OIX - $609.74 - Oil Index Portfolio Hedge
No Change in play. We finally got some movement in the right direction for the OIX hedge but unfortunately that means our other long energy positions are suffering. That is what this play is all about. This is a hedge against falling oil prices. My target price of $500 may seem a long way off but without any hurricanes we could see a strong drop. If we only saw a return to the June lows at 540 it would be a profitable hedge.
Current recommendation: Buy above $600
The CBOE Oil Index consists of 11 energy stocks of primarily integrated oils. The index reacts sharply to changes in the price of oil and gas.
The focus of this play is to hedge our current energy positions against a decline in oil prices as the summer draws to a close. Each reader will have to decide how many contracts needed to hedge their current positions. You do not want to be moving in and out of the OIX position given the relatively wide bid/ask spread.
A drop to $540 should double the premium paid and a drop to $500 should produce a $50 premium or $5000 per contract. At our entry price of $12.00 or $1200 that represents $3800 profit per contract. That would hedge several of our current positions very easily.
Sept $550 Put OIX-UJ @ $12.00, no stop.
WLT - $48.46 - Walter Industries ** Stopped $49.50 **
The coal dip last week stopped us out of WLT at $49.50 on Friday. I believe Walter is a great company and will do well but we have to get past the Q3 coal/gas pricing problem first. I plan on entering WLT again if it touches reaches strong support at $45 and appears to have put in a bottom.
Current recommendation: Watch for new entry around $45
Earnings schedule: August 2nd
Walter Industries is a diversified holding company that owns among other things 700 million tons of high quality low sulphur metallurgical coal. The company has a market cap of $2.1 billion, which includes $1.2 billion in stock of MWA a recent spinoff of their water products company. That values the rest of WLT at barely $900 million or less than half of the value of the rest of their enterprises not counting their coal asset. I heard an analyst preaching the merits of WLT in June and after doing some research I have to agree. The company posted a +84% increase in earnings in Q1 and a jump in revenue from $366 million to $753 million. Very few companies can boast of those numbers. They expect to post earnings of $5.65 for the year in 2006. Walter coal is one of the highest quality, low-vol coking coals in the world. It is sold to major buyers in Europe and South America for about $115 per ton FOB Mobile Alabama. Do the math, 700 million tons x $115 = $80 billion. That is very nice insurance of strong income potential for a long time to come.
WLT was hammered by the recent sell off and by a drop caused when Muller Water (MWA) IPOed on May 30th. The spinoff of a business segment always devalues the parent company but coupled with the May correction this dip is overdone. Decent support just below at $45 and very string support at $40.
Walter Industries, Inc. (Walter) is a diversified company with seven operating segments: Mueller, Anvil, Industrial Products, Natural Resources, Homebuilding, Financing and Other. The Company's seven segments are further grouped into Water Products, Natural Resources, Homebuilding and Financing, and Other. The Water Products group, which consists of Mueller (WMA), Anvil and Industrial Products segments, manufactures water infrastructure and flow control products. The Natural Resources segment consists of coal mining and methane gas operations. Walter markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States, through the Homebuilding segment. The Financing segment provides mortgage financing on such homes and purchases mortgages originated by others. The Other segment includes the manufacturing of foundry and furnace coke, slag fiber and specialty chemicals, as well as the Company's land division.
2008 $60 LEAP Call YZG-AL @ $7.30, exit 7/21 $6.70, -0.60
Entry $48.39 (6/26)
BHI - $75.71 - Baker Hughes Intl ** stop loss $73 **
That was really painful. BHI lost -$8 for the week and returned to strong support at $75. This is the level where I would add to your position with a stop at $73. The 100-day average at $76.64 was broken on Friday but is still in range. Earnings are next Friday.
With our cost now at $2.60 we will not add any new insurance puts. We could end up doubling our cost without any real benefit. We will take the stop at $73 it touched.
