Name That Trade $XOM: Tiger in the Tank?

by Dan April 10, 2015 3:48 pm • Commentary

Shares of Exxon (XOM) is down 7.5% ytd, and down 18% from its 52 week and all time highs last year.  To suggest that sentiment is bad is an understatement, but this week’s blockbuster deal of Royal Dutch Shell agreeing to buy BG Group for $70 billion could change the risk reward dynamic for the large integrated oil companies like XOM.  Could they spend themselves out of recession, and would a massive consolidation wave here in the U.S. put a floor of the stocks of both aquirees and acquirers??  

As for sentiment, analysts expect earnings to decline 50% year over year. and sales are expected to be down 38%, from $412 billion to $255 Billion. To sat analysts are mixed to cautious on the stock is an understatement with 10 buys, 17 holds and 3 sell ratings, oh and Warren Buffett closed out his massive long bet in the quarter:

[caption id="attachment_52692" align="aligncenter" width="600"]from Bloomberg from Bloomberg[/caption]

From a technical perspective, the stock has been basing for the last month, between $84 and $86 for the last month:

[caption id="attachment_52693" align="aligncenter" width="600"]XOM ytd chart from Bloomberg XOM ytd chart from Bloomberg[/caption]

And options prices are cheap when you consider how much the stock has decline and how much crude oil is moving around, with 30 day at the money implied vol at about 17.5%:

[caption id="attachment_52694" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Catalysts: The potential for consolidation in the space (XOM picking up cheap assets), coupled with the potential stabilization of the commodity could cause a bounce back in the shares to $90 in the near term.

XOM reports Q1 results on April 30th, the implied move is only 2%, vs the 4 qtr avg of 2.5%.

If you are looking for a catch up trade with oil trying to stabilize:

XOM ($85.50) Buy June 85 calls for about $2.50

Break-even on June expiration:

Profits: above 87.50, up 2.4%

Losses: of up to 2.50 between 87.50 and 85, max loss of 2.50 below 85

My View:  Its my sense that oil stabilization could be a head fake and few stocks will be immune to selling pressure if crude makes a new low in the months to come.  But if I were looking to play for a catch up trade in a high quality stock like XOM, I would consider defined risk plays like the one described above and look to spread by selling a higher strike call if the stock were to make a quick move higher.  I am not putting this trade on, but think the risk reward over the next couple months is attractive.