A reckoning for Exxon Mobil (NYSE:XOM) is coming. And while it’s not a judgment that brings life or death, it is an event that could set the tone for Exxon Mobil stock into the summer. On Friday morning, May 1, the energy giant will release its quarterly report, allowing shareholders to hear what the energy kingpin has to say about all that ails the oil patch.
With that in mind, let’s take a deep dive into three key factors affecting the company: The latest action in the oil pits, Exxon Mobil stock’s price behavior and market expectations for Friday’s report.
The oil rout continued Monday with the spot price of West Texas Intermediate crude crumbling 25% to $12.93. The losses come after three straight sessions of gains and resumed the downtrend that has been sucking oil lower since the beginning of the year. Last week’s historic plunge deep into negative territory for the May contract of crude oil underscored just how out of whack supply and demand are right now.
Some fear that if oil producers don’t take the hint by slashing output pronto, we could see a similar crash below zero when the June contract expires next month. In the short run, don’t expect much help from the demand side of the equation, either. The novel coronavirus continues to cripple travel, making grounded planes and parked cars the new ghosts haunting oil’s nightmares.
Eventually, this imbalance will right itself and oil prices will find an equilibrium well north of zero. The problem for many energy companies, however, is that they won’t survive if crude prices remain too low for too long. Whiting Petroleum Corp (NYSE:WLL) and Diamond Offshore (NYSE:DO) have already gone bankrupt, and some analysts are forecasting hundreds more could follow.
Enter Exxon Mobil Stock
With that horrific backdrop, you would think Exxon Mobil stock would be biting the dust as well, but it’s 46% off last month’s lows. To be sure, it remains a far cry from its highs and is still down 37% year to date, but I think it’s bullish that the stock has held up so well in the face of oil prices cratering.
Up until last month, it was tracking the trajectory of crude almost tit for tat. The 10-day correlation sat at 0.97 in mid-March. But on March 23, the company divorced itself from oil and began moving to the bullish beat of its own drum. It now boasts a -0.13 correlation with oil, which effectively means both assets no longer have a strong link.
The hope for shareholders is that the stock price has been beaten down enough to price in the oil crash’s impact on corporate profits. Perhaps the stock is looking past oil’s current wrestle with zero to a future free of pandemics and travel restrictions.
Although the weekly time frame has work to do before its downtrend is reversed, the daily trend is chugging higher ahead of earnings. The rising 20-day moving average confirms buyers’ control of the short-term trend. This week’s response to the report could spell the victor for the current test of the 50-day moving average. I’m using $55 as the next intermediate target.
Implied volatility has retreated from last month’s peak but still sits at a higher-than-normal 67%. The straddle that expires on Friday and includes the expected earnings gap is pricing in a move of $2.64 for the entire week. That translates into a 6% move, which doesn’t seem like much given the excitement XOM has seen. To be fair, the stock doesn’t historically move much on earnings, so this is likely the market saying it doesn’t anticipate Friday to be all that different.
Exxon is one of my favorite ways to bottom fish energy stocks if you think the sector eventually recovers. I like swinging naked puts into earnings.
The Trade: If you’re willing to buy stock, then sell the June $40 puts for around $2.15.
If the stock sits above $40 at expiration, you’ll capture the max reward of $215. Alternatively, if Exxon Mobil stock falls below $40, then you’ll have to buy the stock at a purchase price of $37.15.
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