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).