Exxon Mobil (NYSE:XOM), one of the largest oil and gas producers in the world, is expected to report earnings on Aug. 2. The short-term fortunes of XOM shareholders have always been closely linked to the price of oil.

In summary, higher oil prices help increase revenues, cash flows, and profits, helping the stock price go up.

Oil production at present continues to be strong in the U.S. and energy prices are holding in well as the economy keeps growing. Yet, many investors are also concerned about the prospects for Exxon Mobil stock in an industry that’s facing competition from renewable power alternatives.

Let us take a look at what investors may expect from XOM stock in the second half of the year.

How Exxon Mobil Stock Makes Money

With a market cap of $319 billion, the global energy group has diversified businesses that include oil drilling as well as refining and chemicals.

Four main divisions contribute to XOM stock’s revenue:

• Upstream;
• Downstream;
• Chemical;
• Natural Gas and Power Marketing.

Upstream activities include oil and natural gas exploration, field development, and production, while Downstream manages Exxon Mobil’s manufacturing, distribution and marketing activities for oil products and chemicals.

In other words, the downstream production process involves processing the materials collected during the upstream stage into a finished product. As the largest refiner in the world, the majority of the group’s refining capacity is integrated with Exxon Mobil’s lubricants and chemical businesses.

With a large portfolio of commodity and specialty businesses, ExxonMobil Chemical is one of the largest chemical manufacturing companies in the world.

Finally, Exxon Mobil is trying to use its leadership and expertise in the three segments to capitalize on expanding its share in natural gas and power markets.

What to Look For in Exxon Mobil’s Q2 Earnings

Exxon Mobil is a cyclical stock whose earnings are highly dependent on the price of oil.

There are three main factors that drive the price of oil: demand, current supply (i.e., output), and access to future supply, which is dependent on oil reserves.

Because of the interplay of these factors, quarterly results as well as investment returns in the sector tend to be non-linear. XOM stock is no exception. In general, the higher energy prices increase, the larger the earnings and free cash flow impact for the shares.

When Exxon Mobil reported Q1 earnings in April, investors were not fully impressed as profit missed expectations. Although revenue beat the mark, it fell over 6% year-over-year (YoY).

In Q1, CEO Darren Wood highlighted challenging downstream and chemical margin environments as exploration costs, lower oil, gas prices, and heavy maintenance expenditure brought headwinds. Therefore, on Aug. 2, Wall Street is likely to pay special attention to margin levels in these segments.

Exxon’s global production in Q1 remained largely at the same level as Q4 2018 at 2.3 million barrels of oil equivalent per day. Investors will look for any trend change in production levels as a potential sign of changing economic conditions.

The firm said its exploration expenditure was up 42% on the previous year, reflecting investment in the U.S. Permian basin. The oil giant also announced a big discovery in offshore Guyana.

Since 2018 Exxon has been implementing a growth plan, especially in U.S. oil production. As part of this growth plan, Exxon Mobil management aims to double operating cash flow and earnings by 2025. In Q2 results, analysts will want to see positive updates on the company’s strategic plans.

Reinvesting XOM Stock’s Dividend Yield

As a component of the Dow Jones Industrial Average, XOM stock gets a lot of attention due to its high dividend yield that currently is over 4.6%.

Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. Therefore shares like Exxon Mobil usually belong in a capital-growth long-term portfolio.

Analysts believe that XOM stock will continue its position as a reliable high-dividend staple as it is likely to generate enough free cash flow in the coming quarters to support its dividend yield.

Moreover, the Texas-based firm has a healthy balance sheet with long-term debt at about 10% of its capital structure. Even if oil prices fall or demand stays modest, Exxon Mobil can continue to pay its highly coveted dividend.

XOM Stock’s Technical Charts Tell a Mixed Story

If you are an investor who pays attention to technical charts, you may be interested to know that Exxon Mobil’s charts paint a mixed picture.

XOM stock price has been a major market laggard for some time now.

In July 2014, it saw a high of $104.76 and since then the stock price has been volatile, to say the least. In Aug. 2015, it was down to a low of $66.55. As a side note, oil prices began falling in the middle of 2014, pushing Exxon’s earnings and thus the stock price down.

By July 2016, XOM stock was back to a high of $95.55, a price level after which the downtrend resumed. Choppy energy prices made 2018 a rough year for the stock and in Dec. 2018, Exxon Mobil shares saw another low of $64.64, making a double bottom with the low of Aug. 2015.

As of this writing, XOM stock is hovering around $75. Year-to-date, the stock is up about 10% and the longer-term XOM chart has started stabilizing.

However, the shorter-term chart points to more volatility and some potential downside, possibly in the weeks to come.

Although long-term investors would like to see XOM share price stay over $75, the more likely scenario is that the stock will spend some more time between $70 and $75.

I’d expect the $70-level to act as major support, after which further downside would be limited, especially given current oil price levels.

On the upside, $80 and then $82.50-levels are likely to act as near-term resistance in the stock price of this energy sector stalwart.

The Bottom Line on XOM Stock

As the U.S. and Iran exchange war of words, oil prices have once again become volatile in the heat of summer. Yet with its diversified businesses and financial resilience, Exxon Mobil’s fundamental story remains intact.

XOM stock trades at about 17x trailing earnings, making it reasonably priced for new investors who may think of hitting the buy button.

However, there will likely be increased stock price volatility in the near-term, especially after the earnings report, that current and potential XOM stock investors should anticipate.

If you aren’t already long Exxon Mobil stock, you may want to remain on the sidelines until the earnings report as near-term trading could be choppy.

If you already own XOM shares, then you may want to stay the course and ride out any short-term volatility.

Alternatively, you may consider hedging you position. As for hedging strategies, covered calls or put spreads with Aug. 16 expiry could be appropriate as straight put purchases are likely to be expensive due to heightened volatility.

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