Current recommendation: Hold, Buy under $76
Earnings schedule: July 28th
Baker Hughes Incorporated (Baker Hughes) is engaged in the oilfield services industry. The Company supplies wellbore-related products and technology services and systems to the oil and natural gas industry on a worldwide basis, including products and services for drilling, formation evaluation, completion and production of oil and natural gas wells. Baker Hughes operates through subsidiaries, affiliates, ventures and alliances. It operates in three business segments: Drilling and Evaluation, Completion and Production, and WesternGeco. The Drilling and Evaluation segment consists of the Baker Hughes Drilling Fluids, Hughes Christensen, INTEQ and Baker Atlas divisions. The Completion and Production segment consists of the Baker Oil Tools, Baker Petrolite and Centrilift divisions. The WesternGeco segment consists of the Company's 30% equity interest in WesternGeco, a seismic venture with Schlumberger Limited. WesternGeco provides reservoir imaging, monitoring and development services.
Additions 6/08 (closed 6/13)
Entry $85.24 (6/6)
SLB - $61.45 - Schlumberger Ltd ** Stopped $62.00 **
Another one bites the dust. SLB announced a +79% jump in Q2 profits and beat the street by +6 cents. They said profits were slowed by a prolonged spring thaw in Canada making roads impassible. However, strong operations around the world were running "flat out" in the words of the CEO.
This was another example of selling the news even if the news was good. SLB will be back as a play when we buy the late August dip.
Current recommendation: Hold
Earnings schedule: July 21st, 6:AM, conference call 9:AM
Schlumberger Limited (Schlumberger) is an oilfield services company, supplying technology, project management and information solutions. Schlumberger consists of two business segments: Schlumberger Oilfield Services and WesternGeco. Schlumberger Oilfield Services is an oilfield services company supplying a range of technology services and solutions to the international oil and gas industry. WesternGeco, 70% owned by Schlumberger and 30% owned by Baker Hughes, is an advanced surface seismic company.
Statoil awarded contracts to SLB and HAL on June-30th worth more than $1.12 billion. Halliburton was the biggest winner but SLB garnered its share.
Position: Jan $70 Call VWY-AN (SLB-AN) currently $6.10
Insurance put: Entry 6/12
Insurance put: (Closed 6/8)
Entry $66.25 (6/04)
ACI - $32.05 - Arch Coal Inc ** No Stop **
Unbelievable! Arch posted profits, which jumped from $1.7 million in Q2-2005 to $69.6 million in Q2-2006. They predicted strong sales at higher prices going forward and had nothing but good things to say about their business and the coal business in general. They lost -2.23 on the news to close nearly -$6 below the Wednesday high.
This is another causality of the lowered Q3 guidance from Peabody and the weak natural gas prices. Arch is setting the world on fire but funds are selling the stock.
We did not have a stop loss on the 2008 LEAP and I am not adding one today. Let's see what impact options expiration had on this selling before making any further moves. The next support level is just over $30.
Current Recommendation: Buy under $35
Earnings schedule: July 21st AM
The CEO said in an interview on June 28th that a lot of legacy contracts were expiring soon and that had great implications for their bottom line. Arch saw profits jump 10-fold in the first quarter as new contracts took effect. He said coal would be so short that users would want to secure future contracts to guarantee supply. Coal prices have risen sharply since 2004 doubling in most US basins and tripling in some. Because Arch sells its coal under long-term contracts it has yet to see these prices. Customers of Arch had been locked in at 2003 prices. He said over the next three years the vast majority of their contracts would expire. He said Arch would be selective on which they would renew at current prices. With a strong balance sheet they can take a different view of sales. He said it was the best environment seen in over 20 years for coal. The US currently has 310 gigawatts of electric power and 50% is fired by coal. The US is adding 90 gigawatts with 20 GW being completed by 2010. This will consume another 65 million tons of coal or an increase of roughly 6.5% over current production not counting increases in other areas.
Arch Coal, Inc. operates as a coal producer in the United States. The Company's primary business is the production of steam and metallurgical coal from surface and underground mines throughout the United States, for sale to utility, industrial and export markets. Its mines are located in southern West Virginia, eastern Kentucky, Virginia, southern Wyoming, Colorado and Utah. As of December 31, 2005, it operated 21 mines, and controlled approximately 3.1 billion tons of proven and probable coal reserves. During the year ended December 31, 2005, the Company sold approximately 140.2 million tons of coal. The Company has three business segments, which are based on the low-sulfur coal producing regions in the United States, in which the Company has operations. These segments are the Central Appalachia region, the Powder River Basin and the Western Bituminous region. On December 31, 2005, the Company sold its 100% interest in Hobet Mining, Inc., Apogee Coal Company and Catenary Coal Company.
