Event: CVX reports its Q3 earnings tomorrow morning before the open. The options market is implying about a 1.75% one day move, which is in line with both the 4 qtr and 8 qtr averages of about 1.75%.
Sentiment: Wall Street analysts are mixed on the stock, with 16 Buys, 13 Holds and 3 sells, though CVX does have a high average 12 month price target of $132. CVX is down 7% in 2014, and is essentially unchanged vs. where it was 2 years ago, in October 2012. Short interest is negligible at 1% of the float.
Options Open Interest: Open interest is skewed towards puts over calls by a ratio of 1.35 to 1. Recent volume has also favored puts by a ratio of 1.2 to 1. Both the Nov22nd 105 puts and the Nov22nd 120 calls have over 17k in open interest. The Jan15 130 call line has the most open interest of any line, at over 30k.
Price Action / Technicals: CVX hit a 1 year low this month, and remains at the low end of the 2 year range:
The $120 level is the critical technical spot to watch for CVX. That is the confluence of both the 50 day and 200 day moving averages. On the downside, $110 was the low in February, and near the low in October.
Volatility: 30 day implied volatility in CVX hit a 2 year high in mid-October, and has moved lower with the market rally:
CVX’s options pricing is more likely to be affected by the broader market’s volatility at this juncture than anything specific to the stock.
Our View: As I said in today’s XOM Cheat Sheet, this general view from Tuesday’s MorningWord holds for CVX as well:
XOM, CVX, and COP have all seen declining sales in the past 3 years, and XOM and CVX have also seen their EPS decline. Analysts are projecting a slight decline in EPS and sales for 2015 (0-10%) for all three companies. Given this overall picture, if the oil price decline holds over the next 6-12 months, the energy majors are going to be particularly hard pressed to achieve even those relatively low existing sales and EPS projections.
Add to that the risk of continued multiple contraction if the energy sector’s investment environment remains weak, and it’s hard to make a strong fundamental case for owning the energy majors. The probability of a surprise for the group on a fundamental basis seems skewed to the downside. That doesn’t mean there is a trade here given their already oversold positions technically, but we’ll continue to follow this theme closely in the coming months.
As with XOM, the near-term positive case for CVX is that oil is still oversold, so a bounce there might be a positive catalyst for the shares. However, the broader technical and fundamental factors remain aligned against CVX.