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Halftime: Nat Gas Still Joe Terranova's Fave Energy Trade?

Ultra Petroleum is a great growth story, but with natural gas prices trading in the tightest range in eight years and futures falling Friday, Virtus Investment Partners' Joe Terranova wonders if it isn't time for the company to diversify more into oil.

No, said Ultra Petroleum CEO Michael Watford on Friday's "Fast Money." Watford explained that the company is "all about margins and profitability" and looking at different opportunities in oil, he doens't see anything that could match the nat gas assets they currently have. He noted that UPL continues to make money even on the low end of the cycle.

Watford said natural gas is at a trough and has more upside than downside. Ultra Petroleum is able to cover the fluctuating prices because of its unique cost structure, Watford said. On a unit of production basis, he said their costs are roughly half of that of the average cost their competitors pay.

"Even in today's sub $4 gas environment, we make money and certainly as it begins to grow and gets back over to $4.50 and $5 gas, we'll make more and more money," he said.

Asked by CNBC's Melissa Lee what "magic number" will cover their costs, Watford said all costs in the second quarter of 2010 were $268 in Mcf/E. Anything north of that at $3 gives us earnings, he said. With cash costs at $1.20, cash flow would be positive north of $1.30. In the last decade, net income margins have averaged in excess of 30 percent. Cash flow margins were at 70 percent and return on capital touched 20 percent.

What's the Trade?

Terranova has become frustrated with the stock's price action. The problem, he said, is with natural gas prices and thinks the company needs to diversify.

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TOBACCO STOCKS SMOKIN' HOT

Shares of tobacco-maker Altria Group hit a new all-time high in trading Friday. The tobacco names have done well since June 28 when the Supreme Court handed down a favorable ruling, said Steve Grasso of Stuart Frankel.

"This sector moves when the market is down. It moves when the market is neutral. This is the spot you want to be in with the high dividend yield," he said. "People are still chasing cash."

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CALL THE CLOSE

Patty Edwards, chief investment officer at Trutina Financial, thinks the market could push higher.

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Grasso also thinks the market could go higher. He recommends buying protection and staying long the market.

"I think the Treasury correction has much more to come," said Terranova.

"I'm looking at those financials. Yesterday they bounced. They led the market back," said Pete Najarian, co-founder of optionMONSTER.com, adding that he thinks a bounce could happen yet Friday, but the market may end flat.

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Trader disclosure: On October 15, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Pete Najarian owns (GE); Pete Najarian owns (AKAM) call spreads; Pete Najarian owns (YHOO); Pete Najarian owns (ISLN) call spreads; Pete Najarian owns (BRCD); Pete Najarian owns (CNI); Terranova Owns (GLD), (APA), (AAPL), (IBM), (EOG), (HES), (OIH), (OXY), (ORCL), (SU), (VRTS), (XBI), (C), (JOYG), (RIG), (UPL), (PEP), (FCX), (PFE), (HOC), (NOV), (CRM), (MMM), (MCD), (NKE), (CREE), (ISRG), (XLF), (SDS), (GOOG); Terranova is short (APOL); Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Patty Edwards
Edwards Owns (BAC) For Clients
Edwards Owns (JPM) For Clients
Edwards Owns (WFC) For Clients
Edwards Owns (GOOG) For Clients
Edwards Owns (AAPL) For Clients
Edwards Owns (INTC) For Clients
Edwards Owns (GE) For Clients
Edwards Owns (SYT) For Clients
Edwards Owns (PM) For Clients

For Steve Grasso:
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (OPEN)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners are short (QQQQ)

For Erik Oja
***No disclosures***

For Richard Kugele
Needham managed a public offering of (STX) in the past 12 Months
Needham received compensation for investment banking from (STX) in the past 12 months.
Needham makes a market in (STX)

CNBC.com with wires.

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MO
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UPL
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