FTI - $63.27 - FMC Technologies ** Stopped $66 **
FTI rolled over with the market and our raised stop took us out for a near breakeven. Like Arch, Walter and SLB I still believe in FMC but we need to let the August weakness pass.
FMC Technologies, Inc. provides mission-critical solutions for the energy, food processing and air transportation industries. The Company designs, manufactures and services machinery and systems for its customers through four business segments: Energy Production Systems, Energy Processing Systems, FoodTech and Airport Systems. Energy Production Systems segment designs and manufactures systems, and provides services used by oil and gas companies involved in land and offshore, including deepwater, exploration and production of crude oil and gas. Energy Processing Systems segment designs, manufactures and supplies high-pressure valves and fittings for oilfield service customers. FoodTech segment designs, manufactures and services food processing and handling systems to the food industry. Airport Systems segment is a global supplier of passenger boarding bridges, cargo loaders, and other ground support products and services.
FTI announced on June-20th a $130 million contract from Chevron for undersea pipeline equipment and production systems.
RBC Capital Markets issued a report on FTI in early July saying it should be a core holding through 2010. They suggested FTI would be insulated from the price of oil due to the strong deepwater drilling program over the next 3-5 years. RBC raised estimates between 8% to 16% over consensus.
Breakout trigger $63.50 Hit 5/23
Insurance put: (closed 6/8)
Entry $63.50 (5/23)
TIE - $24.77 - Titanium Metals
TIE continued to move lower but not at the same rate of speed as the rest of the market. We will continue to hold our position until after earnings. Billionaire Harold Simmons, Chairman of TIE, bought 275,000 shares last week at an average price of just over $26. He has bought $53.6 million in TIE stock over the last 18 months. His last purchase was May 18th for 200,000 shares at $34.88. He now owns 59.8% of TIE stock. If he is buying at $26 maybe we need to double down here. I ma trying to contact the company about an earnings date before making another move.
Earnings Schedule: Early August, no date set
Analyst Chris Olin of FTN Midwest Securities said this week that demand for TIE products will continue to surge through 2012. TIE is already at 88% capacity and has a backlog of $860 million in orders. Despite additional capacity plans by both TIE and ATI the market is expected to be undersupplied through at least 2010. Chairman Harold Simmons personally owned 2.6% of TIE shares as of March 31st but a holding company he controls owns 37.1% and SEC documents show that he and the company are aggressively increasing their positions. Boeing has orders for 393 of its 787 jumbo jet, which contains a high percentage of titanium components to keep the weight under control. Flight tests of the 7E7 Dreamliner showed it was still too heavy and suggests even more components will be switched over to titanium in the production fleet.
Titanium Metals Corporation (TIMET) is a producer of titanium sponge, melted products and a variety of mill products for aerospace, industrial and other applications. For the commercial aerospace industry, the Company supplies titanium products to manufacturers of commercial airframes. Outside of aerospace markets, the Company manufactures a range of products for customers in the chemical process, oil and gas, consumer, sporting goods, automotive, power generation and armor/armament industries. Approximately 15% of the Company's sales revenue, during the year ended December 31, 2005, was generated by sales into industrial and emerging markets. TIMET markets and sells its products in the United States, the United Kingdom, France and Italy.
Insurance put: (closed 7/13)
BHP - $41.56 - BHP Billiton Limited ** No Stop **
No change in play. Finally a stock that has not declined. BHP recovered from an early week drop to close flat for the week. No complaints here!
Current recommendation: Hold, Buy @ $40
Maintain a profit stop on the long $35 Put BHP-TG @ $31.
