Leaps Trader Commentary
Obviously the volatility from the summer is still with us with $10 price swings becoming the norm for crude. Prices rose on a falling dollar and news that several more OPEC nations had notified buyers of a cut in the amount of oil available. The rising dollar and a stubborn refusal by Russia to join in the OPEC cut sent prices back to $60 on Friday.
OPEC president Chakib Khelil said on Saturday OPEC nations could further reduce oil production if the move last month failed to produce a rally in prices. He also said a report being prepared for the end of November would show if all OPEC members have enforced the October quota cuts. Khelil said a reasonable price for crude would be between $70 and $90 per barrel.
Khelil said the predicted recession in the U.S. and Europe would continue to slow demand and India and China growth would not consume enough extra oil to keep pace with recession declines in the rest of the world. "OPEC countries will therefore probably continue to reduce their production, in order to maintain a balance between supply and demand, at least through the beginning of 2009," according to Khelil.
OPEC's yearly summit is scheduled for Dec-17th and production cuts will again be discussed. Price stability is critical for many OPEC nations who depend on revenue from oil exports for the majority of their budget. For instance 95% of Algeria's revenue comes from energy exports of oil and gas. Sharp drops in prices produce hardship on these dependent countries.
Russia's Finance Minister, Alexei Kudrin, said Russia would defy calls by Venezuela's President Hugo Chavez to join OPEC in cutting production to support prices. Kudrin said, "Russia will pursue an independent strategy." Chavez had hoped his recent increase in cooperation and trade with Russia had given him some influence over Russia's energy policy. Nothing could be further from the truth and Chavez's only connection with Russia is dependent on the size of the checks he writes to buy arms from Russia. If Chavez runs out of money he will find his calls to Russia unanswered.
The 2008 World Oil Outlook report from the IEA is not scheduled to be released until Wednesday but the advance highlights suggest the IEA has taken a sudden turn towards peak oil. They do not call it peak oil and do not claim the world is running out of oil. They do claim that insufficient investment in exploration and production will lead to shortages sooner rather than later.
Previously the IEA had claimed production would continue to grow to well over 120 mbpd by 2030. That would require the addition of six more Saudi Arabia sized oil discoveries and that is simply never going to happen. The IEA is now saying that "conventional oil production" will effectively remain static, rising from 70.4 mbpd today to 75.2 mbpd in 2030. This is a monster decline in estimates and shows the severity of the coming problem.
Six More Saudi Arbias
The IEA also reported data from the world's 500 largest fields showing depletion has risen to a whopping 9.1% per year. This is twice prior estimates and also shows the magnitude of the coming problem.
The IEA says to prevent a future shortage oil companies and governments must invest a minimum of $360 billion a year in finding and producing new oil. Much of that investment must be in the Middle East according to the IEA because they control the last untapped conventional oil reserves. The IEA wants Saudi Arabia to increase production to 15 mbpd from their current 9.6 mbpd and 12.5 mbpd 2010 targets. The Saudi ruling family has already said they would never increase production above 12.5 mbpd in order to preserve the oil for future generations. That will also insure prices will continue to rise for their oil.
The full report will be out on Wednesday and I will summarize it next weekend.
December Crude Futures Chart - Weekly
Portfolio Listing & Top Picks
Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.
Position Summary Table
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.
Top Picks List
Midweek Market Decline A Gift
New Energy Plays
None - See Watch List
New Non-Energy Plays
None - See Watch List
New Watch List Plays Triggered
IO - ION Geophysical
ION spiked to hit our breakout target of $7 on Tuesday after reporting earnings that nearly doubled the comparison quarter. Earnings were 27-cents compared to estimates of 22-cents. The company cautioned in their earnings statement that the oil industry was undergoing stress due to the restriction of financing and capital availability. They did not lower their earnings estimates but the stock sold off slightly on the caution.
ION Geophysical Corporation (ION), formerly Input/Output, Inc., is a technology-focused seismic solutions company that provides acquisition equipment, software, and planning and seismic processing and interpretation services to the global energy industry. Its products, technologies and services are used by oil and gas exploration and production (E&P) companies and seismic acquisition contractors to generate high-resolution images of the subsurface during exploration, exploitation, and production operations. The Company’s products and services include land and marine seismic data acquisition equipment, navigation and data management software products, survey design planning services, seismic data processing services and seismic data libraries. ION operates through four business segments. Three of these segments, Land Imaging Systems, Marine Imaging Systems and Data Management Solutions, make up its ION Systems division. The fourth segment is the Company’s ION Solutions division.
