Thursday Morning – XOM Stop The Madness

Oil Up On Bigger Than Expected Distillate Draw. That’s the headline on every story summarizing energy trading yesterday from Bloomberg to AP and was stated that way on CNBC as well. The “up ” should be in quotes. Forget the part about inventories running a bit slow or that refiner utilization was down, not up as was expected, or that oil sold off until just before the close when the now familiar group of EOD buyers needed barrels at any price.bbb

–It couldn’t hold $60 and is still trending down if you avoid looking at minute charts. If you need more TA on crude, look here.

–Oil inventories now look like this (within a hair of decade high levels):

Natural Gas Rallied Enough To Offset Monday’s Plunge. A quick look at heating degree days shows a jump to 123 vs 114 in the prior week and 84 a year ago when we got a build of 64 bcf. Using somewhat back-of-the-envelope calculations I’m going with a draw of 25 bcf today.
–The nation’s west and mid section are bathed in what can only be refrerred to as tropical weather at present (link) and the early read on degree days had them fallling to 82. As the forecast has warmed considerably since that prediction was made, I’m looking for a return to inventory builds next week. Last year HDDs were 80 for next week and we got a 51 Bcf build so we could get a sizeable increase which should slap gas down hard.

House Resources Committee gets new anti big oil head as Richard Pombo R Cal (pro drilling, anti Bambi) gets swapped out for Jerry McNerny (pro wind, solar, tree hugging, flowers) as chair. PWB reacted favorably even though Prop 87, which would have sent more R&D $ to renewables companies, failed to pass.

Holdings: All pretty much up – AGAIN. Somebody wake up OMM, they actually fell today.

HAL shrugged off a Democrat controlled House and as of this evening the Senate to close with a small gain after being off as much as 3% in pre market trading. Cramer said it was too obvious a play since it’s been beaten down for months. Then he recommended shorting Big Coal because, wait for it, that’s been beaten down for months. Wow, what a genius. Did he stop to think that Pelosi will stop at nothing to get under the covers of this company and dig up even more dirt of which there seems to be a never ending supply?

PTEN shrugged off the Howard Weil downgrade. HW is a very well respected, energy focused investment bank and yet PTEN rallied 2.4%. Unreal.

Now On To Exxon. Exxon shot up at the open and never looked back when oil pared half its gains around mid day. XOM closed up 2.3% at $74.13, the biggest single day gain in five months and another record close.

–Market cap added since October 1: $41.7 billion or more than twice the entire capitalization of GM. XOM stock is UP $7.15, or 11% since Oct 1.

— The December Crude Oil Contract FELL $4.20, or 7% over the same period.

— The effect on your shares of spending far more on buybacks than looking for oil and gas or improving your refineries= PRICELESS

bring from old file and update.

XOM is still playing safe harbor for energy players. This remains the single best performance among the 100+ energy stocks I watch daily and of them, it is among the least hedged.

–The other majors for the most part remain well off highs reached earlier this year

– YTD XOM is up 32% vs 14% for the DJIA and 8% for the S&P500.
– December Crude is DOWN 2% YTD and off 22% from its August high.

– December N Gas is DOWN 30% YTD.

Wow, that’s pretty stellar outperformance for a company that grew earnings 9% this year, mostly via buybacks and from which most analysts are expecting lower numbers next year. hmmmm.

How Do Exxon’s Numbers Relate To Oil Prices?

To vastly oversimplify (which sometimes is pretty useful), XOM’s quarterly earnings are highly correlated to oil prices.

2nd and 3rd quarter saw similar oil prices (about $70 WTI ) but EPS actually fell $0.15 sequentially despite the largest share repurchase in history. Oh yes, they sell natural gas as well, and it was falling. Were it not for those unusually high crack spreads over the summer they would have had a real problem.
XOM Has Jumped The Shark Relative To NTM Earnings

— XOM trades in a narrow range of price to NTM earnings. For the last 4 years this has ranged from roughly 9x to 11x.

–2007 EPS is expected to fall to $6.24 from $6.38 in 2006. This estimate has been trimmed only $0.07 in the last 3 months while the most recent quarter’s estimate has fallen a dime, demonstrating Exxon’s susectibility to changes in oil prices and Walll Street’s reluctance to trim estimates until the last minute.

So what if it’s expensive Zman? Stocks can and do stay expensive for a long time. Most importantly, when will it reverse course?

My short answer is that while I don’t know exactly when XOM will stop rising daily like the sun I know the signs of an overheated stock. There are several signs that lead me to believe that the time is quickly approaching when we will see a reversal. These are a combination of fundamentals, technicals, and gut:

–As others have pointed out, the last $10 move made since the beginning of October has been for the most part been achieved with lower and lower volumes.

–Seemingly irrational, often early moves on light volume and moves that run counter to movements in the price of oil. This has been happening almost daily for the last two weeks.

— Wall Street’s pendulum often swings too far in one direction before rapidly swinging back the other way. Unlike real pendulums, the movement is often most swift at the extremes with buying frenzies and sellilng panics. We are starting to see signs of a buying frenzy and while I’m no technical analyst, I have seen this before and its never pretty.