on prices.

If you have registered for the ASPO Peak Oil conference and have not received a personal email from me with conference notes please send me an email. There is still time to register and join the crowd. Go here to register: http://www.aspo-usa.org/aspousa4/

Jim Brown


Readers write: None today

Send me your email questions and I will try to answer.
Jim @ OptionInvestor.com

October Crude Futures Chart - Daily

October Natural Gas Futures Chart - Daily

October Gasoline Futures Chart - RBOB Daily

 


Changes in Portfolio

New Energy Plays

None - see watch list


New Non-Energy Plays

None


Dropped Plays

None


New Watch List Plays Triggered
FLS $132.12 Flowserv

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.

I strongly urge readers to be patient on new entries. We could see $110 or even $100 before the volatility is over.


 


New Plays

Most Recent Plays

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New Watch List Plays Triggered
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FLS - $132.12 Flowserv

That was not how I wanted to enter the Flowserve play. FLS spiked nearly $6 on Thursday on news they were doing a joint venture with Linde Group to engineer a natural gas refueling system in Europe. Flowserve plans to deliver at least 70 systems for refueling cars to Germany and Austria in 2009. Friday's -$4 decline was profit taking on this spike. The high on Thursday was $138.74 and our breakout trigger was $138. The unexpected spike on news put us in at the high for the week.

Company Info:

Flowserve Corporation (Flowserve) is a manufacturer and aftermarket service provider of flow control systems. The Company develops and manufactures precision-engineered flow control equipment, such as pumps, valves and seals, for critical service applications. Flowserve offers a range of aftermarket equipment services, such as installation, advanced diagnostics, repair and retrofitting. The Company sells its products and services to more than 10,000 companies, including engineering and construction firms, original equipment manufacturers (OEMs), distributors and end users. The Company operates through three business segments: Flowserve Pump Division (FPD) for engineered pumps, industrial pumps and related services; Flow Control Division (FCD) for engineered and industrial valves, control valves, actuators and controls and related services, and Flow Solutions Division (FSD) for precision mechanical seals and related products and services

Breakout trigger: $138 hit 8/28

Position: Jan 2009 $150 Call FLS-AU @ $11.00

 


Play Updates

Existing Plays

XLE $74.65 +0.03 - Energy Select SPDR

Lots of volatility ahead of Gustav but no trend. I raised the stop to $73 just in case the hurricane is a dud.

The XLE is a group of 36 companies in the energy sector. Exxon is the largest component and Tesoro the smallest. See the complete list here.

ETF Info:

Energy Select Sector SPDR Fund (the Fund) seeks to provide investment results that correspond to the price and yield performance of the Energy Select Sector of the S&P 500 Index (the Index). The Index includes companies that primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. The Fund utilizes a passive or indexing investment approach to invest in a portfolio of stocks that seek to replicate the Index. The Funds investment advisor is SSgA Funds Management, Inc.

Breakdown trigger: $72.00, hit 8/04

Position: Dec $80 Call XTG-LB @ $3.00

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UPL $68.15 +2.50 - Ultra Petroleum

UPL has a nice series of higher lows but strong resistance at $73. If there is any disruption of gas from the gulf that resistance could be broken. Ultra has no exposure to the gulf. Our stop is $61.

Prior commentary:

Ultra reported earnings on 8/05 that more than doubled the comparison quarter on a 125% increase in revenue. Production rose +23% and the average sales price of gas was $8.06 per mcf. They get less for their gas because of their location in Wyoming. Once the pipeline is finished to the east coast their profits will again accelerate sharply. They have no downside risk with an active hedging program and no offshore or out of country assets.

Breakdown trigger: $65, hit 8/05

Position: 2010 $80 LEAP WSS-AP @ $13.50

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APC $61.73 +3.08 - Anadarko Petroleum

S&P revised APC to positive from stable after APC completed a period of restructuring efforts a $1.7 billion drop in debt in the first half of 2008. APC is expected to cut another $1.8 billion when it completes another sale of assets to Statoil.

No change. Stop at $56.

Breakdown trigger: $55, hit 8/04

Position: 2010 $70 LEAP Call YPC-AN @ $7.60

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BHP $70.51 +.97 BHP Billiton

No specific news and a continued move higher by BHP. Thursday saw a new four-week high and Friday was profit taking. Stop is now $60.

Breakdown trigger: $65, hit 8/05

Position: 2010 $80 LEAP Call LPH-AP @ $9.50

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COP $82.51 -.67 - ConocoPhillips

Conoco rallied on news it was selling the rest of its retail service stations in order to focus on exploration. Conoco will still have a long-term contract to supply fuel to the stations but will no longer be tied to the properties. Conoco will get something in the ballpark of $800 million from Pacific Convenience & Fuel LLC for the deal. The major oil companies now own less than 5% of U.S. service stations. Stop is $81. If Gustav is a dud we will probably exit on Tuesday.

