Exxon Power Play
Options Plays by Better Trades
April 21, 2009 -
It's almost time to start grimacing at the gas pump again. And that's why
it's nearly time to wade back into energy commodities.
Oil traders have thrown demand destruction to the wind, bouncing crude off
its near-$30/bbl low, while gold's trade as the traditional inflation hedge
has stalled in its tracks after the February run to $1,000 per troy ounce.
This inverse relationship hints that black gold is correlating with the
forward-looking inflation trade more strongly than its peers.
Despite crude inventories being within shouting distance of their highest
point in 19 years and OPEC cuts, the gas prices have remained stalwart. The
front-month crude contract settled up 1.4% to $46.55/bbl on Tuesday despite
forecasts for the EIA's April 22nd inventory report to show another increase
in U.S. supplies.
The energy trade works when rising oil prices push investors back into
energy stocks.
One problem still facing diversified oil majors are the higher costs
associated with refining lighter distillate fuels. Although the likes of
Exxon have been posting huge profits, margins are being squeezed by higher
refinery costs. On Thursday, April 9, Chevron (CVX) said it realized a big
drop in Q1 earnings due to narrowing refinery product margins on top of lower
oil and gas prices.
Reflecting earnings uncertainty, Exxon's May options have an implied
volatility of 36, below near-term mean volatility comparables. This suggests
Wall Street does not expect Exxon's price to fluctuate dramatically from its
April 21 open ($65.29). Exxon reports Q1 results on April 30th.
This uncertainty makes Exxon's call options cheaper than if there was bullish
sentiment heading into next week's quarterly results. Intraday, the
in-the-money May 65 call options had a bid-ask spread of $2.86-$2.89 per
contract.
On January 30th, Exxon recorded a 33% drop in Q4 profits due to lower volumes
and extraordinary expenses from hurricanes. Net income fell to $7.82 billion,
or $1.55/share, from $11.66 billion, or $2.13/share, in the same quarter one
year ago. Yet the oil major easily beat consensus estimates called for
earnings of $1.45/share. Q4 revenues dropped to $84.7 billion from $116.6
billion last year.
Since last quarter, oil prices have stabilized considerably. Recently, crude
has hit modest resistance around $50/bbl, limiting a commodity-correlated
boost for XOM short-term. But if we are entering the initial phase of another
commodity inflation bubble, it might be time to ride the heat wave.
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