Earnings schedule: Aug 23rd
BHP Billiton Limited is a diversified resources group. The Company is an exporter of metallurgical coal for the steel industry; an exporter of energy coal; a producer of iron ore, copper, nickel metal, manganese ore, primary aluminium and manganese and chrome ferroalloys. It also has substantial interests in oil, gas, liquefied natural gas (LNG), diamonds, silver and titanium minerals. BHP Billiton operates in seven segments: Petroleum (oil, natural gas and LNG), Aluminium (aluminium and alumina), Base Metals (copper, silver, zinc and lead), Carbon Steel Materials (metallurgical coal, iron ore and manganese), Diamonds and Specialty Products (diamonds, titanium minerals and metals distribution), Energy Coal (energy coal) and Stainless Steel Materials (nickel metal, and chrome and nickel ferroalloys).
BHP is the second largest global producer of copper, 3rd largest producer of nickel, 4th in uranium, 5th in aluminum and zinc. BHP is also the number one sea borne supplier of coking coal and manganese. BHP also produces oil and gas.
Breakdown trigger $46.75 hit 5/15
Entry $46.75 (5/15)
MDR - $41.07 - McDermott ** Stop loss $38 **
MDR sprinted to $46 on Wednesday but fell back to a low of $41.02 on Friday. This was only two cents above our stop at $41. MDR was awarded new contracts almost daily according to the news wires. We have a 2008 LEAP so I changed the stop to $38.
Current recommendation: Buy @ $40
Earnings schedule: Early August, no date set
J. Ray McDermott is a leading provider of engineering, procurement, construction, and installation services for offshore oil and gas field developments worldwide. McDermott International, Inc. is a leading worldwide energy services company. McDermott's subsidiaries provide engineering, construction, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy and power industries, including the U.S. Department of Energy.
3:2 split on June 1st reduced the strike price by 1/3 and increased the contract size to 150 shares.
Position 2007 $70 LEAP Call OYZ-AN @ $8.50
PTR - $108.35 - Petrochina ** No Stop **
No change in play. Despite the market weakness PTR continues to hold near its highs. News that China grew +11.3% last quarter was a factor in PTR success. PTR owns 14,000 service stations in China and growth is great for consumption!
We have a 2008 LEAP and PTR could be $200 before expiration. As long as we maintain the positive trend the long-term price of oil should be our salvation.
Current recommendation: Hold
Earnings schedule: August 24th according to Ameritrade
Petrochina is the fourth largest energy company in the world. It is a government monopoly but it acts like an independent. PTR is aggressively acquiring leases and rapidly expanding its drilling program. It currently has over 10.9 billion bbls of proven reserves and more than 44 TCF of gas. Warren Buffet owns $2.3 billion of PTR stock. It trades at less than $12 per BOE and has a 3.5% dividend yield. PTR owns 14,000 service stations and has 2,900 franchised stations. It is majority owned by China and has unlimited capital for expansion if China likes the deal. I expect several acquisitions by PTR over the next couple years but with a $208 billion market cap and China as the owner it will not be a target itself. China would never give up control of those oil assets. PTR saw its output rise +6.3% in Q1 to 267.7 million bbls when most companies were posting declines in reserves and production. Gas output rose +35.6%. PTR owns 75% of the oil and gas reserves in China and supplies 40% of its needs. This is as close to a permanent lock on a profit as we can get given the rapid growth of China's economy.
Cramer has been pounding the table on PTR saying it was not afraid to drill in communist countries, places torn apart by strife or run by two-bit dictators like Chavez or Morales. With the Chinese government and military behind it there is little chance of somebody trying to confiscate PTR assets.
PetroChina Company Limited operates a range of petroleum and related activities through four primary business segments: Exploration and Production Segment, Refining and Marketing Segment, Chemicals and Marketing Segment, and Natural Gas and Pipeline Segment. The activities include the exploration, development, production and sales of crude oil and natural gas; the refining, transportation, storage and marketing of crude oil and petroleum products; the production and sales of basic petrochemical products, derivative chemical products and other chemical products, and the transmission of natural gas, crude oil and refined products, and the sales of natural gas.
Position: 2008 $120 LEAP Call LJC-AD @ $16.20
Insurance combo: Closed
Entry 5/14 $116.20
GG $26.85 - Goldcorp ** Closed **
Goldcorp continues to fight resistance at $31.50 and resistance won. The July insurance put closed at 50 cents and left us naked. Given the performance of gold and the market I am bailing on Goldcorp at the present time. We will review it again if the chart on gold changes.