Breakout trigger: $7.00, hit Nov 4th
Position: 2010 $7.50 LEAP Call LAC-AU @ $2.15
Chart of IO
HK - Petrohawk Energy
Petrohawk pulled back nicely to its recent uptrend support giving us a good entry. Earnings soared with net income up eleven times to $305 million from $26.8 million including one-time items. Excluding items earnings were a penny under street estimates. Petrohawk production averaged 315 MMCFE/D for the quarter.
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 Company’s 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 Company’s 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.
Breakdown trigger: $16, hit 11/6
Position: MARCH $20 Call HK-CD, $2.85
Chart of HK
XCO - EXCO ResourcesXCO Dropped sharply to nearly $6 from its $9.38 high for the week on Thursday's market sell off and its earnings report. The rebound was immediate to close back over $8 on Friday. The company reported earnings that beat the street with a +28% rise in revenue despite a loss of 3.2 Mmcfe/d of gas being shut in by hurricane Ike. Production for the quarter was 37 Bcfe. Company Info:
EXCO Resources, Inc. (EXCO) is an independent oil and natural gas company engaged in the acquisition, development and exploitation of onshore North American oil and natural gas properties. The Company’s operations are focused in key North American oil and natural gas areas, including East Texas/North Louisiana, Appalachia, Mid-Continent and Permian. As of December 31, 2007, EXCO’s proved reserves were approximately 1.9 trillion cubic feet equivalents (Tcfe), of which 93.3% were natural gas and 70.8% were proved developed reserves. During the year ended December 31, 2007, EXCO produced 121.3 billions of cubic feet equivalent (Bcfe) of oil and natural gas. On March 30, 2007, EXCO completed the acquisition of oil and natural gas properties, acreage and other assets in the Vernon and Ansley fields in North Louisiana from Anadarko Petroleum Corporation and Anadarko Gathering Company.
Breakdown trigger: $7, hit 11/6
Position: JUN $12.50 Call XCO-FV, $1.25
Chart of XCO
DRQ - Dril-Quip
DRQ declined -4.50 to hit our breakdown trigger at support at $22 on Friday. There was no news just market weakness causing the drop.
Dril-Quip, Inc. (Dril-Quip) designs, manufactures, sells and services engineered offshore drilling and production equipment that is suited for use in deepwater, harsh environment and severe service applications. The Company’s principal products consist of subsea and surface wellheads, subsea and surface production trees, mudline hanger systems, specialty connectors and associated pipe, drilling and production riser systems, wellhead connectors and diverters. Dril-Quip also provides installation and reconditioning services and rents running tools for use in connection with the installation and retrieval of its products. The Company manufactures its products at its facilities located in Houston, Texas; Aberdeen, Scotland; Singapore and Macae, Brazil. The Company maintains additional facilities for fabrication and/or reconditioning in Norway, Denmark, and Australia.
Breakdown trigger: $22, hit 11/7
Position: JUN $30 Call DRQ-FF, $3.40
Chart of DRQ
MOS - Mosaic
The market weakness knocked MOS from its Wednesday high of $43.16 to Thursday's low of $33.60 to trigger our breakdown target at $35. I believe strongly that the fertilizer stocks will continue to prosper as we add 150 million to the world's population every year. Much of the existing population is upgrading their eating habits and calorie intake. This requires larger crop yields and bringing less fertile land into production.
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 Company’s interest. As of May 31, 2008, the Company had a 50% interest in Saskferco Products Inc
Breakdown trigger: $35, hit 11/6
Position: 2010 $50 LEAP Call LXW-AJ, $7.10
Chart of MOS
DWSN - Dawson Geophysical
DWSN dropped nearly $4 on Thursday after reporting record results on Wednesday. The drop triggered our entry at $22.50. DWSN reported a 26% increase in revenue and repayment of the entire $20 million in remaining debt on its credit line. DWSN said its order book was full and backlogged through 2009. DWSN is the leading provider of seismic services in the continental USA. Company Info:
Dawson Geophysical Company is a provider of onshore seismic data acquisition services in United States. The Company acquires and processes two-dimensional (2-D), three-dimensional (3-D) and multi-component seismic data for its clients, ranging from major oil and gas companies to independent oil and gas operators, as well as, providers of multi-client data libraries. Its clients rely on seismic data to identify areas where subsurface conditions are favorable for the accumulation of hydrocarbons and to optimize the development and production of hydrocarbon reservoirs. During the fiscal year ended September 30, 2007 (fiscal 2007), all of its revenues were derived from 3-D seismic data acquisition operations. As of September 30, 2007, it operated 15 3-D seismic data acquisition crews in the lower 48 states of the United States and a seismic data processing center.
