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On February 27, 2012, we published an article titled "Oil price spike may not justify buying big oil stocks", concluding that investors should avoid owning the global "Big Oil" companies, also known as the "Supermajors". At such time, although such companies, as of February 24, 2012 had appreciated between 3.6% and 11.1% since December 30, 2011, and between 11.6% and 24.3% since December 31, 2010, we wrote it was unlikely such gains would continue. In addition, we pointed out that some selling pressures could develop, as a result of upside limitations to oil prices due to de-emphasis of geopolitical tensions, cheap natural gas prices, slowing European economies and technological advances in horizontal drilling and hydraulic fracturing.

Indeed, during the following 20 months, Big Oil stocks combined market capitalization has dropped from $1.236 trillion on February 24, 2012 to $1.203 trillion as of October 4, 2013. Once dividends of about $59.7 billion are taken into consideration, that translates to a gain of only about 2.14% in the value of Big Oil stocks during a period of about 20 months. Meanwhile, during the same period, the Dow Jones industrial average has appreciated by 16.1% from 12,982.95 to 15,072.58 while the S&P 500 index has appreciated by 23.8% from 1,365.74 to 1,690.50.

Although investors would have still generated some profits by holding a basket comprising of Big Oil stocks, the opportunity cost compared to the major stock indices would have been substantial. In addition, with U.S. consumer price inflation at about 2.73% from February 2012 to August 2013, the real return on such investment would have been about -0.59%.

There have been recent reports that the U.S. is on track to overtake Russia as the world's largest producer of oil and gas combined. Does that signal that maybe now it is the right time to buy shares in the largest U.S. oil & gas companies of Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX), ConnocoPhillips (NYSE:COP), Occidental Petroleum (NYSE:OXY) and Anadarko Petroleum Corporation (NYSE:APC)?

Exxon Mobil Corporation

Exxon's stock price has increased by 1.8% year-to-date on a dividend adjusted basis from $84.82 on December 31, 2012 to 86.32 on October 4, 2013. Its current market capitalization stands at $379.95 billion. With analysts' earnings estimates of $7.59 for the year ending December 2013 and $7.99 for the year ending December 2014, Exxon's price/earning ratios are 11.37 and 10.80 respectively.

Meanwhile, Exxon's analysts' estimates for the year 2014 have been revised down during the past 90 days from $8.21 to $7.99. We believe there may be more downward revisions in store. Exxon's earnings for Q2 2013 came in at $1.55 per share, missing analysts' estimates of $1.90 by 35 cents. Decreasing refining margins, lower upstream production and a reduction in share buybacks as outlined in the article "Exxon Mobil: disappointing earnings report and what to expect' don't bode well for Exxon.

Investors may shrug off such news, stressing long term prospects for Exxon. However, the same factors that we have outlined for 2012 for de-emphasis of geopolitical tensions, cheap natural gas prices, slow European economies and increased production due to technological advances in horizontal drilling and hydraulic fracturing still persist today. More importantly, there is even a higher likelihood of easing of geopolitical pressures as Obama is giving indications that he is engaging Iran in talks, while the current military standoff between the U.S. and Syria seems to have eased off for the time being. As a result, with overall US dependency on imported oil declining, as the U.S. domestic production continues to increase, it is very likely that oil prices in the short term will continue to be subdued and may trend lower.

On the other hand, on a seasonal basis, Exxon shares have increased by an average of about 2.81% for the month of October during the past 10 years. They have appreciated in 7 out of the last 10 years, anywhere between 3.3% and 8.1%, while during the 3 down years, they depreciated between 1% and 3.3%. Meanwhile, the 14-day RSI (relative strength indicator) is currently at 30.32, whereby such momentum indicator, which can have values between 0 and 100, typically means that a value of 30 or lower implies that a stock is oversold, while a value of 70 or higher implies that a stock is overbought.

