Although the impact of Hurricane Harvey and Irma is still fresh on the minds of investors, the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) is making a solid comeback. Despite the devastation, some energy stocks such as the ETF’s largest holding, Exxon Mobil Corporation (NYSE:XOM), now present solid buying opportunities. Here’s why XOM stock is still a buy amid the carnage.
Exxon stock is down more than 6% over the past twelve months and it’s within striking distance of new 52-week lows. Add in the fact that hurricane Harvey wreaked some serious havoc on the company’s Gulf Coast operations, and Exxon stock seems almost too risky to own.
Yet, a funny thing happened recently. UBS upgraded XOM stock from “Bearish” to “Neutral,” effectively calling — maybe even creating — a major bottom for the shares.
While in some regards there’s an obvious value-esque, “can’t get any worse” theme with the Exxon stock upgrade, there’s also an idea worth keeping in mind in the future in how the whole thing unfurled.
Exxon Stock Upgraded
UBS analyst Jon Rigby didn’t exactly throw any unexpected curveballs back on Sept. 6 when he explained the upgrade: “In the context of a company renowned for being at its most competitive in bottom-of-the-cycle conditions this is notable … The shares are still on a substantial premium rating but one that is more in line with historic norms.”
The notable, bottom-of-the-cycle premise was in reference to the fact that crude oil prices themselves also appear to have bottomed in conjunction with the brunt of Harvey’s devastation.
While the hurricane essentially shuttered about a sixth of the country’s refining capacity, it crimped the nation’s demand for raw crude even more. Both headwinds were temporary though. XOM’s Baytown, Texas refinery — which is the nation’s second largest with its capacity to crank out 560,500 barrels of oil every day — is back online again after being shuttered a couple of days before Harvey hit.
Perhaps more telling and reflective of the turnaround is the fact that crude oil prices themselves have risen from a post-landfall low of $45.58 in late September to their current price of around $49-per-barrel, and are still trending higher. As it turns out, Rigby feels, this is when XOM stock outperforms stocks of peers like Chevron Corporation (NYSE:CVX) and Valero Energy Corporation (NYSE:VLO) … another name with more than its fair share of operations in Texas.
XOM: A Lesson Worth Remembering
While Exxon stock may still be down more than 6% since its mid-September 2016 price, that’s certainly much healthier than the twelve-month loss of 14% it was sporting just a few days ago when Harvey-related worries were at their most-frenzied levels.
And yes, XOM stock has gained more than 4% since its recent low … a low that some thought would sink much lower before all was said and done.
What gives?
The poetic way of putting it is by chalking it up to the old adage “It’s always darkest before dawn.” To say it in a more relevant way for traders who live and die by navigating the nuances of the equity market, sometimes a stock — not a company, but that company’s stock — has to get its brains blown out in order to finally hit a bottom. Sometimes (and a lot of the time), it takes something on the order of a devastating hurricane to induce that proverbial mercy killing.
The technical term for the act is capitulation, which is effectively the final flushout of the last of a stock’s bulls. With all the would-be sellers finally out of their position, only would-be buyers are left behind. That’s when the slow process of a stock’s recovery can begin in earnest.
Sometimes an external event isn’t needed. Sometimes, as was the case with Exxon Mobil shares, a catalytic event is necessary to push a stock over a cliff. Either way, big blowouts often turn into buying opportunities for stocks of otherwise good companies like Exxon.
Bottom Line for XOM Stock
That’s the lesson-oriented way of saying yes, Exxon stock is a buy here … particularly for anybody who has been kicking the tires, mulling a purchase but were too afraid to dive in. The capitulation is in the rear-view mirror, particular now that we know the nation’s oil stockpiles aren’t showing a severe backup in the supply chain; the bigger-picture downtrend is still intact. Meanwhile, gasoline supplies have fallen, setting the stage for heavy usage of the crude oil currently in storage. That ultimately bodes well for Exxon Mobil.
None of this is to say XOM stock will find smooth, bullish sailing ahead. It will almost assuredly face volatility that’s unnerving at times. That’s nothing new though. Just bear in mind that Exxon, along with its peers, have survived and rebuilt after every hurricane they’ve faced so far. This one isn’t going to be any different.
The only difference between now and pre-Harvey is, XOM stock has recently hit its reset button.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