Breakdown trigger: $22.50, 11/06
BUY MAR $30 Call DVQ-CF, $2.05
Chart of DWSN
BUCY - Bucyrus International
Tuesday's spike in energy triggered the BUCY breakout entry just in time to see a -$9 drop on Wed/Thr. Still BUCY is holding at support and has not violated any recent lows. No specific news.
Bucyrus International, Inc. designs, manufactures mining equipment for the extraction of coal, copper, oil sands, iron ore and other minerals in mining centers throughout the world. In addition to the manufacture of original equipment, the Company also provides the aftermarket replacement parts and service for equipment. The Company operates in two business segments: surface mining and underground mining. The Company’s manufacturing facilities include Australia, China, Germany, Poland and the United States, and service and sales centers include Australia, Brazil, Canada, Chile, China, England, India, Mexico, Peru, Russia, South Africa and the United States. The Company’s surface mining equipment includes draglines, electric mining shovels and rotary blasthole drills. In May 2007, the Company completed the acquisition of DBT GmbH, a subsidiary of RAG Coal International AG.
Breakout trigger: $28.50, 11/4
Position: 2010 $40 LEAP Call YHB-AH, $5.40
Chart of BUCY
Rocky Week But No Drops
Energy Play Updates
DIG $33.58 -$2.00 Proshares Ultra Oil & Gas ETFDIG hit $38 on Wednesday before pulling back on the market weakness and the sharp $10 drop in oil prices. DIG ended its decline abruptly when it hit support at $30 and then rebounded to add $3.27 on Friday.
Ultra Oil & Gas ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones U.S. Oil & Gas Index.
Position: March $50 Call DPB-CX currently $5.00
NE $29.09 -3.12 - NobleNo news, market weakness only. Support at $28, stop $23. No change in play.
Earnings Oct 22nd, $1.43 per share up from $1.18 and est of $1.33
Breakdown Trigger: $35, hit 10.6
Position: 2010 $40 LEAP Call YVJ-AJ @ $5.20
NOV $27.95 -1.94 - National OilwellNo news, market weakness only. Stop at $20, no change in play.
Earnings: Oct-23rd $1.44, +28% compared to analyst est of $1.31
Breakdown trigger: $28.50, hit 10/8
Position: May 2009 $40 Call NOV-EH @ $6.00
PBR $26.77 -$.12 - PetrobrasNo specific news. Tuesday spike in oil prices was offset by Thursday's market weakness and PBR closed even for the week. Definitely no complaints. Stop at $18.
No earnings schedule.
Breakdown trigger: $28.50, hit 10/6
Position: 2010 $40 LEAP Call YMO-AH @ $7.00
PDE $17.52 -$1.27 - PrideMarket weakness only. Pride will host an analyst day on Nov-10th. $10 billion backlog. Fleet utilization was 98%.
Earnings: Oct 30th, $1.09 vs .67 Q3-07 and est of $1.03
Breakdown trigger: $20, hit 10/6
Position: 2010 $25 LEAP Call YAD-AE @ $5.00
RIG $77.11 -$5.22 - TransoceanTransocean announced earnings on Wednesday that missed estimates slightly due to a problem with a drill ship off the coast of Africa. That problem has been resolved and work restarted. Transocean gained +$16 the prior week so the -$5 drop this week was not a problem. Transocean said the cooling economy meant lower costs for its employees and a slowdown in the rapidly escalating cost of equipment. They said day rates may not continue to rise as fast as recent years but would not decline as long as oil remained over $60.
Earnings schedule: Nov-5th
Breakdown trigger: $80, hit 10/6
Position: 2010 $100 LEAP Call YDR-AZ @ 13.40
UWM $22.65 -3.11 - Russell 2000 Proshares Ultra ETFAfter trading as high as $27 on Tuesday the market decline knocked off $5 but this is a long term play and I believe the bottom is behind us.
I am still expecting a strong move higher over the next three months so we have plenty of time to watch this position. If the Russell moves back to 700 the UWM should hit $50. The dollar we lost on the stop is chump change compared to our potential profit.
Ultra Russell2000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 2000® Index.
Recommended 10/23 at $19.94 on the UWM
Position: UWM $25 April Call Option ULX-DY @ avg cost $5.50
ATI $24.28 -$2.26 - Allegheny TechnologiesSame story, different stock. Market weakness blunted last week's gains. No specific news.
Earnings: 10/22 -26%, $1.45 vs $1.88 year ago, $1.44 est
Breakout trigger: $26, hit 10/13
Position: 2010 $40 LEAP Call YFQ-AW @ $3.60
BAC $20.49 -$3.68 - Bank of AmericaMarket weakness pushed financials in general back to support at October lows. No specific news of note.