Exxon October Stock Price Change - 2003 to 2012

YearOctober 1 priceNovember 1 priceChange
2012$88.80$86.38-3.32%
2011$74.20$76.89+3.01%%
2010$61.69$64.95+4.62%
2009$64.78$68.25+4.74%
2008$65.48$71.22+8.14%
2007$79.84$77.69-3.08%
2006$60.95$65.83+7.55%
2005$46.96$48.79+3.37%
2004$40.35$42.24+4.12%
2003$29.23$29.13

-1.04%

Prices are dividend and split adjusted - Data Source: Yahoo Finance

The positive seasonal October price action, the depressed current RSI indicator level, in addition to the moderate forward price/earning ratio all bode well for Exxon shares. On the other hand, potential increased pricing pressure on crude oil, decreased share buybacks, decreasing refining margins and upstream production are not encouraging. As a result, with such contradictory signs, we would remain on the sidelines for the time being and refrain from buying Exxon shares.

ConnocoPhillips

ConnocoPhillips' stock price has increased by 26.39% year-to-date on a dividend adjusted basis from $56.15 on December 31, 2012 to 70.97 on October 4, 2013. Its current market capitalization stands at $86.8 billion. With analysts' earnings estimates of $5.89 for the year ending December 2013 and $6.30 for the year ending December 2014, ConnocoPhillips' price/earning ratios are 12.04 and 11.27 respectively.

ConnocoPhillips' analysts' estimates for the year 2014 have been revised up during the past 90 days from $6.00 to $6.30. Meanwhile, they had exceeded their Q2 2013 earnings estimates of $1.29 by 12 cents, with actual earnings coming in $1.41. Such performance was driven through disposition of assets as well as improved cash margins where ConnocoPhillips has executed on its target for delivering margin and production growth of 3% to 5%.

On a seasonal basis, ConnocoPhillips shares have increased by an average of about 1.2% for the month of October during the past 10 years. They have appreciated in 6 out of the last 10 years, anywhere between 1% and 11.7%, while during the 4 down years, they depreciated between 1% and 7.5%. Meanwhile, the 14-day RSI (relative strength indicator) is currently at 65.83, indicating that the stock is approaching overbought territory.

ConnocoPhillips October Stock Price Change - 2003 to 2012

YearOctober 1 priceNovember 1 priceChange
2012$56.02$55.13-1.57%
2011$49.15$50.33+2.4%
2010$40.40$40.94+1.31%
2009$32.81$33.85+3.17%
2008$32.62$32.94+0.98%
2007$51.92$48.91-5.79%
2006$36.02$40.24+11.72%
2005$38.21$35.37-7.45%
2004$24.13$26.04+7.92%
2003$15.98$15.86

-0.72%

Prices are dividend and split adjusted - Data Source: Yahoo Finance

There is quite a divergence between Exxon and ConnocoPhillips. From a seasonal basis, although ConnocoPhillips has increased an average of 1.2% during the month of October, such performance has been quite volatile during the month. Meanwhile, an elevated RSI could also signal a potential for a pull back in the share price. On the other hand, execution by the company has been stellar, with earnings delivery boding well for the shares, while the macro environment, as in the case for all oil shares, is not constructive at this time. Due to the fact that ConnocoPhillips shares have already appreciated substantially year-to-date, along with an expansion of its price/earning ratio, while the macro environment is not encouraging and the stock may be overbought on a short term basis, we would also prefer not to buy ConnocoPhillips shares at these levels.

Chevron Corporation

Chevron's stock price has increased by 11.9% year-to-date on a dividend adjusted basis from $105.57 on December 31, 2012 to $118.13 on October 4, 2013. Its current market capitalization stands at $228.23 billion. With analysts' earnings estimates of $12.13 for the year ending December 2013 and $12.31 for the year ending December 2014, Chevron's price/earning ratios are 9.74 and 9.60 respectively.

Chevron's analysts' estimates for the year 2014 have been revised down during the past 90 days from $12.45 to $12.31. Meanwhile, they had missed their Q2 2013 earnings estimates of $2.96 by 19 cents, with actual earnings coming in at $2.77 per share. Such underperformance was driven by lower margins on refined products, higher maintenance costs, as well as lower crude oil prices upstream. Given our macro environment outlook, Chevron's upstream earnings will continue to be constrained and possibly decrease further in case oil prices retreat further.

