Will Exxon Resume Its Rally?

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The weakness of oil and natural gas prices during 2012 have contributed to the low growth of ExxonMobil (NYSE: XOM). As we are entering 2013, let's examine the performance of Exxon in recent years, estimate its fourth quarter results, the effect of oil and gas prices on Exxon, and the performance of the company with respect to other leading oil companies.

Exxon's Fourth Quarter

The company’s fourth quarter financial reports will be published on February 1. The recent drop in the average quarterly price of oil during the fourth quarter by nearly 4% compared to the third quarter may have pulled down the profitability of the company.  On the other hand, the spike in the average quarterly price of natural gas by 23% may have helped rally the company’s profitability. Since the company's revenues from natural gas represent a smaller fraction than oil out of the total revenue mix, this could suggest the drop in the oil price will have a stronger negative effect on revenues than the positive effect natural gas prices will have.

<img src="/media/images/user_12845/exxon-xom-profitability-oil-and-ng-dec_large.jpg" />

The chart above shows the changes in the profitability of the company in recent quarters and normalized prices of oil and natural gas.

Let's move now to see how Exxon performed compare to market, energy prices and its competitors.

Oil and Exxon

As indicated in the chart above the price of oil slipped in the fourth quarter compared to the previous quarter.  During November-December, the linear correlation between oil and Exxon's stock reached 0.60. Therefore, the decline the price of oil is likely to adversely affect the company’s valuation (assuming the use of DCF). Since the beginning of the year, oil prices declined by 11.8%. If the price of oil will continue to decline, and my guess it will, this trend is likely to adversely affect Exxon's revenues and stock.  

NG and Exxon

Despite the rise in natural gas prices in recent weeks, the prices are still low compared to the prices in previous years. If the price of natural gas will resume its downward trend it could also pull down Exxon's profit margins. 

S&P500 and Exxon

During the year the S&P500 index has out-performed the stock of Exxon. The rise in the S&P500 index reflected the slow growth in the U.S economy.  The recent positive U.S reports include: the U.S GDP expanded in the third quarter by 3.1%, and the Philly Fed index bounced back. If the U.S economy will continue to show signs of progress, this rally is likely to reflect in the slow progress of the stock markets including the S&P500.  One of the main factors that contributed to the rise of Exxon during the year was the recent rally of the S&P500: during 2012 the linear correlation between Exxon and S&P500 reached nearly 0.77. This means, under certain assumptions, the rise of S&P500 index could explain around 61% of the company’s movement.

The chart below presents the normalized prices of Exxon, S&P500 index and crude oil prices during 2012 (prices are normalized to January 3, 2012). As seen in the chart below, Exxon has outperformed the price of oil but under-performed the S&P500.

<img src="/media/images/user_12845/exxon-oil-and-snp500-dec_large.jpg" />

Exxon and Other Oil Companies

Let’s examine how Exxon performed compared to other leading oil companies in recent years. The chart below presents the operating profitability of Exxon, BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS-A) between 2009 and 2012 (for the first three quarters).

<img src="/media/images/user_12845/exxon-xom-profitability-dec_large.jpg" />

As presented herein, the profit margin of Exxon was higher than the above-mentioned companies. Moreover, the profitability of Exxon has risen in recent years. If this trend will continue, it could suggest this company will remain attractive in the months to follow.

Despite the higher profit margin, Exxon offers the lowest dividend yield of the three companies: Exxon paid a quarterly dividend of $0.57 – a yearly dividend yield of 2.63%; BP offered a quarterly dividend of $0.54 –a yearly dividend yield of 5.19%; Royal Dutch Shell paid a quarterly dividend of $0.86 – an annual dividend yield of 4.99%;   

So what is up ahead for Exxon? Based on the above, even if oil and natural gas prices will resume their downward trend, the company's profitability will remain higher than its competitors. Moreover, if the company will continue to grow, this could eventually reflect in the company's value and its stock will rally.

For further Reading

Will Crude Oil Continue to Rise?

Big Swings for Oil; where will Oil Price Land?

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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