Goldcorp Inc. (Goldcorp) is a North American-based gold producer engaged in exploration, extraction and processing of gold. The Company's primary asset is its Red Lake Mine, a gold mine in Canada. It's other operations include the Bajo de la Alumbrera gold-copper mine (the Alumbrera Mine) in Argentina; a 100% interest in each of the San Dimas gold-silver mine (the San Dimas Mine); the San Martin gold-silver mine (the San Martin Mine); the Nukay gold-silver mine (the Nukay Mine) in Mexico, and a 100% interest in the Peak gold mine (the Peak Mine) in Australia. Goldcorp also has 100% interests in the Los Filos gold development stage project (the Los Filos Project) in Mexico and the Amapari gold project (the Amapari Project) in Brazil. Goldcorp also owns approximately 59% of Silver Wheaton Corp. (Silver Wheaton), a mining company with 100% of its revenue from silver production.
Goldcorp expects to produce 2 million ounces of gold in 2006 at an average cost of $125 an ounce. Goldcorp does not hedge its gold production. This will represent nearly $1 billion in profits at the current price of gold.
Breakout trigger $36.00 hit on 5/01
CSX - $61.94 - CSX Corp ** No Stop **
CSX suffered from the sell the news syndrome on earnings despite very strong earnings and guidance. Support remains $60 and we still have an August $65 put. I am hoping part of the selling was options expiration related and next week will see somce reason return to the markets.
CSX Corp, posted earnings that beat the street by 51 cents and was +127% over the same quarter in 2005. They also announced a 2:1 stock split, a 10 cent post split dividend (+54%) and a $500 million buyback program over the next 12 months. They said business was so strong they expected to raise prices up by +6% this year and again in 2007. They did receive some insurance payments related to hurricane losses that inflated earnings slightly but were roughly equivalent to the profits they would have made without the hurricanes. The company said business was booming for as far out as they could see. CSX lost -5.34 from the post earnings spike to Friday's close at $62.
The insurance put is out of range but we will leave the profit stop on it just in case the market rolls over.
Current recommendation: Buy above $60
Maintain a profit stop on the Aug $55 Put CSX-TK @ CSX $52
Earnings schedule: July 18th
CSX Corporation (CSX) based in Jacksonville, Florida, owns companies providing rail, intermodal and rail-to-truck transload services that combine to form transportation companies, connecting more than 70 ocean, river and lake ports. CSX's principal operating company, CSX Transportation Inc. (CSXT), operates the railroad in the eastern United States with approximately 21,000-mile rail network linking commercial markets in 23 states, the District of Columbia, and the Canadian provinces of Ontario and Quebec. CSX Intermodal Inc. (Intermodal) is a coast-to-coast intermodal transportation provider, an integrated intermodal company serving customers from origin to destination with its own truck and terminal operations, plus a dedicated domestic container fleet. Containers and trailers are loaded and unloaded from trains, with trucks providing the link between intermodal terminals and the customer.
Insurance Put: (closed 6/08)
Entry $60.50 (4/03)
BTU - $44.60 - Peabody Energy ** No Stop **
Can I take back my recommendation from last week when BTU was trading at $54? Dang, you might know BTU would be the company to stink up the coal sector. BTU warned that Q3 earnings would be less than expected but raised estimates for the full year. All traders heard was "warned" and BTU was knocked for a -$10 loss for the week. When the generals trip the entire army stumbles. BTU tripped everyone and the BTU weakness may not be just temporary. We have a 2008 LEAP so time is on our side but it may be a fight for the next couple months. I want to wait until options are settled next week before trying to reduce our costs again. Strong support in the $40-$42 range is our hope for a recovery.
BTU announced the acquisition of Australia's Excel Coal for $1.4 billion. The market liked the deal and BTU rose on the announcement. Excel is expected to boost its production from 5.6 million tons in 2005 to 15 million tons in 2007. BTU already produces about 60 million tons per quarter so at 2007 levels Excel will amount to about 6% of the 255 million ton total. The key to the equation is the distance from Australia to the high-demand markets like India and China as well as the volume of metallurgical coal Excel produces. If BTU is on the acquisition path James River (JRCC) and Foundation (FCL) have been rumored as targets as well as Massey Energy (MEE) and Consol Energy (CNX). Those would require a much stronger investment and face some regulatory hurdles.
