XOM Tiger Tanking

by Dan February 1, 2016 1:20 pm • Commentary• Trade Ideas

Event: Exxon (XOM) reports Q4 results tomorrow before the open. The options market is implying about a 3.3% one day move. With the stock at $76 the Feb 5th weekly 76 straddle is offered at about $2.55, if you bought that, and thus the implied move, you would need a move above $78.55, or below $73.45 to make money, or about 3.3% in either direction.  

Price Action / Technicals: XOM has shown very good relative strength to many of its smaller oil peers, The stock is down less than 3% year to date while crude oils decline of close to 15% has wreaked havoc on some of the smaller oil related stocks.

The three year chart of XOM shows the fairly obvious downtrend resulting in a near 30% decline from XOM’s all time highs made in mid 2014.  The stock broke the downtrend in Q4 2015, but has not been trending lower since early November:

[caption id="attachment_60868" align="aligncenter" width="600"]XOM 6 year chart from Bloomberg XOM 6 year chart from Bloomberg[/caption]

A re-test of the downtrend places the stock in the low $70s. But a look at the one year chart shows how the downtrend from Spring 2015 to its crescendo low in August.  From its counter-trend rally highs in early Nov the stock has once again engaged in a downtrend making a series of lower highs and lower lows.

[caption id="attachment_60869" align="aligncenter" width="600"]XOM 1yr chart from Bloomberg XOM 1yr chart from Bloomberg[/caption]


To be clear, XOM is a cheap stock, with poor sentiment and a 3.85% dividend yield with little buyback support. Also, consensus estimates call for an expected 50% eps decline in 2015, not far off from the 53% decline in eps from 2008 to 2009 before bouncing 55% in 2010. Consensus estimates for 2016 have come down sharply in the last few months, from a 9% eps increase in 2016 to consensus now calling for a 25% yoy decline, the lowest eps print in more than 20 years.

Sentiment has gone from bad to worse over the last few months, despite the relative strength noted above.  With Crude oil down 5% today, its easy to take a dim view of the space, and a break of the psychologically important $30 level on the downside could be a self-fulfilling prophecy for new lows.

With that 2016 eps estimate where it is, the stock trades on a forward basis at levels not seen since 2009. But lower for longer oil will make it hard to call XOM a cheap stock, despite the fat dividend yield. At some point XOM may have to cut their dividend for the first time ever.

So what’s the trade? Long premium strategies are challenged into the print given the price of options.   Given today’s weakness in crude and related stocks, we like the idea of playing for a continuation of the move in the coming weeks, and target $70 in XOM between now and Feb 19th expiration:

*Trade: XOM ($75.65) Buy Feb 19th 75/70/65 Put ButterFly for $1

-Buy to open 1 Feb 19th 75 put for 2.05

-Sell to open 2 Feb 19th 70 puts at .65 each or 1.30 total

-Buy to open 1 Feb 19th 65 puts for 20 cents

Break-Even on Feb 19th expiration:

Profits: between $74 and $66 make up to $4 with max gain at $70

Losses: up to $1 between $74 and $75 & between $65 and $66, max loss of $1 below $65 and above $75

Rationale:  The butterfly trade structure helps to mitigate the premium at risk, offsetting some of the expected decay post results.

Read our discussion about Butterflies Here