Earnings July 23rd, $3.50 per share

Position: 2010 $90 LEAP YRO-AR @ $11.35

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ENER - $75.17 -4.21 Energy Conversion Devices

ENER blew out earnings with 24 cents when analysts were expecting 16 cents. The spiked over $82 on the news but their gross margin guidance drop from 33% to 31% was credited with knocking $7 off the Thursday high. On Friday Piper Jaffray downgraded them to neutral and Jeffries Paul Clegg raised his target to $96 and reiterated them as a buy. Clegg had nothing but good things to say about ENER and he expects the margin to continue higher as the year progresses. Cowen and Company called the results a solid beat ad said the guidance appeared conservative. Stop is $66.

Breakout trigger: $68.50 hit 6/16

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

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CRR $60.10 +1.74 - Carbo Ceramics

Carbo hit a new high at $62 on three days last week but was unable to move past it. On Friday they announced the sale of their Pinnacle Technologies subsidiary to Halliburton for $137 million. They also announced a buyback of two million shares. With only 24 million outstanding that is just under 10% of the outstanding shares. Stop is $53.

Breakout trigger: $48 Hit 5/12

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


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Non-Energy Positions
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RIMM $121.60 -9.85 Research in Motion

That was not a fun week. RIMM was crushed by the warnings in the chip sector and through guilt by association to Apple and their iPhone problems. I personally don't think they are related but whenever Apple is down RIMM is weak also. Our stop is $119 so any further decline will take us out of the play. RIMM reported on Friday the BlackBerry Bold would launch on AT&T on October 2nd and just in time for holiday shoppers.

Prior comments:

RIMM is a combo play this time around to offset the extreme cost of the call option. We bought the call for $27.50 and sold the $110 put for $20.90 for a net debit of $6.60. In theory the call will continue to appreciate as RIMM moves higher and the put will continue to decline as it gets farther out of the money.

Breakout trigger: $125, hit 8/06

Long 2010 $140 LEAP Call YKD-AH @ $27.50
Short 2010 $110 LEAP Put YKD-MZ @ $20.90, net debit $6.60
 


Leaps Trader Watch List

Dropped Entries
None

New Watch List Entries
FTI
FMC Technologies

Current Watch List

HP - Helmerich & Payne

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: $52

Buy 2010 $60 LEAP Call LQB-AL

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HES - Hess Corp

Company Info:

Hess Corporation (Hess) is a global integrated energy company that operates in two segments: Exploration and Production (E&P) and Marketing and Refining (M&R). The E&P segment explores for, develops, produces, purchases, transports and sells crude oil and natural gas. These exploration and production activities take place principally in Algeria, Australia, Azerbaijan, Brazil, Denmark, Egypt, Equatorial Guinea, Gabon, Ghana, Indonesia, Libya, Malaysia, Norway, Russia, Thailand, the United Kingdom and the United States. The M&R segment manufactures, purchases, transports, trades and markets refined petroleum products, natural gas and electricity. As of December 31, 2007, the Company owned a 50% interest in a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations located on the East Coast of the United States.

Breakdown trigger: $95

Buy 2010 $100 LEAP Call WHS-AT
Sell 2010 $90 LEAP Put WHS-MR

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VLO - Valero

Company Info:

Valero Energy Corporation (Valero) owns and operates 17 refineries located in the United States, Canada and Aruba that produce conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products. The Companys principal products include conventional and California Air Resources Board (CARB) gasolines, reformulated gasoline blendstock for oxygenate blending (RBOB), ultra-low-sulfur diesel, and oxygenates and other gasoline blendstocks. Valero also produces a substantial slate of middle distillates, jet fuel, and petrochemicals, in addition to lube oils and asphalt. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It also sells refined products through a network of approximately 5,800 retail and wholesale branded outlets. Effective July 1, 2007, the Company completed the sale of the Lima, Ohio refinery to Husky Energy Inc.

Breakdown trigger: $32

Buy 2010 $40 LEAP Call YPY-AH

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

USO - US Oil Fund

I am targeting worst case here with crude falling to $100. That would take the USO to $80 and very strong support. This is a hail Mary play where we could do very good if triggered but odds of getting triggered are slim.

