Exxon Mobil: Just Hold On

| About: Exxon Mobil (XOM)

Summary

Exxon Mobil is currently trading lower on news that OPEC won't come to an agreement in Vienna.

Shareholders should exercise caution as to their position, but realize that their drawdowns are not as severe as what the futures curve is dictating.

Crude oil may just be starting its streak of bad days on the market.

There will be a buying opportunity in Exxon Mobil (NYSE:XOM), but it isn't today. I'm looking at a live feed of the futures market right now and crude oil, via the WTI is down about 4%, with the Brent showing a similar plunge. At the end of the day, Exxon's strength comes from high crude oil prices and while they're one of the best companies in the space - and a heavily diversified one at that - they still have a large amount of macro exposure. So, now that it becomes clearer that OPEC and non-OPEC nations will fail to reach an agreement, when can investors expect to buy XOM on the dip?

Source: Niobrana News

This Week In Vienna

It's funny - it seems so easy just to cooperate with someone when it's in your best interest to. However, OPEC just cannot get it together. Non-OPEC nations are also starting to withdraw and really shareholders of great oil-exposed names like Exxon Mobil are the ones who suffer. The chart below is a graph not typically seen by long-term investors, as it is a three day chart. However, I believe it shows something very interesting about the company.

Click to enlarge

Source: Bloomberg

This three day chart tells you two things: XOM dipped at the open of Tuesday's session and XOM didn't dip nearly as much as crude oil futures. Let's start with the latter factor. Could this mitigated single-day decline be due to the spike in natural gas prices today (February futures are up 3%, as well as the later dated futures) or is this due to the strong diversification that the company has? While it's impossible to know for sure, we do have to understand that this stock is mitigating your portfolio's drawdown and you should be grateful for that. That's an excellent reason to add this name to your portfolio. For the other factor, however, XOM is down and it's not time to pull the buy trigger today.

Why not, right? The stock is down off of its summer highs of $95.55 and there's another dip today that makes it a perfect contrarian opportunity, especially for the short-term. The key thing to understand about what's happening today with OPEC not coming to a production limit agreement is that supply is effectively in the same state that it was in twelve months ago. On top of that, E&Ps globally have been cutting costs like wildfire to lower their breakevens, so profitability for most E&Ps is at a lower level for crude. That means that crude has room to fall and to what exact level, not one analyst on the street knows (so, beware of anyone telling you the bottom is at an exact price per barrel).

Click to enlarge

Source: Bloomberg

What happens now is we go back to the drawing board. The level of uncertainty with OPEC is sky-high, because this time last year, we were in the same fundamental situation - waiting for OPEC to cut to stabilize global oil markets above $50/barrel. Since that hasn't happened, that puts the United States and Russia in a difficult position. Russia, on its own, is going to need to scale back output (as they are the top global producer at low prices), but the United States is going to have to as well. That comes after a substantial uptrend in rig count since the spring and comes after inventories have shown a lack of progress.

Exxon Mobil may have to cut production (wouldn't be surprised if they did) and may even have to lower capex guidance further. This is all because of the failure in Vienna today. The funny thing is that the meeting isn't over - it's just that everyone has already accepted the negative outcome. So, if you're an Exxon-Mobil shareholder, count your blessings that your drawdown isn't linked to the futures market, but know that there's more negativity ahead.

If Not Now, When?

Fortunately, the benefit of companies like Exxon Mobil is being able to mitigate drawdown in times of negative fundamental developments. As I said, WTI and Brent futures are down about 4%, but XOM is down just over 1.3% at the time of writing this. That's really quite impressive as I'd expect the single session day decline to be much more substantial. Yes, this is a discount you're getting if you're looking to either lower your cost basis into XOM (perhaps you went long this summer and have a cost basis above $90/share) or if you're trying to exact a bit more of value for the long-term.

Click to enlarge

Source: Bloomberg

Again, I really think there's going to be a few more days of crude oil pain before this stock becomes a convicting buy. Why? OPEC's uncertainty and negativity will not last just one day and the lack of cooperation puts a strong resistance on at $46/barrel. This is going to be a multi-week event and is really ill-timed as December is historically tax-loss selling season, so crude could really take an aggravated dip next month. Last year at this time, we saw crude dip nearly 15% in December, before rolling all the way down from $35/barrel at January 1 to a low of $26.19/barrel. Again, all the more reason to exercise caution with your position in Exxon-Mobil.

Conclusion

At the end of the day, if XOM is nicely shielded from OPEC's impacts. A 1 or even 2% dip in the stock is nothing in the grand scheme of investing. Watching the developments from OPEC is going to be critical because if it looks like a supply glut re-emerges to mimic last year's production levels, then way lower prices are warranted and exiting XOM to avoid a sharper drawdown is going to have to be a necessary portfolio action.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XOM over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.