Bottom of the Barrel
After seeing three more watch list entries make it into the actual portfolio this week we are scraping the bottom of the barrel for new plays. This is probably good since we already have a full slate of positions.
I considered dropping Conoco from the list several times due to the problems with Russia as evidenced by the current Sakhalin-2 fiasco. Russia signed a deal with Shell and others to develop a massive $20 billion oil and gas project. The terms of the deal were for the partners to recover their costs before they had to pay Russia any royalties. Now that the project is almost finished Russia revoked their EPA permit saying they spoiled the environment. In reality it is simply another ploy like the Yukos scandal to extract a better deal now that the development is nearly finished.
Conoco is not involved in the Sakhalin-2 project but they have been continually investing in Lukeoil with their stake now up to 19%. This is a huge risk for Conoco given the current state of Russian nationalism. However, as long as Putin keeps his part of the deal Conoco has access to the second largest reserves on the planet. Russia benefits from Conoco's experience and technology and Conoco gets to produce the oil. It is a win-win for both sides as long as the rules don't change.
Just as I was planning on dropping COP they announced this week a sweeping new agreement with Encana to produce and market Canadian oil. This agreement includes upgrading two of Conoco's US refineries to handle heavy Canadian oil and raise production from 60,000 to 550,000 bpd. The joint venture in Alberta will also add 500,000 bpd of production from the oil sands project. This is a very strong announcement that provides Conoco with a secure flow of oil from Canada and a sizeable jump in refining capacity. It was enough for me to leave them on the watch list. I always liked Conoco's aggressive posture but the Russian business has me worried and based on the stock price I think others are worried as well.
Future watch list additions may come from sectors other than energy and only when real value appears.
Current Watch List
LTR - Loews Corp
Loews Corporation is a holding company. The lines of business the subsidiaries are engaged include commercial property and casualty insurance (CNA Financial Corporation (CNA), a 91% owned subsidiary); production and sale of cigarettes (Lorillard, Inc. (Lorillard), a wholly owned subsidiary); operation of interstate natural gas transmission pipeline systems (Boardwalk Pipeline Partners, LP (Boardwalk Pipeline), an 85%-owned subsidiary); operation of offshore oil and gas drilling rigs (Diamond Offshore Drilling, Inc. (Diamond Offshore), a 54%-owned subsidiary); operation of hotels (Loews Hotels Holding Corporation (Loews Hotels), a wholly owned subsidiary), and distribution and sale of watches and clocks (Bulova Corporation (Bulova), a wholly owned subsidiary).
Breakdown target: $36.50 - Firm target
Buy 2009 $40 LEAP Call VRH-AH
Chesapeake Energy Corporation (Chesapeake) is an oil and natural gas exploration and production company. It is engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs, and the marketing of natural gas and oil for other working interest owners in properties it operates. As of December 31, 2005, the Company owned interests in approximately 30,600 producing oil and gas wells, which were producing approximately 1.5 billions of cubic feet equivalents (bcfe) per day. On November 14, 2005, Chesapeake acquired Columbia Energy Resources, LLC and its subsidiaries, including Columbia Natural Resources, LLC (CNR) and its natural gas reserves, acreage and mid-stream assets. In 2006, the Company acquired oil and natural gas assets from private companies located in the Barnett Shale, South Texas, Permian Basin, Mid-Continent and Ark-La-Tex regions. It also acquired an Oklahoma-based trucking company in 2006.
CHK appears to be headed for a retest of support at $27 but I am hoping for a drop all the way back to $25.
Breakdown Target: $27.50
Buy 2009 $30 LEAP Call VEC-AF
ECA - Encana
EnCana Corporation is a natural gas producer in North America. It is a holder of natural gas and oil resource lands onshore North America. The Company is also engaged in select exploration and production activities internationally. EnCana operates under two main divisions: Upstream and Midstream & Marketing. The Upstream division manages EnCana's exploration for, and development and production of, natural gas, crude oil and natural gas liquids (NGLs) and other related activities. EnCana's Midstream & Marketing division encompasses the Corporation's market optimization activities and remaining midstream assets. EnCana is in the process of divesting the majority of its remaining midstream assets, including its natural gas storage business and the Entrega Pipeline.
Strong support at $40 should be our first target with a backup at $35 for a second position. Encana is attempting to sell some midstream assets and that could impact the stock price significantly when it happens.
Breakdown target: $42.50
Buy 2009 $50 LEAP Call ZBM-AJ
CVX - Chevron Corp
Chevron Corp. (Chevron), formerly ChevronTexaco Corporation, manages its investments in subsidiaries and affiliates, and provides administrative, financial and management support to the United States and foreign subsidiaries that engage in integrated petroleum operations, chemicals operations, coal mining, power and energy services. Petroleum operations consist of exploring for, developing and producing crude oil and natural gas; refining crude oil into finished petroleum products; marketing crude oil, natural gas and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car. Chemicals operations include the manufacture and marketing, by affiliates, of commodity petrochemicals for industrial uses, and the manufacture and marketing, by a consolidated subsidiary, of fuel and lubricating oil additives.