We have been unbelievably unlucky on our insurance puts on BTU. Every one was filled near the highs for the day, low for BTU, and was followed promptly by a strong jump in BTU rendering our put worthless. I am hesitant to buy another one and I plan on selling an in the money calls when gas prices roll over. That collapse could last more than a month so we should be safe. I just want to get past the earnings before making any new moves.
Current recommendation: Buy under $40
Earnings schedule: July 20th
Peabody Energy Corporation (Peabody) is the largest private-sector coal company in the world. During the year ended December 31, 2004, the Company sold 227.2 million tons of coal. It sells coal to over 300 electricity generating and industrial plants in 16 countries. The Company owns, through its subsidiaries, majority interests in 32 coal operations located throughout all the United States coal producing regions and in Australia. Most of the production in the western United States is low-sulfur coal from the Powder River Basin. In the West, it owns and operates mines in Arizona, Colorado, New Mexico and Wyoming. In the East, it owns and operates mines in Illinois, Indiana, Kentucky and West Virginia. The Company owns four mines in Queensland, Australia. Most of the Australian production is low-sulfur, metallurgical coal. In addition to the mining operations, the Company markets, brokers and trades coal.
Position: 2008 $55 LEAP Call LLW-AK @ $9.50
Insurance Put: (closed 6/30)
Insurance put: (closed 6/9)
April 8th covered call:
April 24th covered call:
Entry $48.00 (3/07)
CCJ - $37.00 - Cameco ** No stop **
No change in play. Earnings are next Thursday and there is no uranium glut. I am hoping positive earnings will spark a new upward trend.
I am not going to buy another insurance put yet. Strong support at $35 should last unless the market implodes again. Hopefully the correction is past and only aftershocks remain.
Current recommendation: Hold
Earnings Schedule: July 27th
Original Play Description:
We were triggered on the breakout at $72.50 on Monday and again on the $67 breakdown target on Wednesday. Each trigger was for a 1/2 position giving us a full position with an average cost of $9.80 each. That turned out to be the closing price on Friday so if you missed either opportunity you did not miss anything. We are going to add another full position after CCJ splits on Feb-23rd.
This is my best single play in the list. Cameco just announced record earnings and raised their forecast for 2006 and beyond. They projected a +40% rise in revenue and a rise in margin from 23% to 28% for 2006. At the same time they announced a 2:1 split for Feb-23rd on the NYSE. They also raised the dividend to 32 cents from 24 cents payable on April 13th.
They also announced they were buying Zircatec for $108 million. Zircatec is a maker of nuclear fuel bundles for Canadian designed heavy water reactors. They said the acquisition would moderately boost 2006 earnings assuming no material changes in operations.
The combination of events including the purchase of Zircatec caused the stock to plunge from its all time high of $82.15 on Feb-1st to close at $69.97 on Friday Feb-3rd. That level remained support for the entire week through Feb-10th.
Cameco Corporation is engaged in exploring, developing, mining and milling uranium ore to produce uranium concentrates. The Company is also a commercial converter of uranium concentrates (U3O8) to UF6 (uranium hexafluoride), as well as a supplier of services to convert uranium concentrates to UO2 (uranium dioxide). Cameco, through its subsidiaries, has a 31.6% limited partnership interest in Bruce Power Limited Partnership, which operates six nuclear reactors in Ontario, Canada. Cameco also owns 53% of Centerra Gold Inc. (TSX: CG), a growth-oriented gold mining and exploration company engaged in the acquisition, exploration, development and operation of gold properties in Central Asia, the former Soviet Union and other emerging markets.
Breakdown target $67.00 hit
Pre-split average cost: $9.80
Additional Position: 2008 $40 LEAP LTA-AH @ $9.00 on 2/25.
