Option Investor

Weekly Newsletter, Saturday, 12/13/2008

Printer friendly version

Table of Contents

  1. Commentary
  2. Portfolio Listing
  3. New Plays
  4. Play Updates
  5. Watch List

Leaps Trader Commentary

Go Home, We Will Call You

That is what drillers all over the U.S. are being told this week as the fallout from lower gas and oil prices. With nat-gas prices hitting $5.50 last week Whiting Petroleum (WLL) called it quits on capex spending.

One of my sons is a driller for a Whiting contractor and they literally told them to go home. The contract drilling firm that he works for told them Whiting cancelled the contract and told them to plug any unfinished holes and pack it up.

This story is being repeated all across the U.S. and around the world as hundreds of projects are cancelled for lack of funding. Whiting is just one of hundreds of firms that have to face the cold hard facts. Whiting spent $850 million for capex in 2008 and said spending for 2009 will be substantially less. They said they would only be drilling within their own excess cash flow and would not take on any more debt EVEN if it came available. That comment is telling. It means they lost access to their capex credit lines just like hundreds of other exploration and production firms. When oil was over $100 bankers and investors were eager to put their money on the line because payback was guaranteed. With a $100 drop in crude prices to the mid $40s it is no longer guaranteed and bankers are running scared.

Goldman Sachs hit the sector hard on Friday saying they could see prices in the $30 in 2009 and their target price for all of 2009 was $45. There are literally thousands of projects that won't get funded, started or completed if oil prices remain in the 40s.

We could see another blowout of labor and equipment like we saw in 1998 that nearly ruined the industry. Merrill Lynch said there were 1400 working gas rigs in the U.S. and they expect many of them to be laid down. When rigs are mothballed they are laid out flat on the ground to avoid accidents and damage. Many times parts are cannibalized to keep other rigs running rather than buy new parts while the others lay rusting.

Encana announced it had postponed indefinitely its plans to split into two separate companies because of the financial crisis. Encana typically announces its next year's budget in December but so far their announcement has been to "proceed in a conservative and prudent manner."

These companies are refocusing their efforts to areas where wells are cheap and gas is easy to produce. At $5.50 and falling there are quite a few areas where it is no longer cost effective to drill.

This same problem is occurring in the oil patch and work is being halted everywhere until oil prices rebound. Oilfield workers are paid hourly. If they are not working they are not being paid and most cannot last more than a couple paychecks before they have to find another line of work. It months pass before oil prices rebound then all those workers will have moved on to a new job. Restarting the recent pace of drilling will be nearly impossible for several years.

New workers will have to be hired and trained. Rigs renovated and missing parts ordered with unknown backlogs. Pipe orders will have to be put in process with the potential for being backordered for a year or more. Make no mistake. Halting drilling today is going to be a serious problem when the recession passes and demand spikes suddenly.

With the drop in oil prices the oil sands developments have turned into quicksand for many firms. These are very expensive, very labor intensive projects that need oil prices over $60-$65 to be commercially viable. Suncor Energy (SU) and Canadian Natural Resources (CNQ) have two projects in advanced stages and relatively low cost but both have slowed development significantly. StaatoilHydro scrapped its multi-billion dollar Edmonton upgrader because of falling prices. Out of seven major oil sands projects only one, an expansion by Shell (RDS) remains in play. Shell already backed off on two other projects. Petro-Canada ran out of money in September when it was unable to attract project financing on falling oil prices. Nexen announced it was delaying its Long Lake expansion until prices recovered. This same story is playing out all around the world and the impact to future production volumes in 2010-2011 is going to be drastic.

OPEC meets again on Wednesday and it is almost a sure bet that they will cut another 1.5 million barrels of production. I am betting that we see a sell the news event because of last week's rally in advance of the meeting. First, depending on the success they have had in getting members to adhere to the November cut, investors will be taking odds on getting a December cut to stick. OPEC countries are hurting and they can't afford to cut production but they also can't afford not to cut production. If they just keep pumping as fast as they can we could see prices in the $30s and that would create untold devastation in the oil patch. They need to suck it up and bite the bullet and stand tough on production until prices return to the mid $60s or higher. They have the power but they are too weak to use it. Let's hope they find some backbone.

January crude futures expire next Friday.

The results of the reader poll last week on continuing to include low priced stocks in the recommendations was 100% yes. I received dozens of emails all strongly in favor of profiling those stocks. Since they make such a good addition to an IRA I was not surprised and glad to see such a strong response. I am adding two more solar stocks this week that I believe have a bright future. It is not my intention to load up the portfolio with solar stocks but they have been beaten pretty severely and I believe these are good candidates.

