Will Exxon Continue To Trade Up?
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The recent fall in the price of oil didn’t seem to curb the recent rally of Exxon Mobil (NYSE: XOM). The upcoming publication of its third quarter financial report may shed some light on the recent developments of the company. In preparation for the earnings reports, let’s examine what may have affected the company’s stock in recent months, and what is ahead for Exxon for the rest of year.
Exxon's Micro View
The company’s third quarter financial reports will come out on Nov. 1. The recent decline in the average quarterly price of oil during the third quarter by nearly 1.4% compared to the second quarter may have adversely affected the profitability of the company. On the other hand, the hike in the average quarterly price of natural gas by nearly 22% may have helped pull up the company’s profitability. Since revenues of natural gas represent a smaller portion than oil's out of the total revenue mix, this means the fall in the oil price will have a stronger effect than the natural gas prices have.
But the big news for Exxon is its recent agreement with Celtic Exploration, in which Exxon will purchase the company at an estimated $3.1 billion. According to Celtic Exploration, the agreed-upon transaction price includes a 35% premium over the current stock price. Furthermore, according to the company's second quarter reports there was a 14% drop in revenues compared to the first quarter of 2012, but a net profit for the first time in the past year.
For now, this agreement seems to generate some positive market sentiment toward Exxon. Nonetheless, the actual effect of this agreement on the company's operations and revenues will become clearer in the company's future financial reports.
Let's see how Exxon performed compare to the market, energy prices, and its peers.
S&P 500 and Exxon
The recent rally of the S&P 500 reflects some signs of optimism that the U.S economy might be slowly recovering. The recent positive economic reports that were published include a rise in U.S retail sales, a positive Philly Fed index for the first time in six months, and a hike in number of housing starts. If this trend continues it could pull the S&P 500 up even further. One of the main factors that contributed to the rally of Exxon was the recent rise in the S&P 500: during September-October the linear correlation between Exxon and S&P 500 reached nearly 0.78. This means, under certain assumptions, that the rally of S&P 500 index could explain nearly 60% of the company’s stock rise.
Oil and Exxon
The recent decline in the price of oil, and by extension United States Oil (NYSEMKT: USO), didn’t seem to curb Exxon's rally. During September-October, the linear correlation between oil price and Exxon reached only 0.38. Nonetheless, in the long term the decline in the price of oil is likely to affect the company’s valuation (assuming you use a DCF). Since the beginning of the year oil prices have declined by 10.5% while United States Oil is down by 14.1%. I still think the price of oil will come down further , unless of course there will be an unexpected oil related shift, e.g. a rise in the tension in the Middle East.
NG and Exxon
Despite the recent rally of natural gas prices and United States Natural Gas (NYSEMKT: UNG) in recent months, the prices are still low for the season and even in historic terms. If the price of natural gas will continue to rise it could contribute to rally of Exxon, even though the linear correlation between Exxon and natural gas prices during the past couple of months was negative.
The chart below shows the normalized prices of Exxon, natural gas and crude oil prices during 2012 (prices are normalized to Jan. 3). As seen in the chart below, Exxon has outperformed the price of oil but under-performed the price of natural gas.
Despite the straightforward connection between the changes in major energy prices, including oil and natural gas, the daily changes in the prices of crude oil and natural gas didn’t seem to have a strong linear correlation with Exxon’s stocks.
Exxon and Other Oil Companies
Let’s examine how Exxon performed compared to its peers. The chart below shows the operating profitability of Exxon, Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS-A) during the past five quarters. As seen, Exxon is in the middle of the pack among these companies. During the second quarter, however, Exxon’s operating profitability was slightly higher than Chevron’s operating profitability and much higher than that of Royal Dutch Shell’s. Further, Exxon’s stock outperformed Chevron and Shell’s stocks: during the year, Exxon’s stock rose by 9.9%; Chevron’s stock by 3.2%; and Royal Dutch Shell stock declined 5.1%.
On the other hand, Exxon does offer the lowest dividend yield of the three companies: Exxon offers a quarterly divided of $0.57, which is a yearly divided yield of 2.45%; Chevron offers a quarterly divided of $0.9, which is a yearly divided yield of 3.13%; Royal Dutch Shell offers a quarterly divided of $0.86, which is a yearly divided yield of 4.94%;
What is the bottom line? There are some factors that could curb the rally of Exxon mainly if the price of oil will further decline. On the other hand, if natural gas prices will continue to rally, if Exxon’s operating profitability in the third quarterly report will remain as high as in the second quarter, and if the S&P500 will continue to rise, then Exxon’s stock is likely to continue its upward trend.
This article on Exxon and Market Review was first published on Trading NRG
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
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