You Should Reduce Long Exposure To These Companies

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 |  Includes: BP, COP, XOM
by: CRG Research

Second quarter earnings are being released, and I am updating my valuations. Additionally, I'm trying to get a feel for how certain equities will trade during the quarter, which groups will be strong, and which ones will be weak. In this article, I'm examining Exxon (NYSE:XOM), Conoco Phillips (NYSE:COP) and BP (NYSE:BP). Conoco has reported earnings and released its SEC filing. Exxon and BP's SEC filings are weeks away. That said, I think long-term investors should be reducing exposure to the aforementioned firms as a bear market could occur in the coming months.

Rating System

Buy - Be long

Neutral - No position

Sell - Be short

The ratings, research and analysis in this article should be considered as a starting point for further research.

Exxon - Buy (reduce exposure)

I'm awaiting the release of Exxon's second quarter earnings. My original estimate was for $158B of revenue: the firm is likely to fall short of that estimate. The revised estimate is for $126B of revenue.

Company v. Industry [TTM]

  • Return on Assets: 12.36 v. 5.40

  • Return on Investment: 16.5 v. 6.54

  • Return on Equity: 25.84 v. 8.95

(Company versus industry data courtesy of Reuters)

Based on the management effectiveness ratios, management is outperforming its peers in the industry.

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Revenue-share and Book value-share are increasing: the increases are considered bullish for common equity shares of Exxon Mobil Corp.

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Shares of Exxon are trading above the rising 50-day simple moving average, a sign that the trend is towards higher prices. Investors should be buying dips with reduced exposure, however, caution is suggested, as shares are trading near the 2012 high and may decline in price.

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Exxon on a price-sales basis is undervalued as the valuation metric is near the 2011 and 2012 lows.

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Exxon on a price-book value basis is fairly valued to overvalued as the valuation metric is near the 2012 peak.

ConocoPhillips - Buy (reduce exposure)

In the three months ending June 30, 2012, revenue declined 14 percent. A decline in sales and other operating revenue contributed to the decline. Total costs and expenses declined almost 16 percent. Net income declined by 33 percent.

The firm generated high-quality earnings as the cash balance declined, a bearish indication.

Conoco separated its downstream and upstream businesses. The downstream business is now known as Phillips66.

Geo-Political Risks

The firm faces on-going geo-political risks, most notably in South America.

Credit Risks

The credit risks appears to be negligible as the largest risk would probably come from trade receivables.

Sales

The majority of sales comes from North America, Latin America, and Europe.

Outlook

Third quarter production is estimated to be 1.475M to 1.525M barrels of oil equivalent per day. Third quarter production should be negatively impacted by planned downtime in Alaska and Canada.

Operating Segment Income

Income was led by the Other International segment while the Lower 48 and Latin America segment was one of the smaller income generators during the second quarter period. We'll have to watch to see if the firm can increase income from the Lower 48 and Latin America in future quarters. Higher natural gas prices would increase income.

Assets Sales

Conoco plans to raise up to $8B from asset sales over the next 12 months. In my opinion, asset sales would lower their ability to produce and thus generate future income.

CapEx

Captial expenditure increased substantially during the first six months of 2012 compared to the first six months of 2011. That's long-term bullish for shares of Conoco.

Company v. Industry

  • Return on Assets : 7.70 v. 0.43

  • Return on Investment : 9.71 v. 0.78

  • Return on Equity : 18.09 v. 1.42

(Company versus industry data courtesy of Reuters)

Management is effective compared to its peers in the industry.

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Book value-share is increasing and is now at a five-quarter high: the increase is considered bullish for common equity shares of Conoco.

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Shares of Conoco are trading above the rising 50-day simple moving average.

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Price-sales is rising and is near a recent peak. ConocoPhillips restated income statements, and thus my analysis isn't placing much emphasis on the price-sales valuation metric.

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The price-book value metric suggests the firm is fairly valued.

BP -- Buy (reduce exposure)

The financial position of BP is improving as book value-share increases. The share price is declining, and the enterprise is undervalued on a relative (recent history) basis.

BP is liquid as current assets are 23% greater than current liabilities. Revenue increased 9.3% in the first quarter of 2012, compared to the year-ago quarter. BP's first quarter 2011 earnings aren't high quality; further, cash from operations wasn't enough to cover cash usage in investing activities in the first quarter of 2012. That said, the macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline further. Some investors may want to protect long positions by buying put or selling call options.

I'm awaiting BP's second quarter earnings and SEC filing for further analysis.

Company v. Industry

  • Return on Assets: 8.39 v. 5.40

  • Return on Investment: 11.90 v. 6.54

  • Return on Equity: 22.11 v. 8.95

(Company versus industry data courtesy of Reuters)

Management is effective compared to its peers in the industry.

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Book value-share is increasing: the increase is considered bullish by financial analysts.

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Shares of BP are trading above the rising 50-day simple moving average.

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Price-sales is declining as the common equity share price declines and sales-shares increases. However, we have seen a recent increase in value.

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Price-book value is declining as the common equity share price declines and book value-share increases. However, we have seen a recent increase in value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.