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Summary

  • XOM's policy is not to use hedges on its production.
  • The Iraq War III is causing oil prices to spike higher. Many believe oil prices will continue to climb to $120/barrel or even $150/barrel.
  • XOM could glean huge amounts of extra revenues from its non-hedged oil.
  • XOM also has 10 major new production projects coming online in 2014 -- a record. These are expected to contribute an extra 300,000 boe/d.
  • XOM is technically set up for a break higher. The very positive above fundamentals should help XOM's stock price break significantly higher.

The Iraq War III is now upon us, and it does not look like it is going away soon. The Sunni's have been alienated by Prime Minister Maliki's government policies, which are generally anti-Sunni. The Sunni militants have risen up; but they have seized only primarily Sunni cities and territories so far. Experts at the Brookings Institute believe that a stalemate is the most probably scenario at this point. Bagdad is primarily a Shia city (75%-80%) of about 9 million people. The experts do not think it will be (or that it can be) overrun by the Sunni militants. The experts also don't believe a rapid counter offensive by the Shia's is likely to happen or to work. Thus Iraq is in limbo; and it is likely to stay that way with continued fighting for a long time. The various sects have hated each other for a long time.

As a consequence of the above, Iraqi oil production is sure to be cut back. This will push world oil prices upward. Plus the threat of the unknown, due to continued military actions, is sure to add to that push. Oil prices have already spiked a bit; but over the next few weeks and months they seem likely to go higher. Many think oil prices will rise 10% to 20%. They are already up about 5% on the above news. Others are touting $150/barrel oil again. Up does seem to be the most likely direction for oil near term.

Exxon Mobil (NYSE:XOM) is one of the world's largest oil and natural gas producers. In Q1 2014 XOM had 2,148,000 bpd in liquids production. I don't know the exact state of XOM's hedging; but their policy statement about it says, "We generally do not use financial instruments to hedge market exposures." From that I presume that XOM has little or no hedges on its oil. XOM doesn't seem to split out oil and NGLs in most of its announcements, therefore I will ballpark XOM's oil production at 1,500,000 bopd. If the price of oil (usually both WTI and Brent move approximately in sync) goes up 20%, then XOM will gain another approximately $20/barrel * 1,500,000 bopd * 365 days = $10,950,000,000 (about $10.1B in extra revenues) per year. Even for a company as big as XOM this is not a small amount of money.

To ballpark the effect, Q1 2014 earnings were $9.1B. Upstream earnings were $7.8B (up 11% from the previous year). The extra $10.1B in revenues would require little or no extra effort by XOM. This would mean that most of the extra revenues would go directly to the EBITDA line; and a large proportion would go directly to the earnings line. The above is just one example. The actual number could be much smaller if prices do not spike as much; or it could be much bigger. In either case XOM should benefit nicely with respect to both revenues and earnings. This should give the stock impetus to break higher.

If that isn't a big enough impetus for a break higher, XOM has announced that it plans to start production at 10 major projects -- a company record -- in 2014. This is expected to add new capacity of about 300,000 net Boe/d.

XOM's total Q1 2014 natural gas production was 12,016 mmcf/d. This translates into approximately 2 million boe/d. If you add the 2.148 million boe/d in liquids production, you get about 4.148 million boe/d in total production. 300,000 Boe/d in extra production amounts to an add of about 7.2% for 2014. This by itself should help the stock to go up. 3% is closer to the norm for growth for XOM. With XOM not drilling for natural gas as much due to the low prices in the US, its natural gas production was actually down about 10% year over year in Q1 2014. Liquids production, excluding the Abu Dhabi item, was up 3.3% driven by a project ramp up at Kearl and lower downtime. The point is that the outlook for XOM production growth for FY2014 is better than it has been in many previous years. Hence XOM should have more than the higher price for oil engendered by the Iraq War III to aid its stock price in going up. XOM is a buy.

The two year chart of XOM provides some technical direction for this trade.

(click to enlarge)

The slow stochastic sub chart shows that XOM is near overbought levels. The main chart shows that XOM is in a jagged uptrend, which seems strong. With the Iraq War III and the 10 new major XOM projects that are coming online in 2014, XOM has a lot of fundamental upside potential. For those expecting oil to spike upward further XOM seems an excellent buy. Technically it seems to be a buy too. It appears to be making a breakout to the high side (see yellow lines in the chart above). Since fundamentals strongly agree with this break out to the high side scenario, it is appropriate to buy into XOM at this time. CAPS gives XOM four stars (a buy).

However, on thing investors should worry about is a sharp downturn in the US and world economies. The World Bank recently downgraded its world economic growth outlook for 2014 from +3.2% to +2.8%. The IMF cut its April forecast for US GDP growth for 2014 from +2.8% to +2.0%. Neither of these cuts is encouraging to an investor. Investors should be aware that oil prices usually fall during bad economic times. Hence one scenario might be that oil and XOM prices might rise 10%+. Then they might begin to fall. Investors probably don't want to wait for a full blown fall. We may be at the end of a bull market. The BULL is already 5+ years old, and BULLS only last about 4 years on average. The average bear market fall is about -40% over a two year span. Now isn't the time to get greedy. If you make good profits on XOM, don't be afraid to get out. However, it is possible that XOM could rise 30%+, so don't be too anxious to get out either. Plus XOM does pay a 2.7% dividend.

NOTE: Some of the fundamental financial information above is from Yahoo Finance.

Good Luck Trading.

Source: Unhedged Exxon Mobil Has The Ultimate Positive Exposure To Spiking Oil Prices