$XOM Q3 Earnings Cheat Sheet

by Enis October 30, 2014 11:48 am • Commentary

Event:  XOM reports its Q3 earnings tomorrow morning before the open.  The options market is implying about a 2% one day move, which is above both the 4 qtr avg of about 1.75%, and the 8 qtr avg of about 1.25%.

Sentiment:  Wall Street analysts are mixed on the stock, with 13 Buys, 15 Holds and 5 sells, and a 12 month price target of around $101.  XOM 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:  Total open interest is evenly split between calls and puts, at about 400k each.  The 1 month average volume has slightly favored puts, by a ratio of 1.1 to 1.  The Nov22nd 95 calls have over 20k of open interest, as do the Jan15 100 calls.  The Jan15 105 calls have over 38k of open interest, but are only worth a dime at this point.

Price Action / Technicals:  The two year daily chart in XOM illustrates the rangebound price action that has been prevalent for much of that period:

XOM daily chart, courtesy of Bloomberg
XOM daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

However, when XOM broke out to a new all-time high this summer, the technical picture looked drastically different.  Since the July high near $105, XOM has had one of its worst 3 month stretches of the past 5 years.

The 50 day moving average is now around $95.50, and that is the first resistance level to watch.  Above that, the 200 day ma is around $98.  On the downside, the October low is $86.91, with $85 more important long-term support.

Volatility:   XOM’s recent spike in implied volatility in mid-October was a major outlier compared to the past 2 years:

XOM 30 day implied volatility, courtesy of Bloomberg
XOM 30 day implied volatility, courtesy of Bloomberg

Implied volatility has moved lower, but is still in the high teens ahead of earnings tomorrow.  Given the continuing volatility in oil prices, XOM implied volatility is unlikely to fall much below 15 after the event.

Our View:  We discussed the fundamental backdrop for the integrated oil majors in a MorningWord post on Tuesday, with the following takeaway:

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.

The technical situation is not too positive at the moment either, with ample upside supply given the speed of the recent selloff.  The main positive is that the stocks bottomed before crude oil the commodity, so a bounce in oil from oversold levels might lead to some more near-term upside in XOM.  Given that near-term potential positive against the longer-term fundamental and technical negatives, we don’t see a good risk/reward trade in XOM here.