On a seasonal basis, Chevron shares have increased by an average of about 0.76% for the month of October during the past 10 years. They have appreciated in 7 out of the last 10 years, anywhere between 0.4% and 7.6%, while during the 3 down years, they depreciated between 2% and 4.1%. Meanwhile, the 14-day RSI (relative strength indicator) is currently at 22, indicating that the stock is oversold.

Chevron October Stock Price Change - 2003 to 2012

YearOctober 1 priceNovember 1 priceChange
2012$106.70$103.18-4.13%
2011$98.43$97.11-2.12%
2010$74.98$74.13-1.97%
2009$66.97$68.88+1.96%
2008$62.87$67.17+5.91%
2007$74.99$72.41-4.09%
2006$53.50$58.01+7.62%
2005$43.99$44.53+0.42%
2004$39.66$41.12+2.90%
2003$26.83$27.83

+1.08%

Prices are dividend and split adjusted - Data Source: Yahoo Finance

As in the case for Exxon, the positive seasonal October price action, the depressed current RSI indicator level, in addition to the moderate forward price/earning ratio all bode well for Chevron shares. On the other hand, our macro environment outlook is not encouraging. As a result, with such contradictory signs, we would remain on the sidelines for the time being and refrain from buying Chevron shares.

Occidental Petroleum

Although some may consider that Occidental is not a Supermajor, with its market capitalization of $76.88 billion, it is the fourth largest U.S. oil & gas company by market capitalization after ConnocoPhillips. Occidental's stock price has increased by 27.28% year-to-date on a dividend adjusted basis from $74.96 on December 31, 2012 to $95.41 on October 4, 2013. With analysts' earnings estimates of $7.10 for the year ending December 2013 and $7.45 for the year ending December 2014, Occidental's price/earning ratios are 13.44 and 12.81 respectively.

Analysts' average earning estimates for the year 2014 have been rather stable for Occidental during the past 90 days at $7.45 per share. Meanwhile, they had missed their Q2 2013 earnings estimates of $1.60 by 2 cents, with actual earnings coming in $1.58. Performance for upstream and chemicals was satisfactory, but midstream underperformed. Given our macro environment outlook, Occidental's upstream earnings will also be constrained and possibly decrease in case oil prices retreat further, unless production levels increase enough to make up for such potential downside risk.

On a seasonal basis, Occidental shares have increased by an average of about 3.84% for the month of October during the past 10 years. They have appreciated in 8 out of the last 10 years, anywhere between 1% and 12.1%, while during the 2 down years, they depreciated between 2.5% and 4.8%. Meanwhile, the 14-day RSI (relative strength indicator) is currently at 78, indicating that the stock is overbought

Occidental October Stock Price Change - 2003 to 2012

YearOctober 1 priceNovember 1 priceChange
2012$76.70$73.05-4.75%
2011$88.19$93.85+6.41%
2010$73.23$82.12+12.13%
2009$69.40$73.90+6.47%
2008$49.66$48.41-2.52%
2007$60.84$61.48+1.04%
2006$40.65$43.60+7.24%
2005$33.61$33.79+0.53%
2004$23.38$25.22+7.85%
2003$14.42$15

+4.03%

Prices are dividend and split adjusted - Data Source: Yahoo Finance

From a seasonal basis, Occidental has performed quite strongly, increasing an average of 3.84% during the month of October. Meanwhile, an elevated RSI could signal a potential for a short term pull back in the share price. Although earnings missed during the last quarter, such miss was minor while revenues slightly exceeded expectations by about $13 million.

Again, with our outlook for the macro environment not constructive at this time, the substantial year-to-date gains already experienced by Occidental shares, the expansion of its price/earning ratio, and the overbought status of the stock as indicated by its elevated RSI, we would also prefer not to buy Occidental shares at these levels.