Check out the end of year renewal special we are advertising this weekend. There is another crude oil video and two special reports on energy.

Click here for the full package description

Jim Brown

January Crude Futures Chart - Daily
[Image 1]
Natural Gas Futures Chart - Daily
[Image 2]
January Gasoline Chart - Daily

Gasoline chart unavailable this weekend. Thank you Qcharts!

Portfolio Listing & Top Picks

Current Portfolio

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
Table lists CALLS/LEAPS only. Insurance puts, if applicable, are not shown.

[Image 1]

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.

Top Picks List
[Image 2]

New Plays

The future is so bright you need to wear shades.

New Energy Plays

HLX - Helix Energy Solutions

Helix shares rose last week on news the company was going to sell most of its oil and gas assets and concentrate on its highly profitable drilling services business. Raymond James upgraded HLX to a strong buy on the news saying it was one of the most under valued companies in the oil patch. HLX also owns 58% of Cal Dive International. HLX has accumulated a large portfolio of operating interests in various fields and production facilities. A sale of these non-core assets will produce a huge revenue boost and make the company more of a takeover target.

Company Info:

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).

Buy 2010 $10 LEAP Call WAI-AB currently $2.45

Chart of HLX
[Image 1]

ESLR - Evergreen Solar

Evergreen was picked by RBC Capital as one of the top 20 stocks to benefit from the Obama infrastructure plan. Part of the plan is to make office buildings more energy efficient through upgrades to their energy handling and the addition of solar.

Evergreen has been beaten severely in the recent market decline and makes a good stock to add to our portfolio as a stock rather than a LEAP.

Company Info:

Evergreen Solar, Inc. develops, manufactures and markets solar power products enabled by its String Ribbon technology. The Company’s revenues are primarily derived from the sale of solar modules, which are assemblies of photovoltaic cells that have been electrically interconnected and laminated in a physically durable and weather-tight package. The Company sells its products using distributors, systems integrators and other value-added resellers, who often add value through system design by incorporating its modules with electronics, structures and wiring systems. Its products are sold primarily in the United States, Germany and Korea. Evergreen Solar, Inc. manufactures and markets solar power products, including solar cells, panels and systems. It markets and sells all solar panels manufactured by EverQ under the Evergreen Solar brand, as well as manages customer relationships and contracts.

Too cheap for LEAPS, buy the stock instead.

BUY stock in ESLR currently $2.75

Chart of ESLR
[Image 2]

CSIQ - Canadian Solar

Canadian not only supplies solar for commercial and residential applications but also sells those solar panels you see on the top of road signs, traffic lights, warning lights, etc. They are diversified and don't rely on only one product.

Company Info:

Canadian Solar Inc. (CSI) designs, develops, manufactures and sells solar cell and module products that convert sunlight into electricity for a variety of uses. The Company conducts all of its manufacturing operations in China. The Company’s products include a range of standard solar modules built to general specifications for use in a range of residential, commercial and industrial solar power generation systems. It also designs and produces specialty solar modules and products based on its customers’ requirements. Specialty solar modules and products consist of customized modules that its customers incorporate into their own products, such as solar-powered bus stop lighting, and complete specialty products, such as solar-powered car battery chargers. It sells its products under its CSI brand name and to original equipment manufacturing (OEM) customers under their brand names.

Stock too cheap for leaps, buy the stock.

BUY Stock in CSIQ currently $5.55 Chart of CSIQ
[Image 3]

New Non-Energy Plays


New Watch List Plays Triggered

FXI - iShares China Index

The China Index ETF spiked to $29 on Monday on positive economic news from China and then went nowhere all week. I believe the bottom is behind us but there could still be some rocky moves as we near year-end.

Company Info:

This ETF tracks the 25 largest and most liquid Chinese companies trading on the Hong Kong stock exchange. With assets of some US$3 billion, iShares FXI has its largest holdings in financial services (30%), energy (22%), telecommunications (21%), and business services (13%). iShares FXI has over 60% of its assets concentrated in its top 10 stocks. China Mobile (10.4%) and Petro China (9%) are its two largest holdings, followed by China Life Insurance (8%).

Breakout trigger: $29, hit 12/08

Position: 2010 $35 LEAP Call YOF-AI @ $5.10

Chart of FXI
[Image 4]

POT $66.55 +8.55 - Potash

POT rebounded +8 after raising their estimates the prior week. It appears traders have started moving back to the commodity stocks for 2009. On Tuesday POT joined Mosaic and Uralkai in announcing production cuts of 20% beginning in January. POT said it was only temporary due to a slowdown in credit by the buyers. With few companies able to obtain credit in any form the number of waiting buyers has shrunk.

