CHK - $23.05 Chesapeake Energy ** Stop $20.50 **
CHK surged to a new high at $24 on Monday and pulled back slightly on profit taking. $23 support appears to be holding as we await the next round of oil price increases.
Chesapeake Energy derives 90% of its revenues from natural gas. They are very aggressive about replacing reserves and will capitalize on the continued increase in prices. Gas prices have soared in the U.S. due to the addition and conversion of electric plants to the cleaner fuel. Several times over the last winter the gas levels supplying those plants dipped to dangerous levels. The demand is increasing faster than supply and the production peak is now estimated to be 2007. Prices are going to continue higher, much higher and Chesapeake is positioned to benefit.
This summer much of northern California will get its electricity from gas due to a drought in the northwestern hydro-electric grid. Generation levels will be below normal and natural gas is the fall back fuel.
2007 $20 LEAP Call VEC-AD @ $4.00
Insurance put: July $17.50 CHK-SW @ 90 cents
Entry $19.00 (05/13)
APC - $82.62 Anadarko Petroleum ** Stop $74.00 **
APC broke out to another new high on Thursday near $85 and pulled back only slightly to rest. APC is doing very well and bidders appear on every dip.
Anadarko has 2.37 billion barrels of proven reserves. They are the largest independent in a field of giants. Buying reserves is cheaper than finding them.
Anadarko has just completed a restructuring program and raised estimates on May-2nd. They expect output to rise +5% in 2005 and costs to be below industry trends. S&P is estimating $8.55 for earnings in 2005 and a price target of $85.
2007 $75 LEAP Call OCP-AO @ $10.10
Entry $70.50 (5/04)
COP - $58.12 Conoco Phillips ** Stop $52.00 **
Like Crude oil COP surged over $60 early in the week. Late week profit taking saw it slide back to $58 but that support held. COP is still my favorite major oil with large reserves and aggressive management.
COP reported earnings of $4.10 that rose +80% over the year-ago period. Analysts had only expected $3.29. They said unplanned down time at refineries kept them from doing even better. They also said they were going to spend $3 billion between 2006-2010 to increase their ability to handle the cheaper sour crude.
COP has been aggressively purchasing assets around the globe and especially in Russia. Putin has said repeatedly that COP assets and agreements are not at risk and that COP is a partner with Russia in producing their oil.
2:1 Split on June 2nd gave us 2 of each.
(2) 2007 $50 LEAP Call OJP-AJ @ $7.88
Entry (4/18 $49.00)
OXY - $78.95 Occidental Petroleum ** Stop $73.00 **
OXY broke out to a new high once again on Thursday at $81 and held its gains very well. Support at $78 was tested twice and both times it held. OXY has been getting a lot of positive press with Merrill raising its target to $88 earlier in the week. Merrill is well behind the curve on oil but they have been good about raising their targets once they are passed. Their prior target was $77.
OXY declared a quarterly dividend of 31 cents in early May and appointed former U.S. Secretary of Energy, Spencer Abraham, to their board. Earnings in 2004 were a record $2.6B and as the CEO pointed out on Friday it was more than a billion more than they earned in 2000. Not a bad growth record. Q1 earnings were up +74% over Q1-2004.
OXY reported earnings on April 26th of $2.16 per share compared to estimates of $1.99. OXY said it had higher than expected production, strong pricing and record chemical sales. Still it failed to produce the blowout earnings of COP due to hedging.
OXY reported an agreement with Oman to invest $2B in the Mukhaizna oil field and upgrade production from 10,000 bbls per day to 150,000 per day. I would happily invest $2B once to get $3B return per year. Good job!
OXY is the 239th largest company in the world and an oil giant.
2007 $70 LEAP Call VXY-AN @ $10.00
Entry $68.00 (4/19)
XOM - $58.17 Exxon Mobil ** No Stop **
XOM was the worst performing stock this week with a sharp drop on Thr/Fri. This suggests it was index related or that funds are taking profits and shifting into a faster mover. XOM has very heavy institutional ownership and about 6 billion shares. This makes strong gains hard to achieve. It also has the largest reserves of any company and many countries. With $30 billion in cash there is also fear they will make an acquisition at what seems to be high prices to many.