Anadarko

Anadarko is not necessarily considered one of the Supermajors, nevertheless, it is the fifth largest U.S. oil & gas company with its market capitalization of $47.2 billion. Anadarko's stock price has increased by 26.87% year-to-date on a dividend adjusted basis from $74.01 on December 31, 2012 to $93.90 on October 4, 2013. With analysts' earnings estimates of $4.53 for the year ending December 2013 and $5.40 for the year ending December 2014, Anadarko's price/earning ratios are 20.73 and 17.39 respectively.

Meanwhile, Anadarko's average analysts' estimates for the year 2014 have been rather stable during the past 90 days, with slightly higher revision from $5.37 to $5.40 (although within such 90 day period they had fluctuated up and down by about 16 cents). Meanwhile, Anadarko's earnings for Q2 2013 came in at $1.05 per share, beating analysts' estimates of $.91 by 14 cents. Its revenue of $3.5 billion, although slightly shy of average expectations of $3.5 billion, was still supported by rising production such as the Wattenberg Horizontal and Eagleford Shale programs which generated an increase of more than 45% year-over-year in net barrels per day of liquid sales volume.

On a seasonal basis, Anadarko shares have increased by an average of about 3.64% for the month of October during the past 10 years. They have appreciated in 7 out of the last 10 years, anywhere between 3% and 16.3%, while during the 3 down years, they depreciated between 0.1% and 4.1%. Meanwhile, the 14-day RSI (relative strength indicator) is currently at 52.6, indicating that the stock is neither overbought nor oversold.

Anadarko October Stock Price Change - 2003 to 2012

YearOctober 1 priceNovember 1 priceChange
2012$68.45$72.81+6.37%
2011$77.71$80.46+3.53%
2010$60.66$63.21+4.21%
2009$59.64$58.27-2.30%
2008$34.24$39.82+16.29%
2007$56.93$54.60-4.10%
2006$44.44$47.25+6.33%
2005$43.10$43.05-0.11%
2004$31.77$32.78+3.19%
2003$20.33$20.94

+3.00%

Prices are dividend and split adjusted - Data Source: Yahoo Finance

Anadarko has executed well during the past year through its concentration on U.S. shale as well as international exploration and offshore deep water drilling, while it continues to strengthen its midstream operations. On a seasonal basis, Anadarko has performed rather well during the month of October, rising an average of 3.64%. Despite Anadarko's share price appreciation of almost 27% year-to-date, its 14-day RSI indicator is reasonable and does not indicate that the stock is overbought at these levels. All such indicators bode well for Anadarko's share price.

Anadarko's forward price/earning ratio in excess of 17 is not cheap, although it can prove to be justified in case Anadarko continues to deliver. Otherwise, Anadarko shares can see a substantial drop in price. Given such divergent catalysts for Anadarko's future direction, in addition to uncertainty in the macro environment, we are inclined to conclude that Anadarko shares are positioned to record substantial moves in either directions.

To such effect, we would recommend buying calls that expire in May 2014 with a strike of $92.5 where they closed at a premium of $8.76 on October 4, 2013, in addition to buying puts with a strike of $85 where they closed at a premium of $4.80, with a ratio of 2 put contracts for every 1 call contract. Break-even levels would be $75.33 to the downside and $110.83 to the upside. Hence, if Anadarko shares move by more than 19.8% to the downside or 18% to the upside, then investors would generate profits. Naturally, if shares exhibit little price movement during the next 7 months, then investors can potentially lose the premiums spent.

Conclusion

We believe there is a divergence in indicators for the five U.S. oil & gas stocks examined. In the case of Exxon, Chevron, ConnocoPhillips and Occidental, such stocks are already either oversold or overbought in the near term, while experiencing divergent fundamental and macro environment indicators. To such effect, we would continue to refrain from buying such shares. In the case of Anadarko, its shares seem to be neither overbought nor oversold in the near term, while its excessive price/earning ratio and its solid operational execution so far this year could trigger a substantial move in the share price in either direction. As a result, we would recommend establishing an option strategy in order to benefit from such potential move.

Source: Should You Own U.S. Big Oil And Gas Stocks?