Company Info:

Potash Corporation of Saskatchewan Inc. is an integrated fertilizer and related industrial and feed products company. The Company’s potash is produced from six mines in Saskatchewan and one mine in New Brunswick. Of these mines, it owns and operates five in Saskatchewan and the one in New Brunswick. Its nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. It has nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad. The Company’s phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, animal feed supplements and industrial acid, which is used in food products and industrial processes. It indirectly holds all outstanding interests in PCS Joint Venture, Ltd., which formerly manufactured, processed and distributed fertilizer and other agricultural supplies from plants located in Florida and Georgia.

Breakout trigger: $58, hit 12/09

Position: 2010 $80 LEAP Call WPT-AP @ $17.30

Chart of POT
[Image 5]

Play Updates

Positive Trend Developing

Dropped Plays

DWSN - Dawson Geophysical - Dropped

Energy Play Updates

DIG $29.76 +4.10 - Proshares Ultra Oil & Gas

Crude rose ahead of the OPEC meeting next Wednesday and expectations are for them to cut 1.5 mbpd.

Company Info:

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.

Breakdown trigger: $30, hit 12/1

Position: MAR $35 Call DPB-CG $5.40

FSLR $116.92 -$11.62 - First Solar

That was the wrong week to initiate a play on FSLR. After gapping open on Monday to nearly $140 it crashed back to earth and support at $115. There was o specific news. The Nasdaq announced after the close on Friday that FSLR would be added to the Nasdaq-100 and that should provide lift next week.

Covered Call position:

Buy 100 Shares FSLR currently $128
Sell 2010 $150 LEAP Call LZL-AA currently $40.70
Profit if called is $40.70 in premium + $22 in stock (49%)

Put spread position:

Buy 2010 $100 LEAP Put LQM-MT currently $32.90
Sell 2010 $250 LEAP Put LZL-MJ currently $135.70, net credit $103

SMG $29.06 -1.13 - Scotts Miracle Gro

SMG lost all its ground on the Thursday market crash and did not rebound strongly on Friday. The former chairman and CEO from 1996-2001 died after a long illness. He had nothing to do with the current company but the news may have weighed on prices.

Breakdown trigger: $25, hit 11/21

Position: 2010 $30 LEAP Call WOF-AF @ $5.20

DWSN $15.13 -1.53 - Dawson Geophysical Dropped

DWSN broke support and hit new 52-week lows. Time to kick it to the curb.

Breakdown trigger: $22.50, 11/06

Position: MAR $30 Call DVQ-CF @ $2.05, exit 12/14 -0-

FLS $52.03 +8.90 - Flowserve

A new five-week high for Flowserve. Coverage was initiated by the Maxim Group with a BUY.

Breakdown trigger: $45, hit 12/1

Position: April $55 Call FGV-DK (no leaps) $5.33

Stock Positions

FTK $3.05 +$.62 Flotek

The beauty in a cheap stock is the leverage. The +62 cent move was a +25% jump. FTK closed near a new four-week high.

Options on FTK cost nearly as much as the stock and time decay works against you. Just buy the stock. At $3 it is cheaper than any LEAP.

Position: Stock of FTK @ $3.01

CLNE $4.84 -0.05 - Clean Energy Fuels

CLNE moved over $1 intraweek but ended with no change. Just waiting on Obama. No change in play

Clean Energy is the leading provider of natural gas (CNG and LNG) for transportation in North America. It has a broad customer base in the refuse, transit, ports, shuttle, taxi, trucking, airport and municipal fleet markets, fueling more than 14,000 vehicles daily at over 170 strategic locations across the United States and Canada. With the sudden surplus of natural gas it will be easier to convince companies to switch to the cleaner, cheaper fuel. The Clean Truck Program at California's ports is planning to switch out 8,000 diesel trucks for Nat Gas trucks over the next five years. This is just one program and CLNE has a major jump on everyone else.

Options on CLNE cost nearly as much as the stock and time decay works against you. Just buy the stock. At $5 it is cheaper than any LEAP.

Position: Stock of CLNE @ $4.84

CY $4.71 +0.60 - Cypress Semiconductor

Chip stocks were hot and CY closed near the high for the week. No change in play.

Options don't make sense on a $4 stock.

Position: Stock in CY @ $4.11

BZH $1.70 -0.45 Beazer Homes

No change in play.

