The Donald Trump rally is gone. Any benefit oil sector watchers were hoping to get from a pro-oil president and a former Exxon Mobil Corporation (NYSE:XOM) CEO as Secretary of State have long passed. Furthermore, the OPEC production cut rally is gone, as even members of the world’s most influential oil group have been unable, or unwilling, to stem the slide in global oil prices and the build in global oil supplies.
And the situation is getting worse. Just today, the U.K. joined France in its anti-oil stance, pledging to outlaw combustion engine vehicles starting in 2040.
As a result, the situation is not good for Exxon Mobil. The company is slated to step onto the earnings stage this Friday morning, and while pledges to outlaw oil-driven consumer vehicles won’t impact Exxon’s bottom line right now, all this anti-oil sentiment is having a dragging effect on crude prices — and that is sure to affect guidance, especially with global oil supplies still rising.
Diving into the numbers, Wall Street is expecting Exxon to post a profit of 84 cents per share, more than double last year’s results of just 41 cents per share. Revenue is expected to rise 7.3% to $61.92 billion. However, with oil prices remaining below their first-quarter levels, expectations are fading fast.
For instance, EarningsWhispers.com reports that Exxon’s second-quarter whisper number arrives at 79 cents per share — 5 cents below the consensus.
And that’s not the end of the pessimism either. Heading into Friday’s report, 18 of the 26 brokerage firms following XOM stock rate the shares a “hold” or worse, while the 12-month consensus price target rests at $83.03.
Click to Enlarge Despite the overall negative opinion here, there is ample room for bearish sentiment to grow should XOM stock break out of its recent trading range to the downside — especially if guidance slips due to falling oil prices.
Options traders are about the only source of optimism for XOM stock. The July/August put/call open interest ratio currently rests at 0.53, with calls nearly outnumbering puts among options most affected by Exxon’s earnings report. However, this ratio rises to 0.65 in August — a sign that pessimism may finally be creeping in.
As for July 28 implieds, options are pricing in a potential move of only about 2% for XOM stock through expiration. This places the lower bound near $78.72 and the upper bound at $81.78.
2 Trades for XOM Stock
Put Spread: With the potential for short-term losses if XOM breaks below the lower rail of its recent trading range, a bearish strategy seems appropriate heading into earnings. Traders looking to profit from such a breakdown might want to consider a Jul 28 $79.50/$80 bear put spread.
At last check, this spread was offered at 13 cents, or $13 per pair of contracts. Breakeven lies at $79.87, while a maximum profit of 37 cents, or $37 per pair of contracts, is possible if XOM stock closes at or below $79.50 when July 28 options expire at the end of the week.
Put Sell: Should support hold, however, XOM stock could still be left to bounce around in its current trading range, with a trend toward the lower end of this range as oil prices languish. Traders looking to profit from technical support might want to consider a Jul 28 $79 put sell. At last check, this put was bid at 17 cents, or $17 per contract.
As with all put sells, traders will keep the premium received for entering the trade as long as XOM stock trades above $79 through July 28 expiration at the end of the week. If Exxon were to trade below $79 prior to expiration, then you could be assigned 100 shares of XOM stock per contract sold at a cost of $79 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
