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Sector Reset

The drop last week in energy stocks with oil still hovering around $75 is only a preview of the carnage we could see if oil prices ever reset to fair value. The current political tensions surrounding Iran, Iraq, Israel and Syria, problems in Nigeria and production still offline in the gulf will eventually fade. The $15-$20 of risk premium will evaporate and the entire sector will reset to fair value.

Our challenge is going to be the urge to buy the dip well before the dip is over. In order to avoid being triggered on new entries on the way down I am going to refrain from posting entry levels on watch list plays. We will wait, patiently I hope, until it appears a bottom is in place. I know it will be tough to watch all those "bargains" and not take the plunge but patience is the key.

This week I am adding several to the watch list for future planning only. The BTU warning blew us out of the Walter position but I still think it is a company we must own long term. Schlumberger is another company that has to be on our must own list but was eliminated as an active position last week.

I am also adding Ultra Petroleum (UPL), Suncor (SU) and Diamond Offshore (DO). Take a few minutes each week and study the charts of each watch list entry so you can follow my thinking once the decline begins.

Of course we always have the hurricane wild card to deal us a potential blow. If a cat-5 storm blows through the oil fields like Katrina our best-laid plans could evaporate. That is a chance we take and we will try to manage the problem if it comes to pass.


Jim Brown
 

Dropped Entries

None


New Watch List Entries

Current Watch List

CEO - CNOOC Limited

CNOOC Limited is a producer of offshore crude oil and natural gas and an independent oil and gas exploration and production company. It mainly engages in oil and natural gas exploration, development, production and sales. The Company has four major oil production areas offshore China, which are Bohai Bay, Western South China Sea, Eastern South China Sea and East China Sea. It is an offshore oil producer in Indonesia. The Company also has certain upstream assets in regions, such as Africa and Australia. As of December 31, 2005, it owned net proved reserves of approximately 2.36 billion barrels-of-oil equivalent (BOE) and its annual average net production was 424,108 barrels-of-oil equivalent per day (BOEPD).

CEO has been rather volatile over the last year but the 50-week moving average currently at $75 has been decent support. The June drop in oil prices saw CEO trade as low as $70. I want to target the $70 level on any future dip.

CEO does not have LEAPS so I am going to email everyone the play particulars depending on when that $70 level is hit. Currently December is the longest option series available. I am hoping before $70 is hit a new series in 2007 will be added.

I repeat, we will buy the dip sometime in August. Details to follow at that time.

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UPL - Ultra Petroleum

Ultra Petroleum Corp. (Ultra) is an oil and gas company engaged in the development, production, operation, exploration and acquisition of oil and gas properties. The Company's operations are focused primarily in the Green River Basin of southwest Wyoming and Bohai Bay, offshore China. As of December 31, 2005, Ultra owned interests in approximately 148,007 gross acres in Wyoming covering approximately 230 square miles. The Company owns working interests in approximately 330 gross productive wells in this area and is operator of 53% of the 330 gross wells. Its domestic operations are focused on developing and expanding a tight gas sand project located in the Green River Basin in southwest Wyoming. During the year ended December 31, 2005, the Company's Wyoming production was approximately 87.4% of total oil and natural gas production on a thousand cubic feet of natural gas equivalent (MCFE) basis and 98.5% of the Company's estimated net proved reserves were in Wyoming on an MCFE basis.

Ultra has been extremely volatile for the last six months with the price of natural gas falling more than -50%. Ultra has current support at $50 but I would like to target something even lower if gas supplies hit a new record late in the summer. $40 would be my initial target depending on the price of oil and gas in September.

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SU - Suncor

Suncor Energy Inc. (Suncor), formerly Suncor Inc., is a Canadian integrated energy company that explores for, acquires, develops, produces and markets crude oil and natural gas, transports and refines crude oil and markets petroleum and petrochemical products. Periodically, the Company also markets third-party petroleum products. Suncor also carries on energy trading activities focused principally on buying and selling futures contracts and other derivative instruments, based on the commodities the Company produces. The Company has four principal operating business units: Oil Sands; Natural Gas; Energy Marketing and Refining, Canada, and Refining and Marketing. During the year ended December 31, 2005, the Company produced approximately 206,100 barrels of oil equivalent (BOE) per day, comprised of 174,500 barrels per day (bpd) of crude oil and natural gas liquids and 190 million cubic feet per day (mmcf/d) of natural gas.

Suncor has performed better than the sector over the last month and appears to be holding above $75. I would normally like to target the 200-day average in the $71 range but June's low of $68 is slightly below that average. That makes $60-65 a more likely target as a retest of that June low.


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DO - Diamond Offshore

Diamond Offshore Drilling Inc. (Diamond Offshore) provides contract drilling services to the energy industry worldwide and is also engaged in deepwater drilling with a fleet of 44 offshore drilling rigs. The Company's fleet consists of 30 semisubmersibles, 13 jack-ups and one drillship. The Company's offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and jack-up markets. The Company provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.

Diamond Offshore appears to have fallen out of favor with investors and has been on a steady decline since hitting $86 in early July. It has decent support in the $55-$60 range but we need to see a rebound appear before taking a position.

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SLB - Schlumberger

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.

SLB has decent support at $55 and again at $50. SLB said business was booming in its July earnings release and yet it still sold off. I would initially target $55 but would want to see some buyers appear before making an entry.

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WLT - Walter Industries

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, 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.

We are looking at Walter primarily for its coal and gas operations but water products is also doing well. Dragging WLT lower was the BTU warning and worries over its housing division. Strong support is $40 but like the others we want to see some buyers appear before we make an entry.
 

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