XOM reported a +44% jump in earnings but missed analyst estimates. After items XOM earned $1.15 and analysts were expecting $1.20. XOM hedged to capture high oil prices and prices continued to move higher. They also saw a drop in production as mature fields continued to decline. XOM said it will spend $15-$16 billion in capex in 2005 in an effort to discover/produce more oil. They also said they were going to buy back $3.5 billion in stock in the current quarter. Their record profits of $7.86 billion for the quarter give them plenty of cash for anything they desire. Maybe a couple acquisitions would help that sagging production.
XOM has larger reserves and more cash than any other oil company. They have to find something to do with their $30 billion and it will either be returned to the shareholders or used to buy more reserves.
XOM is the largest oil company in the world and while it has the largest reserves it also has the highest overhead cost.
2007 $60 LEAP Call ODU-AL @ $6.70
Entry $58.00 (4/19)
XLE - $44.93 Energy SPDR ** Stop $41.50 **
The XLE is also holding near its recent highs at $46 set on Monday. The various sectors represented by the XLE gives it diversity for strength. This allows minor swings by a given sector to be offset by gains in the others.
The XLE SPDR is composed of 27 energy stocks and represents about 8% of the SPX. This is the 8% that helped push the SPX to the current levels with the rise in oil over the last year. In fact the XLE has far exceeded the SPX in performance over the past year.
The XLE functions like an energy index and should rebound or bottom before oil stocks in general. Once traders start nibbling at the individual stocks in the index we will get our first glimpse of a rebound in the making.
I chose a leap close to the money because there was no material price difference for the Leaps $2-3 away. Insurance is cheap and I expect this to be a very long-term play.
BUY 2007 $40 LEAP Call ORJ-AN @ $5.60
Entry $39.75 (4/18)
CVX - $56.77 Chevron Texaco ** No stop, New Put **
CVX cratered on the CNOOC announcement after holding near its recent highs at $59.50 for most of the week. Investors are worried that Chevron will raise its offer to battle CNOOC and they are taking profits from the May rebound from $50. Our new insurance put we added last week at $55 should protect us.
Chevron spiked to $54.50 on May 6th on news of an oil find in Utah by Wolverine where Chevron has extensive leases. It was also announced that Chevron had won a portion of the 15 blocs up for bid in Libya.
Chevron posted earnings that disappointed the street due to several unplanned outages at various refineries. CVX saw refining profits fall -36% but the condition is expected to be temporary. The stock is also weak due to uncertainties about the Unocal acquisition.
Chevron announced in early April that it was purchasing Unocal for $18 billion in cash and stock and both CVX and UCL dropped sharply. This was not a surprise for Chevron to make the purchase but the timing caught everyone off guard.
In theory everyone was waiting for oil to drop in Q2 and allow the next round of acquisitions to be made at a more reasonable value. Instead Chevron did a take under on Unocal by offering less than the current share price. It is a good deal if you can pull it off.
Chevron beat out several other firms including China's CNOOC who had been a hot pursuer but had to drop out at the last minute after it could not complete the final terms in time. CNOOC has since offered $67 a share for Unocal but the deal is expected to fail due to a lack of approvals.
Chevron will likely sell off about $3 billion in non-core assets once the deal is consummated. The main asset Chevron wanted was the 1.7 billion barrels of proven reserves and tens of thousands of acres of additional leases still to be explored. Chevrons current average cost of produced crude is $27. After selling the non-core assets they will end up with the Unocal proven reserves at about $9 a bbl plus billions in other assets like gas fields, power plants and joint ventures around the world. This was a very sweet deal for Chevron.
It may take some time for the cloud to lift from the stock price but the next jump in oil prices should do wonders. Chevron dropped back to its 100-day average at $55.50 on the news and this should be very strong support. There is not expected to be any hurdles to getting the deal approved as most of the assets are either out of the country or will be divested as part of the deal.
The Unocal leap was actually triggered when the price hit $59 on the announcement. With UCL trading at $58.74 at Friday's close there would not have been any material movement. Because any Unocal leap will eventually end up being a Chevron leap I am electing to use the previously recommended Chevron leap as the actual position. I am using Friday's close for the entry price.
2007 $60.00 LEAP Call VCH-AL @ $5.60
We held both CVX and UCL leaps when the buyout was announced. I dropped the UCL listing as a duplicate to focus on the eventual merged company. Anybody holding the UCL leaps at the time should still be in them and ready to benefit from a higher UCL bid by CNOOC.
New Put 6/19
Entry $56.67 (04/07)