The stock price is so cheap that options don't make sense.

Position: STOCK in BZH @ $2.15

Non-Energy Positions

HPQ $35.97 +$2.44 Hewlett Packard

HP is back knocking on the breakout door at $36 and tested that resistance level three times last week. No change in play.

Breakdown trigger: $33, hit 11/25

Position: 2010 $40 LEAP Call WPW-AH @ $5.60

VIX 54.28 -5.65 - Volatility Index

The VIX closed at nearly a five-week low and volatility is evaporating as each day passes. Extremely bad news has been unable to push it higher suggesting the worst is over. If the VIX breaks below 50 it could go to 30 very quickly with bullish holiday sentiment. Maintain the stop at 70.

Position: JAN $50 PUT VIX-MJ @ $3.90

AAPL $98.27 +4.27 - Apple Inc

Back over 100 again twice last week and a strong rebound on Friday. Apple's got it, RIMM lost it. Expect Apple to rise through year-end on strong iPhone sales.

Breakout trigger: $96, hit 12/03

Position: 2010 $120 LEAP Call WAA-AD $18.40

UWM $18.05 +0.65 - ProShares Ultra Russell 2000 ETF

I feel like we are pushing a rope on the Russell. It has a couple of great days of gains and then bleeds for three days a week. We need the UWM to move over resistance at $20 to signify a breakout.

Company Info:

Ultra Russell2000 ProShares seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Russell 2000 Index

Breakdown trigger: $16, hit 12/1

Position: April $25 Call ULX-DY $2.55

Leaps Trader Watch List

New Watch List Entries

NXY - Nexen

MDR - McDermott Intl

Current Watch List

XLE - S&P Energy SPDR

Company Info:

The S&P Energy sector SPDR represents about 13% of the S&P-500. Energy companies in this Index primarily develop and produce crude oil and natural gas, and provide drilling and other energy-related services. Leaders in the group include ExxonMobil Corp., Chevron Corp, and ConocoPhillips.

Breakdown trigger: $44 *** New Trigger ***

BUY 2010 $50 LEAP Call WHA-AX

NXY - Nexen

Nexen is a very well run exploration and production company and was recently rumored to be a takeover target of Total SA (TOT). That $19.7 billion bid never occurred and NXY dropped back to support last week. I believe that Total and others are waiting to see if oil prices fall further before making any bids. If oil prices drop they can buy assets cheaper. If oil prices rise their stock is worth more as a currency.

On Tuesday the 9th Nexen announced its budget for 2009 and expects more than $1 billion in free cash flow to add to their current $1.8 billion cash balance and use for share buybacks. They expect to spend $2.6 billion on oil and gas projects in 2009. They have another $2 billion in fully committed, undrawn credit.

This is a small but strong company with great prospects.

Company Info:

Nexen Inc. (Nexen) is an independent, Canadian-based, global energy company. Nexen operates in four segments: oil and gas, Syncrude, energy marketing and chemicals. The Company owns 7.23% of the Syncrude Joint Venture, which develops and produces synthetic crude oil from mining bitumen in the oil sands in northern Alberta. Energy marketing includes its crude oil, natural gas, natural gas liquids, ethanol and power marketing business in North America, Europe and Asia. Chemicals includes operations in North America and Brazil that manufacture, market and distribute sodium chlorate, caustic soda and chlorine through the Canexus Limited Partnership.

Breakdown trigger: $15

BUY 2010 $17.50 LEAP Call KJA-AW

Breakout trigger: $19.50
(Do not buy on any deal announcement)

BUY 2010 $22.50 LEAP Call KJA-AX

MDR - McDermott Intl

McDermott is a major infrastructure company with an emphasis in oil and gas. They have a huge backlog despite oil prices in the 40s. They are diversified into several segments and would fit well in an Obama infrastructure package. They have fallen from $70 to $6 and appear to have found a bottom.

Company Info:

McDermott International, Inc. is an engineering and construction company with specialty manufacturing and service capabilities and is the parent company of the McDermott group of companies, including J. Ray McDermott, S.A. (JRMSA) and The Babcock & Wilcox Company (B&W). The Company operates in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems. On July 27, 2007, the Company acquired Secunda International Limited. On May 1, 2007, it acquired Marine Mechanical Corporation.

Breakdown trigger: $7.50

BUY 2010 $10 LEAP Call YAE-AY

Breakout trigger: $10.50

BUY 2010 $12.50 LEAP Call YAE-AV

Dropped Watch List Entries



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