Earnings: Oct 6th @ 15 cents
Entered: Oct 13th @ $20.87
Position: 2010 $25 LEAP Call WBA-AE @ $5.90
STLD $9.52 -2.40 Steel DynamicsSTLD declined on market weakness only, no specific news. Earnings are still up +61% over the last year so business is good and the economic decline is making scrap even cheaper.
Recommended 11/2 @ $11.92
Position: 2010 $15 LEAP Call WAF-AC currently $3.40
JPM $37.35 -$3.50 - JP MorganNo specific news. Strong gain on Mon/Tue was offset by the market weakness on Thr/Fri. The banking sector is still suffering until the TARP program kicks into high gear.
Earnings: Oct 15th @ 11 cents
Breakdown trigger: $40. Hit 10/6
Position: 2010 $50 LEAP Call WJP-AJ @ $6.00
XLF $14.22 $-1.31 - Financial SPDREarly week gains offset by Wed/Thr market weakness. No specific news.
Breakdown trigger: $17, hit 10/6
Position: 2010 $20 LEAP Call WFS-AT @ $3.00
Leaps Trader Watch List
New Watch List Entries
CMP - Compass Minerals
HES - Hess Corp
Current Watch List
HLX - Helix Energy Solutions
Helix Energy Solutions Group, Inc. (Helix) is an international offshore energy company providing reservoir development solutions and other contracting services to the energy market, as well as to other oil and gas properties. Helix operates in the Gulf of Mexico, North Sea, Asia Pacific and Middle East regions. The Contracting Services segment utilizes the vessels and offshore equipment that when applied with the methodologies reduce finding and development (F&D) costs. The Oil and Gas segment is engaged in prospect generation, exploration, development and production activities. On December 11, 2007, the Company’s wholly owned subsidiary Cal Dive (CDI) completed the acquisition of Horizon Offshore, Inc. (Horizon). In July 2007, the Company acquired the remaining 42% interest in Well Ops SEA Pty Ltd. On September 30, 2007, Helix 30% working interest in the Phoenix oilfield, the Boris oilfield and the Little Burn oilfield to Sojitz GOM Deepwater, Inc. (Sojitz).
Breakdown trigger: $8.50
BUY 2010 $10 LEAP Call WAI-AB
Breakout trigger: $11.50
BUY 2010 $20 LEAP Call WAI-AD
ENER - Energy Conversion Devices
Energy Conversion Devices, Inc. (ECD) commercializes materials, products and production processes for the alternative energy generation, energy storage and information technology markets. The Company designs, manufactures and sells photovoltaic (PV) products, known as PV or solar laminates that generate renewable energy by converting sunlight into electricity. Solar laminate sales represent more than 90% of the Company’s revenues. It also receive fees and royalties from licensees of its nickel metal hydride (NiMH) battery technology and sell high-performance nickel hydroxide used in NiMH batteries. It has two principal joint ventures that are commercializing technologies invented by ECD: Cobasys LLC, which manufactures and sells rechargeable NiMH batteries, and Ovonyx, Inc., which is commercializing phase-change memory devices through licensing and joint development agreements. The Company operates its business in two segments: United Solar Ovonic and Ovonic Materials.
Breakdown trigger: $35
BUY 2010 $50 LEAP Call KYU-AJ
CMP - Compass Minerals
Compass Minerals International, Inc. (Compass) is a salt producer in North America and the United Kingdom. As of December 31, 2007, the Company operated 10 production and packaging facilities, including the rock salt mine in Goderich, Ontario and a salt mine in the United Kingdom in Winsford, Cheshire. The Company’s product lines include salt and sulfate of potash, and it operates a records management business. Salt consists of sodium chloride, potassium chloride and magnesium chloride. These products are used for highway deicing, dust control, consumer deicing, water conditioning, consumer and industrial food preparation, agricultural and industrial applications. In addition, Compass is a producer of sulfate of potash (SOP), which is used in the production of specialty fertilizers for high-value crops and turf. In the United Kingdom, the Company operates a records management business utilizing excavated areas of its Winsford salt mine with two other locations in London, England.
Breakdown trigger: $52.50
BUY MARCH $60 Call CMP-CL
Breakout trigger: $60.50
Buy MARCH $70 Call CMP-CN
HES - Hess Corp
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: $56.50
BUY 2010 $70 LEAP Call WHS-AN
Breakout trigger: $62.50
BUY 2010 $80 LEAP Call WHS-AP
Dropped Watch List Entries
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