All things considered, it’s pretty safe to say the market was underestimating Exxon Mobil Corporation (NYSE:XOM). Or, perhaps it would be more accurate to say investors overestimated the adverse impact hurricanes Harvey and Irma would have on the company’s operations. XOM stock edged even higher in the wake of Friday morning’s third quarter report, extending a rally that’s been building since early September.
Is this the move that will get — and keep — the XOM stock price over the hump? Maybe. In some regards it’s already over the hump, though we’ve seen this before, but to no avail. The good news is that the “what” that will keep Exxon Mobil shares on the bullish side of the fence is on the verge of happening.
Exxon Mobil Earnings
Last quarter, Exxon Mobil turned $66.2 billion worth of revenue into a per-share profit of 93 cents, easily trouncing the year-ago top line of $56.7 billion and bottom line of 63 cents per share of XOM stock. The pros were only calling for earnings of 86 cents per share on revenue of $63.4 billion.
It was a pleasant surprise, to say the least, not just because two major storms — one of which temporarily shuttered Exxon’s Baytown, Texas refinery (the nation’s second-biggest) — didn’t do the fiscal damage analysts expected, but also because the company is expanding margins without any real help from crude oil prices. Crude ended last quarter at $51.56 per barrel up from $48.24 a barrel at the end of Q3 2016.
Chevron Corporation (NYSE:CVX) also delivered a similar earnings beat, though CVX stock pulled back after falling short of the profit estimate of 98 cents per share, its operating bottom line of 85 cents per share in the third quarter was still better than the year-ago’s 68 cents. Output was up 8%, year-over-year.
In short, Exxon Mobil — like Chevron — is getting better at dealing with an environment of low oil prices, keeping a lid on expenses and focusing on expenditures with the best and highest-odds payoffs. As CEO Darren Woods put it, “For the fourth-consecutive quarter, we generated cash flow from operations and asset sales that more than covered our dividends and net investments in the business.”
Though it’s always a moving target, the industry’s break-even price for oil has been pared down to around $50 per barrel. Crude prices are hovering just above that mark now. That’s ‘just enough.’
It’s All About Oil Prices From Here
While most of the industry’s players can survive as long as oil prices stay above $50, surviving is hardly thriving. Though Exxon can and will continue to work towards lowering expenses, at this time, most of the potential cost-culling has been done. If XOM and its peers are to grow their bottom lines, it’s primarily going to be driven by rising oil prices.
Good news on that front… we’re close to a major breakout from crude oil.
The oil outlooks, broadly speaking, aren’t terribly encouraging. The EIA forecasts an average Brent crude price of only $54.07 per barrel for 2018, versus its current value of $52.65. Take those outlooks with a grain of salt, however. This is the same EIA that gets it wrong on a regular basis (not that other forecasters fare any better, really).Rather, it may be just as fruitful if not more so to take a close look at what traders are doing with their actual dollars. And what they’re doing with real money right now is quietly buying oil, and testing the waters for much more bullishness ahead.
The chart below speaks for itself. Since early 2015, crude oil prices have formed an uneven, though readily apparent, upside-down head and shoulders pattern. Should the neckline (orange) at $53 fail to hold the current bullish effort back, the theory holds, a small move above $53 could turn into a sizable move well above $53.
It’s not just the bullish head and shoulders setup that’s so interesting, and bullish, at this time though. The other item in the middle of the chart is a Chaikin money flow indicator, which gauges the amount of volume — or participation — in a trend. The similar Chaikin oscillator at the bottom of the chart tells the same story in a slightly different way.
In both cases though, we’re getting the same message. That is, while the forecasters — who may or may not have any skin in the game — are just ho-hum about oil, traders with something to lose are increasingly making real bets on higher oil prices. Both Chaikin indicators are on the verge of new multi-week highs.
That bodes well for Exxon.
Looking Ahead for XOM Stock
None of this is to say the oil bulls are right and the EIA is wrong. It is simply to prod an important thought question: Do you have faith in the people who will be held accountable for their outlook, or the people that aren’t ever held accountable for being wrong?
And to be clear, as close as crude prices may be to a breakout, they’re not there yet. Though it’s only a few pennies between here and the ceiling at $53, it may as well be a few dollars.
If and when things unfurl the way it looks like they’re trying to go though, it may well prove to be a game-changing catalyst for XOM stock, as Exxon Mobil has already proven it’s a lean, mean oil machine.
As an alternative, the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) or the iShares Dow Jones US Energy Sector (ETF) (NYSEARCA:IYE) are positioned to take the same ride, even if not as dramatically as Exxon Mobil stock could.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.