Squeeze More Income Out of Exxon

by Joseph Hargett | April 24, 2013 11:06 am

The recent plunge in Apple (NASDAQ:AAPL[1]) stock has allowed Exxon Mobil (NYSE:XOM[2]) to reclaim its former title as the world’s most valuable company by market capitalization (at about $400 billion). But while the title sounds flashy and grabs headlines, it will mean very little when Exxon steps up to release its fiscal first-quarter earnings figures Thursday morning.

Stock of the Week[3]Despite the fact that global oil prices remained elevated throughout the quarter, Wall Street is expecting sluggish year-over-year growth from the oil baron. Currently, the consensus is looking for earnings to rise 2% to $2.04 per share from $2 in the year-ago period. Revenue is expected to fall 3.4% to $119.8 billion.

With the numbers largely expected to fall in line with those estimates, most investors will be paying close attention Exxon’s shift away from natural gas and back toward oil production. The company jumped on the natural gas bandwagon in 2009, snapping up leading natural gas producer XTO Energy for $41 billion. But low natural gas prices have held Exxon’s revenue in check.

As a result, the company told investors at a meeting in March that it is scaling back natural gas production by about 5% and increasing oil production by 2%. Because of the shift, Exxon said it thinks total production will fall 1% overall … and investors will be scouring the company’s quarterly report for any impact on guidance.

As a whole, the brokerage community is in a holding pattern when it comes to XOM shares. According to data from Thomson/First Call, only eight of the 24 analysts following the stock rate it a “buy,” compared to 15 “holds” and one outright “sell” rating. Additionally, the current 12-month consensus price target of $95 represents a considerably low premium of about 6.4% to Tuesday’s close at $89.30.

Turning toward the options pits, we find a wealth of apparent negativity ahead of Exxon’s quarterly report. Specifically, there are roughly 150,000 puts open in the April/May series of options, compared to call open interest of roughly 70,000 contracts. As a result, the April/May put/call open interest ratio arrives at a very bearishly slanted 2.15, with puts more than doubling calls in the period.

Taking a closer look reveals that a majority of these puts reside at the out-of-the-money May 82.50 and 80 strikes, with each sporting more than 30,000 contracts. On the call side, there are roughly 12,000 contracts at each of the May 87.50, 90, 92.50, and 95 strikes.

With April implieds pricing in a meager post-earnings move of less than 2%, it is possible that much of the May options activity revolves around providing additional revenue for those traders already holding XOM stock in their portfolios (i.e., covered calls, bear call spreads and bull put spreads).

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The last of these trading strategies — the bull put spread — looks even more attractive when you take XOM’s technical backdrop into account. The stock recently has recovered from a round of heavy selling pressure, with XOM rebounding from support near $85 last week. Shares have reclaimed key support at their 50- and 200-day trendlines, but the recent round of buying has the stock’s 14-day RSI heading sharply higher, hinting that buyers could soon run out of steam.

With technical support in abundance, and XOM’s implieds suggesting very little upside potential, a bull put spread might be the best options strategy at this point. Options traders looking to capitalize on this situation might want to consider the May 85/87.50 bull put spread.

This spread was bid at 49 cents, or $49 per pair of contracts, at the close of trading on Tuesday. The maximum profit of the premium collected is 49 cents, which is retained as long as XOM closes above $87.50 when May options expire. A maximum loss of $2.01, or $201 per pair of contracts, is possible if XOM closes at or below $85 at expiration.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  3. [Image]: https://investorplace.com/hot-topics/stock-of-the-week/

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