OIX - $642.28 - Oil Index Portfolio Hedge
No Change in play. The OIX failed to maintain any gains for the week and should drop like a rock once oil prices begin to crater. I would continue to use the OIX as a hedge for any current positions but use the Sept 600 put OIX-UY instead of the initial strike.
Current recommendation: Buy above $600 using OIX-UY
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.
BHI - $75.39 - Baker Hughes Intl ** Stopped @ $75 **
BHI took itself out of contention with a touch of our stop at $75 on Friday for a loss of -90 cents.
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.
Current recommendation: Hold
Earnings: July 28th, EPS $4.14, $1.4 billion
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.
ACI - $35.45 - Arch Coal Inc ** No Stop **
No change in play. Arch is bleeding with the rest of the coal community but we have a strong insurance position with the Sept $35 put to take advantage of any late August decline.
No stop on current insurance put. Hold for instructions.
Current Recommendation: Buy under $35
Earnings: July 21st, $69.6 million, $0.48 cents
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.
Entry $48.36 (5/31)
TIE - $25.83 - Titanium Metals ** Exit **
The stop loss was $25 and it closed at $25.83 after losing -$3 for the week. I am throwing in the towel to clear the way for new energy plays over the next few weeks.
Current Recommendation: Sell
Earnings: July 24th, +64%, $54.3M, 0.31 cents
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 - $41.07 - BHP Billiton Limited ** Exit **
I am throwing in the towel on BHP as well this week. It gave back all its gains from the prior two weeks and appears ready to breakdown under support at $40. The strike at its copper mine is weighing on the stock.
Current recommendation: Sell
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 - $47.70 - McDermott ** Stop loss $38 **
MDR posted earnings that showed a +59% growth in operating income and a +87% growth in order backlog. While it is hard to argue with numbers like that it is also hard to read MDR financials. They reorganized again and that made the numbers difficult for most to understand. Still, that backlog number is very strong. The BP disaster this week shows that the infrastructure tax must be paid and MDR is in the business of collecting that tax.
I am adding a put just in case we get a sector implosion over the next five weeks.
New Insurance Put:
Current recommendation: Buy @ $43
Earnings schedule: August 7th
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 - $116.25 - Petrochina ** No Stop **
No change in play. New two-month highs this week. I am adding a put to protect against a drop in oil prices.
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.
New insurance put:
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
CSX - $58.96 - CSX Corp ** Stopped @ $59 **
CSX slipped to a new five-month low on the implosion in the transportation sector. That took us out at our $59 stop. Even the best stocks go down when their sector takes a -16% dump.
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.
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: Hold
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 - $46.16 - Peabody Energy ** Stop loss $39 **
BTU is struggling and has nearly given back its gains from the prior week. $44 should be support followed by $40 and I am reluctant to add any new puts. They are very expensive and we have had rotten luck with BTU. I glanced at the national weather chart and there is hot weather everywhere except the northeast. I am hoping another week of inventory draws in natural gas will lift it off support. I did add a stop loss just in case.
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 over $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.
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 - $38.48 - Cameco ** No stop **
CCJ said last week it had borrowed uranium from some customers to sell to others. There is simply not enough to go around. Demand through 2009 is expected to be 50 million pounds. Unsold production is only 20-30 million pounds. The price of uranium is continuing to move higher and CCJ owns 20% of the market. I am surprised we have not seen a move to the upside. CCJ has been dormant for the last several months and I continue to believe it will catch fire eventually. Strong earnings, strong backlog, demand greater than supply, it should be rocketing higher. Spread the word!
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: Buy @ $35
Earnings: July 27th, +138%
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 - $33.87 - Halliburton ** Stop Loss $30 **
HAL is holding its gains from the prior week and volume is positive. I am still a believer over $30.
Current recommendation: Buy over $30
Earnings: July 21st, +44% or $0.55 cents
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
Insurance Put: (5/22) Contracts
doubled by 2:1 split (HAL-SS)
Insurance Put: (7/23)
Entry $39.50 (2/06)
VLO - $64.83 Valero ** Exit **
VLO took a -$4 hit from Wednesday's high and I am exiting the play rather than add any insurance. We are up +$5 and I am taking the profit. We will reenter VLO again on the next dip and use a longer LEAP. Our 2007 has about run its course. With gasoline prices about to drop refiners should lead the drop.
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: