zman’s Energy Brain

oil, gas, stocks, etc…

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Exxon Trending Towards Expensive

Posted by zmann on October 13, 2006

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).


12 Responses to “Exxon Trending Towards Expensive”

  1. Pete said


    This is a really informative site. Your energy insights are without equal as far as I’m concerned. In your opinion, do you see any pullback in oil before October expiration?

  2. Great write-up Zman!

    Here is my favorite chart:;range=3m;compare=uso+cvx+dvn+cop+hes+apc+vlo+tso;charttype=line;crosshair=on;logscale=on;source=

    Clearly, XOM and DVN are the best short opportunities here.

  3. zmann said


    While I’ve got a 50/50 chance on that call, I’m going to hedge and say I think so, but it really depends on the size of the Wednesday draw in heating oil. Another 2+mm bls and you’re probably looking at a pop. On the other hand, Venezuela’s oil minister has been quoted as saying that any cuts, be they from quotas or production levels, will begin Dec 1 instead of the previously stated Nov 1. This jives with the Saudi comments that deliveries to Asia will remain at current levels through November. I’ll write more about my thoughts on OPEC early this week in a piece, probably Monday. Anyway, good luck and I’m glad you like the site. As alway, it’s a work in progress so feel free to ask lots of questions and offer suggestions about things you’d like to here about here.

  4. zmann said

    Nice chart Soccer! They both should be great on the downside but the XOM being a DJI component has made all the difference in its performance. Patience. Its day will come but not likely until after earnings.

  5. […] As you can see from a 1-year chart, until July ALL of these stocks tracked United States Oil Fund ETF (AMEX: USO – News) (the oil ETF) very closely. For XOM in particular, Zman did an excellent analysis of why this situation is unlikely to continue. […]

  6. George said

    Wondering if you know how much of monthly oil production/sales is covered under futures contracts, and how much is sold on the open spot market.? Seems much of the inflated oil price is due to oil producing countries/companies manipulating future contracts.Is there any way to track the ownership of futures before the experation date? Where do I find a record of an oil company”s hedge account,is it listed on annual report?

  7. zmann said

    Most E&P companies disclose hedges in their 10Qs or 8K reg FD filings. XOM keeps a tighter leash on data but having looked at their commodity price realizations relative to benchmarks such as WTI or Brent on past quarters, I’d say they’re not doing a lot of hedge. Moreover, given their sheer size and vast geographic breadth, it would be difficult for them to put on positions of sufficient magnitude to make a difference.
    As far as I know, the futures ownership data is private unless disclosed by the fund or individual.

  8. George said

    XOM on the 26th 3rd Q earnings are going to be another record,yes oil was @77$$,will be more than anyone ever in a Q. ..and yes they will raise dividend some more maybe 2 cents this time,they like to point out 20+ years straight they have done this.. Is that going to drive stock price up? The dividend is a joke at this stock price, what do people see in this stock, they dont reward the share holder with record profits..only the CEO = board with more stock options.when does the shoe drop on this pig.? after the election?

  9. […] Fed Leaves Rates Unched… Then the Fed proved that it did do some work since the last meeting by changing one sentence in the meeting press release while leaving rates unchanged …again. The Dow jumped into super rally mode, then paused, jumped again and finally plummeted back to where it started before the announcement. Before jumping again. Silly market. …Giving XOM the green light to hit its all time closing high. And on the eve of earnings. Nice. You’d think they built a new search engine or sold videos downloadable into small, portable and very sleek players,but no, they just sell oil. And they expect the price of this oil to fall and they don’t plan to sell much more of it next year than this year. This run puts XOM at 11.6x forward earnings, at the upper end of the five year chart as previously discussed, and even counting today’s little commodity run, the stock remains completely disassociated from what it sells. I stop using that chart when it stops being so ironic. […]

  10. George said

    OK so I was wrong.only 10.5 billion profit , no record and no rise in the dividend.Blew the streets $1.58 avg away at $1.70 something , and still nothing for the share holder.I admit I under estimated how greedy and how sharp the accounting pencil..Will be interesting if the reserve build will be based on LNG again instead of OIL.listen to the call,if you can stand the ….this company runs on SAP maybe it even has them fooled..

  11. […] until July ALL of these stocks tracked USO (the oil ETF) very closely. For XOM in particular, Zman did an excellent analysis of why this situation is unlikely to […]

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