Exxon Mobil Moving With Crude
We may still be amazed at the quarter Exxon reports on Thursday but nobody ever went broke taking a profit.
Maybe I'm afraid at the way I love you
Baby, I'm amazed at the way you pulled me out of time
Hung me on a line, maybe I'm amazed at the way I really need you..."
"Maybe I'm Amazed" (Paul McCartney)
The above song is one of those songs whose studio version pales in comparison to the live version. Peter Frampton experienced a similar phenomena. Of course Van Halen would fall on the other side of this spectrum as their studio work was genius but hard to replicate on "the road."
What amazes me today is the seemingly never-ending rally in the price of crude oil. It's quite amazing, actually. Recently on the show Fast Money, we had Lynn Westfall as a guest. Mr. Westfall is a Senior Vice President and Chief Economist at Tesoro Corporation (TSO).
Mr. Westfall was also surprised at the recent price of oil, stating the fundamentals and everything that he is seeing points to a crude price closer to $60 per barrel.
But one thing I learned very early on in my career at Drexel Burnham Lambert was that "things" are worth whatever the market is willing to pay for them. So although to a certain extent I share Mr. Westfall's view on the price of oil, I would be foolish not to listen to what the market is telling me.
But with the price of crude making a new high every day, I find that Exxon Mobil (XOM) is also telling me something. Since the middle of August, Exxon Mobil's stock price has virtually been trading lock step with the price of crude oil. But over the last few weeks, with crude racing up from $85 to $93, a strange thing has been happening to XOM and it has my antenna up.
After topping out at $95.27 a couple of weeks ago, XOM has been on a bit of a slide. Nothing earth-shattering or even perceptible, for that matter, but noteworthy enough for me to think something may be setting up in XOM. At around 13 times trailing and forward earnings, Exxon Mobil trades at the higher end of the spectrum on the valuation curve when compared to its peers. The company most associated with XOM, Chevron Corp. (CVX), for example, trades at 10.50 times both trailing and forward earnings. Another thing to take into consideration is the significance of the move we have already seen. Remember, XOM was a $70 stock back in March. We have already seen a 31% rally in a company that currently has a market cap just north of half a trillion dollars.
Exxon Mobil is due to report this Thursday, November 1 before the open. The "Street" is looking for $1.74 EPS on $100.47 bln in revenues. At this point, anything less than an outright beat and potentially giving solid guidance for 2008 may disappoint all the "weak longs" that have purchased XOM as a proxy for the crude market.
Exxon Mobil is a monster company that has been executing extremely well, albeit with very strong tailwinds. However, if you had asked me a few months ago what the price of XOM would be with the Dow Jones at 13,900, crude oil closing in on $93 and PetroChina (PTR) going from $125 in August to $250 now, I would have been forced to say something close to $105. I am not necessarily advocating an outright short position of XOM heading into earnings (although for the risk takers among you that is worth a look).
What I do feel prudent about, however, is some form of profit taking in XOM if you are already an owner of the stock as we get closer to Thursday's release. We may still be amazed at the quarter XOM reports on Thursday but nobody ever went broke taking a profit. If XOM blows away numbers, I do not think the run on the upside would be large enough to be cost-prohibitive to get back in, whereas if it disappoints this Thursday, I think there is a chance you will see XOM with an $87 handle.
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