Will Exxon Continue To Trade Up?

The recent fall in the price of oil didn’t seem to curb the recent rally of Exxon Mobil Corporation (NYSE: XOM). The upcoming publication of the third financial reports of the company may shed some light on the recent developments of the company. In preparation for the publication of the financial reports, let’s examine what may have affected the company’s stock in recent months, and what is up ahead for Exxon for the rest of year.

Exxon’s Micro View

The company’s third quarter financial reports will come out on November 1st. 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 stock price of the company. Further, 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 future financial reports.

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

S&P500 and Exxon

The recent rally of the S&P500 reflects some signs of optimism as 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 may suggest the U.S economy is slowly recovering from its economic slowdown. If this trend will continue it could further pull up the S&P500. One of the main factors that contributed to the rally of Exxon was the recent rise in the S&P500: during September-October the linear correlation between Exxon and S&P500 reached nearly 0.78. This means, under certain assumptions, that the rally of S&P500 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 the rally of Exxon. 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 DCF). Since the beginning of the year oil prices declined by 10.5%; United States Oil, by 14.1%.  I still think the price of oil will furthercome down, 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, its linear correlation between Exxon and natural gas price during the past couple of months was low and negative.

The chart below shows the normalized prices of Exxon, natural gas and crude oil prices during 2012 (prices are normalized to January 3r , 2012). 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 XOM & oil and natural gas October


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 Corporation (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 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%; 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%;

Exxon XOM profitability

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.

For further Reading

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.