Exxon Trending Towards Expensive

XOM = Xtra Oily Machinations. XOM is still playing safer harbor for energy players. –The stock is off a paltry 4% from its 8/22/06 all time interday high of $71.22. This is the single best performance among the 100+ energy stocks I watch daily and of them, it’s probably the least hedged.

–The other majors have fallen 7% to 17% (COP) from their 2006 highs

– The XOI is down 12% and the gassier XNG is off 8% (which is pretty baffling given natural gas’ performance this year). Service stocks, who sell stuff to XOM and haven’t seen a wit of pricing pressure have been bashed, falling a whopping 25% as measured by the OIH.

– USO is down 28% from its high.

So Back To XOM. What going on with the company’s numbers? Are they growing at astronomical rates? Are commodity prices that big a factor. In a word, yes.

– Lets look at the second quarter. Production grew 9% (6% after divestments), but net income grew 36% and EPS grew 40% due to buybacks. Although Exxon doesn’t break out commodity price realizations in its filings, production was roughly 65% oil in the second quarter. Prices were key to revenue and earnings growth.

To vastly oversimplify (which sometimes is pretty useful), XOM’s quarter earnings are highly correlated to oil prices. Big surprise. See the secnd chart below to see just how correlated. Note that anticpated earnings for 3Q and4Q flatten out while oil looks to me like its going to averge the same levels in 3Q vs 2Q before dropping about $10 for the fourth quarter.

Moreover, the stock trades in a narrow range of price to next twelve months (NTM) expected earnings, for the last 4 years this has ranged from roughly 9x to 11x. Since August, the fall in oil prices has caused analysts to modestly reign in their estimates for 3Q and 4Q and no one is going out on a limb to say earnings will be anything other than flat 2007 over 2006. But as XOM has successfully treaded water, the multiple, on a forward basis has expanded. The chart below shows it better than I can possibly state, but as XOM fights the tide of falling oil prices, it becomes increasingly expensive, especially in light of recent multiples.

Conclusions. 1) XOM quarterly earnings are highly correleated to oil. 2) it appears that the recent decoupling of XOM from oil prices is taking XOM to the high end of its trading range relative to forward earnings (using consensus estimates).

Friday Morning

– Norway Boat Crisis. Oil continues to reactive positively to the “Norway emergency boat crisis”. Did Norway join Opec and someone forget to tell me? These guys are perfect candidates. They produce 2.7 mm bopd but used to produce over 3.5. They suddenly “discover” some issues that must be “dealt with today” forcing the closure of nearly 10% of their production, potentially through the middle of November. BP couldn’t have timed it better.

– Crude Up. Crude has topped $58.80 in early trading. Look for resistance at $59 and $60 with support at $58. If we break down through $58 the stocks might actually come in some. However, I doubt oil will close sub $58 going into another OPEC threatened weekend (I’m going with a $58.52 close).

-- OPEC Remains Outwardly Quiet. A week ago when their president said that cuts were coming on Monday, I guess he meant next Monday.

– Analysts Say Oil To Fall Next Week. A Bloomburg survey of analysts called for oil to fall next week as everyone remains skeptical about production cuts. The survey has a 52% history of succcessfully predicting next week’s oil price. Wait, a minute, I know I’ve got a quarter here somewhere. Flip. Oh yes, oil prices are going down next week.

–12,000 Here We Come! GE made their numbers this morning and futures are holding close to unched. Without a negative surprise, this go, go market will probably advance into the weekend taking oil stocks with it.

Note to CNBC: As a long time watcher of your show, I’ve noticed an “up is good, down is bad” mentality in your reporting on the markets. I can hear the corks popping in the background everytime the DJIA makes a new high and guest after guest will proclaim even loftier levels. In three weeks, when the DJIA sinks 400 points over 3 days, those guest will disappear, to be replaced by your long faced, doom and gloom, naysayer guests. Wouldn’t it be prudent, as we make new highs and stretch valuations to the limit, to start scheduling interviews with those depressing folks? Just trying to help.

– Natural Gas Down. Not that anyone cares but gas dropped 6% yesterday, erasing almost a third of the completely stupid rally its enjoyed in the last two weeks. Yesterday morning, I said a break of the critical $5.76 level was needed and while we got a test of it, we closed at $5.78. This morning electronic trading has gas off another nickel and support looks to me to be at $5.64.

—-I’m expecting injections of 45-50 Bcf next week. Anything above 50 should prompt a test of $5 on Thursday although analysts will throw out higher estimates they know we can’t make to “create a disappointment”. Sorry, feeling a bit cynical today after yesterday’s thrashing but that’s how the game is played.

—-The storage tab above is updated with lots of data and a new chart.

—-If I hear one more analyst or trader reference winter as a reason to buy gas I’m going to throw something harmless at my TV. The country saw a one day cold snap on Thursday and the weekend will be warmer just about everywhere. Get over it! Many of these guys have been very long gas, see CFTC tab, and should use this opportunity to exit.

Analyst Watch: nada, zip, nothing. can you blame them? I’d be quiet too, the stocks go if commodities rise, they go up if commodities fall. Why screw that up with some analysis. Yup, early indications are showing the E&P, service stocks, and refiners advancing across the board.

– ok here’s one. FBR cut their price target for SGY from $55 to $44 (the stock’s at $39.70 now) so I guess I feel somewhat vindicated on my comments yesterday that being twice a bridesmaid but never a bride is bad for Stone.