Company Info:

United States Oil Fund, LP (USOF) is a commodity pool that issues limited partnership interests or units that may be purchased and sold on the American Stock Exchange (the AMEX). The Company invests in futures contracts for light, sweet crude oil and other types of crude oil, heating oil, gasoline, natural gas and other petroleum-based fuels that are traded on the New York Mercantile Exchange (NYMEX), International Currency Exchange (ICE) Futures or other United States and foreign exchanges (collectively, Oil Futures Contracts). It holds interests in other oil-related investments such as cash-settled options on Oil Futures Contracts, forward oil contracts, and oil-based over-the-counter transactions. As of December 31, 2007, USOF held 4,754 Oil Futures Contracts traded on the NYMEX and 300 Oil Futures Contracts traded on the ICE Futures. The Company operates under full management control of its sole General Partner, Victoria Bay Asset Management, LLC (the General Partner).

I am not using LEAPS because I view this as a short-term trade.

Breakdown trigger: $82

Buy JAN $90 Call UNA-AL

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AAPL - Apple Computer

Despite my comments in the RIMM play description I think Apple is primed to explode when Best Buy begins selling the iPhone. This is a great entry into the mass market and 986 Best Buy stores and it will all happen in about three weeks.

Company Info:

Apple Inc. designs, manufactures, and markets personal computers, portable digital music players, and mobile communication devices and sells a variety of related software, services, peripherals, and networking solutions. The Company sells its products worldwide through its online stores, its retail stores, its direct sales force, and third-party wholesalers, resellers, and value-added resellers. In addition, the Company sells a variety of third-party Macintosh (Mac), iPod and iPhone compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores. The Company sells to education, consumer, creative professional, business and government customers.

I am using shorter-term calls rather than LEAPS because of the extreme premium for LEAPS of $35 or more. If you have the money to play you can buy the $150 call and sell the $200 put for a net debit of about $5 and a move to $225-$250 as many analysts expect would be very profitable. The risk is 2:1 because a falling stock price increases your short put premium while your long call premium shrinks. You lose on both sides. However, if Apple rises you win big on both sides. It would not be a play for timid traders.

Breakout trigger: $182

Buy Jan 2009 $200 Call APV-AT

Breakdown trigger: $160 *** New Trigger ***

Buy Jan 2009 $190 Call APV-AR

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PCP - Precision Cast Parts

Similar to Flowserve but different. PCP appears to have made a bottom at $92 and a break over $104 would be strong.

Company Info:

Precision Castparts Corp. is a manufacturer of complex metal components and products, provides investment castings, forgings and fasteners/fastener systems for critical aerospace and industrial gas turbine (IGT) applications. The Company also provides investment castings and forgings for general industrial, automotive, armament, medical and other applications; nickel alloys and product forms, as well as cobalt alloys, for the aerospace, chemical processing, oil and gas, pollution control and other industries; fasteners for automotive and general industrial markets; specialty alloys, waxes and metal processing solutions for the investment casting industry; refiner plates, screen cylinders and other products for the pulp and paper industry; metal-injection-molded and ThixoFormed parts for automotive and other markets; low-pressure sewer systems; gas monitoring systems for the power generation industry, and metalworking tools for the fastener market and other applications.

Breakdown trigger: $93

Buy Jan 2010 $120 LEAP Call YAM-AD

Breakout trigger: $105

Buy Jan 2010 $120 LEAP Call YAM-AD

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

MOS - Mosaic

We are going to keep running this play until we get it right.

Company Info:

The Mosaic Company (Mosaic) is a producer of phosphate and potash crop nutrients for the agricultural industry. The Company operates its business through three business segments: phosphates, potash and offshore. The Phosphates segment produce phosphate fertilizer and feed phosphate which are used in crop nutrients and animal feed ingredients, respectively. The principal inputs used in crop nutrients production are phosphate rock, sulfur and ammonia. 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. As of May 31, 2008, Cargill, Incorporated owned approximately 64.4% of the Companys interest. As of May 31, 2008, the Company had a 50% interest in Saskferco Products Inc.

Breakout trigger: $113 *** New Trigger ***

Buy Jan 2009 $140 LEAP Call LXW-AX

Breakdown trigger: $95

Buy Jan 2009 $120 LEAP Call LXW-AD

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

FTI - FMC Technologies

Company Info:

FMC Technologies, Inc. (FMC Technologies) is a global provider of technology solutions for the energy industry and other industrial markets. The Company designs, manufactures and services systems and products, such as subsea production and processing systems, surface wellhead production systems, high-pressure fluid control equipment, measurement solutions, and marine loading systems for the oil and gas industry. During the year ended December 31, 2007, it operated in three business segments: Energy Systems (comprising Energy Production Systems and Energy Processing Systems); FoodTech, and Airport Systems. On July 31, 2008, FMC Technologies completed the spin-off of its FoodTech and Airport Systems businesses into John Bean Technologies Corporation.

Breakout trigger $57.

BUY APR $60 Call FTI-DL
 


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