Exxon (XOM), the nation's largest oil & gas company, which has just set multiyear highs topping $95/share, reports earnings this week on Thursday. Expectations are that Exxon is going to be reporting one of its lower quarterly earnings in several years.
Reasoning behind this is that crude profits, despite crude's rising price, are expected to be down. Also, the company's production as a whole has been slowing, catalyzed by natural gas prices waning.
Analysts are expecting Exxon, currently going back and forth with Apple as largest company in the world, to report $1.90/share EPS and $105 billion in revenue.
Exxon has been a decent vehicle for investors over the last year, earning a respectable and safe 7.6% in the last 12 months, which is far from meteoric, but represents safe, steady growth commensurate with the company's current 0.77 Beta valuation. Exxon is a great hold as part of your "defense first" squad with companies like Proctor & Gamble (PG) and Johnson & Johnson (JNJ) - and I'll argue that this earnings call could be potential to make both short term and long term income.
Investors are going to be paying attention, mostly on this call, to Exxon's future prospects to help pare declines in oil and gas production moving forward. The sight glass is going to be focused on 2015 and beyond, as Exxon's production has slowed of recent - clearly not effecting the stock price, however.
Oil & gas is still king, in this investor's opinion. Like banking, it's one sector that is both too closely tied to world governments and too in demand for it ever to reach catastrophic levels. Because of this, I'm bullish on Exxon in the long-term, with an options idea for the short term.
My Short Term Exxon Trade
Exxon isn't usually a company that moves a ton with earnings, which means two things:
- Volatility isn't a given at earnings.
- Options premiums including IV aren't as high as they are with other companies.
So, how do we take advantage of that in the short term? I've looked a short term options play that gives you three bonus weeks post-earnings for price movement (assuming you don't get it post-earnings). I love playing the $92.50 options spread here. It's going to cost you $2.80 to buy (as of the writing of this article), and I love the position it puts you in with three whole weeks until expiration and a catalyst in the way.
Essentially, your breakeven points are going to be $95.32 and $89.68, relatively easy points to get to, in this investors opinion, with three weeks and a catalyst in the way, all before expiration. Also, because we're playing a straddle here versus a spread, the risk of loss only lies in how close XOM could potentially close to $92.50. The three weeks' worth the time here almost guarantees you're going to get an opportunity to sell, should you not feel comfortable with the short-term play as it progresses.
My Long Term Exxon Trade
Execute buy orders.
OK, it's a bit more complicated than that, but not really. Depending on how you're feeling going into this, I have two scenarios to play out for the long-term. Since I'm bullish on Exxon as a whole going into this situation, they're relatively simple:
- Buy before earnings, hope for a beat
- Buy before earnings, on a miss, average down
- Wait until after earnings, buy on momentum
The long-term and the dividends are clutch with Exxon. It's an extremely safe long term buy. Want to see the difference the dividends make over a sustained period of years? Check out Doug Carey's superlative article that breaks down what companies like Exxon can do for your retirement portfolio. Doug states:
Now let's look at the case where they invest in a basket of solid dividend payers such as Exxon. It is important to note that I am not recommending investing in just one stock. I am recommending investing in a basket of solid dividend-paying stocks that have characteristics similar to Exxon.
In this example I assumed a dividend yield of 2.7% (Exxon's current dividend yield), long-term annual dividend growth of 9%, and no increase in the stock price at all. I ran these numbers in our free online calculator called Dividend Yield And Growth.
Of Account (Nominal $)
Of Account (Real $)
Real Annual Return After Taxes
Based simply on the fact that oil & gas companies are going to remain a staple for years to come, combined with the fact that Exxon is the largest company in the world that offers a dividend, makes it one of the most risk-adverse investment vehicles that you can enter into in 2013. A beat this quarter should reaffirm my theory that oil & gas companies, even when having poor quarters, are risk adverse and great vehicles for your money. A miss, in my opinion, should be viewed as a buying opportunity as, again, Exxon will remain a stock staple for years to come.
As always, best of luck to all investors.