Like Conoco Chevron has failed to impress investors over the last year. There is strong support at $55 and I believe it will retest that level before the fall is over. Chevron did make a like discovery to the BP find in the Gulf but it was under reported and Chevron's boost promptly faded. If we can buy it right we will bet on future discoveries in the same area.
Breakdown target: $56
Buy 2009 $60 LEAP Call VCH-AL
ATI - Allegheny Tech
Allegheny Technologies Incorporated (ATI) is a producer of specialty materials for global markets. The Company operates in three business segments. The High Performance Metals segment produces, converts and distributes a range of high-performance alloys, including nickel and cobalt-based alloys and super alloys, titanium and titanium-based alloys, exotic alloys, such as zirconium, hafnium, niobium, nickel-titanium and their related alloys. The Flat-Rolled Products segment produces, converts and distributes stainless steel, nickel-based alloys, and titanium and titanium-based alloys, in a variety of product forms, including plate, sheet, strip, engineered strip and Precision Rolled Strip products. The Engineered Products segment produces tungsten powder, tungsten heavy alloys, tungsten carbide materials and carbide cutting tools. On April 5, 2005, the Company acquired Garryson Limited, a producer of tungsten carbide burrs, rotary tooling, and specialty abrasive wheels and discs.
Yes, ATI is into high performance metals. They are also the only major manufacturer of very high strength pipe capable of being used in wells like the new Gulf discoveries by BP and Chevron. Drilling 30,000 feet under 7500 feet of water requires extreme performance pipe for every stage of the underwater application. This pipe segment is rapidly growing for ATI and will become a major profit center over the next two years. There is strong support at $55 but I would like to try and tag it at $50 if possible.
Breakdown target $58.00
Buy 2009 $70 LEAP Call OYG-AN
MRO - Marathon Oil
Marathon Oil Corporation (Marathon) is engaged in the exploration and production of crude oil and natural gas on a worldwide basis. The Company operates in three business segments: Exploration and Production (E&P), Refining, Marketing and Transportation (RM&T) and Integrated Gas (IG). The E&P segment explores for and produces crude oil and natural gas on a worldwide basis. The RM&T segment refines, markets and transports crude oil and petroleum products, primarily in the Midwest, the upper Great Plains and southeastern United States. The IG segment markets and transports natural gas and products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol on a worldwide basis. On June 30, 2005, the Company acquired the remaining 38% ownership interest in Marathon Ashland Petroleum LLC (MAP). As a result of the acquisition, MAP became a wholly owned subsidiary of Marathon and was subsequently renamed as Marathon Petroleum Company LLC (MPC).
Breakdown target: $70
Buy 2009 $80 LEAP Call VXM-AP
HES - Hess Corporation (Formerly Amerada Hess (AHC))
Hess Corporation explores for, develops, produces, purchases, transports, and sells crude oil and natural gas. These exploration and production activities take place in the United States, United Kingdom, Norway, Denmark, Russia, Equatorial Guinea, Algeria, Gabon, Libya, Indonesia, Thailand, Azerbaijan, Malaysia and other countries. The Company also manufactures, purchases, trades and markets refined petroleum and other energy products. It owns 50% of a refinery joint venture in the United States Virgin Islands, and another refining facility, terminals and retail gasoline stations located on the East Coast of the United States. As of December 31, 2005, the Company had 692 million barrels of proved crude oil and natural gas liquids reserves.
Breakdown target $35
Buy 2009 $40 LEAP Call VHS-AJ
SWN - Southwestern Energy
Southwestern Energy Company is an integrated energy company primarily focused on natural gas with proven reserves of more than 825 BCF. Through its wholly owned subsidiaries, the Company is engaged in natural gas and oil exploration and production business. It operates principally in three segments: exploration and production, natural gas distribution and marketing. The Company's exploration and production activities are concentrated in Arkansas, Texas, Louisiana, New Mexico and Oklahoma. It's wholly owned subsidiary, Arkansas Western Gas Company, referred to as Arkansas Western, operates integrated natural gas distribution systems in northern Arkansas. The Company provides marketing services in each of its core areas of operation through its gas-marketing subsidiary, Southwestern Energy Services Company.
Breakdown target: $25
Buy 2008 $30 LEAP Call LVX-AF (no 2009 leaps)
MDR - McDermott Intl
McDermott International, Inc. (MII) is the parent company of the McDermott group of companies, which includes J. Ray McDermott, S.A. and its consolidated subsidiaries; McDermott Incorporated (MI) and its consolidated subsidiaries; Babcock & Wilcox Investment Company (BWICO), a subsidiary of MI; BWX Technologies, Inc., a subsidiary of BWICO, and its consolidated subsidiaries, and The Babcock & Wilcox Company, a subsidiary of BWICO, and its consolidated subsidiaries. Through these subsidiaries, MII operates as a global energy services company with three business segments.
Breakdown target $38
Buy 2009 $50 LEAP OYZ-AJ