Put insurance: (expired 6/18)
Monday Mar-20TH cost reduction strategy:
HAL - $30.01 - Halliburton ** Stop Loss $25 **
HAL imploded after the split on news that they were backing away from the KBR IPO. Earnings for HAL were strong beating the street by +6 cents but that included some one-time gains. HAL now says they will consider a tax-free spinoff of KBR to current HAL stockholders in addition to or in place of an IPO. Investors waiting over the last several months for an IPO date fled in droves when the news was announced. I still believe in HAL and I think it is a buy at this level. $30 and $27.50 are both support levels. Under $25.00 I would bail.
The July $32.50 puts closed at $2.55, less our cost of $1 for a +1.55 profit. The split gave us two contracts instead of the one contract of the July $65 put we started with. This reduced our cost in the LEAP. I am recommending we add another put just in case the damage is not over.
New insurance put:
Current recommendation: Buy under $30
Halliburton Company is an oilfield services company, and a provider of engineering and construction services. The Company provides services, products, maintenance, engineering and construction to energy, industrial and governmental customers. Its six business segments are Production Optimization, Fluid Systems, Drilling and Formation Evaluation, Digital and Consulting Solutions, collectively the Energy Services Group, and Government and Infrastructure, and Energy and Chemicals, collectively known as KBR. In August 2004, the Company sold its surface well testing and sub-sea test tree operations to Power Well Service Holdings, LLC. In January 2005, the Company emerged out of the chapter 11 proceedings and can operate the businesses without Bankruptcy Court supervision.
Halliburton was awarded a two-year contract with Statoil worth $193 million for cementing, drilling and completion fluid. Statoil said they were the largest contracts of their type awarded in 2006. In addition to the initial term there are three two-year extensions, which should bring the final value to somewhere in the $1 billion range allowing for adjustments.
Original Position: 2007 $85 LEAP Call VHW-AQ @ $9.80
Our adjusted cost in the 2007 $80 LEAPS is now $11.25
(5/22) Contracts doubled by 2:1 split (HAL-SS)
Insurance Put: (7/23)
Entry $39.50 (2/06)
VLO - $62.01 Valero ** No Stop **
VLO rolled over with the rest of the energy sector despite rising crack spreads. Earnings are still a week away and I am going to recommend another insurance put just in case.
Insurance put: Buy August $60 Put VLO-UL currently $1.70
Current recommendation: Hold
Earnings Schedule: August 1st
Commentary from 6/18
Petrie Parkman analyst Chi Chow produced a 20-page report on Valero explaining why VLO trades at a discount to its peers. He blames it on the Valero spending spree that put Valero on the top in the United States. Despite very strong profits it left little cash to return to shareholders in the form of stock buybacks so prevalent recently. Valero also had a change in management with founding CEO Bill Greehey passing the baton to Bill Klesse. Chow thinks this is a very positive shareholder development. Chow suggested Valero sell five refineries currently processing the expensive light sweet crude and running on tight margins. Chow said Valero could get up to $5.8 billion in after tax proceeds. He also said Valero could generate $550 million from selling its retail gas stations and focus only on the refining business. He said Klesse is a shareholder friendly CEO and total share repurchases as a result of those actions above could amount to as much as $11 billion or up to 22% of outstanding shares.
This would be huge news and rumor has it that Valero is considering dumping some refinery assets in order to concentrate on the more profitable sour crude operations. This would be a windfall for shareholders and I hope it comes soon!
Valero Energy Corporation (Valero) owns and operates 18 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 3.3 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. 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 sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.
Valero posted a company update on their website in late June. As part of the presentation they project higher earnings than the First Call consensus. Gasoline margins ytd in 2006 are up significantly over 2005. They expect strong year over year comparisons for Q2. According to Valero the US supply of on-road diesel is shrinking and Valero's margins are expanding. Valero estimates crude supplies will have to grow by +1.3 mbpd annually through 2010 just to stay even with demand. They see increased demand for light sweet crude and limited supply. Because Valero refines mostly sour crude their margins are significantly higher than other refiners.
The complete presentation can be viewed here: Presentation
Merrill upped VLO to a buy on June 29th.
Position: 2007 $60 LEAP Call VHB-AL @ $6.60
Monday Mar-20TH cost reduction strategy:
Monday July 24th: