This is a follow up on my post from yesterday, where I looked at Exxon Mobil (NYSE:XOM). I took 10 years of monthly price data for the S&P 500, NatGas, Brent and Occidental Petroleum (NYSE:OXY) and dropped it into a multiple linear regression calculator. Here's a chart:
The visual fit demonstrates the connection, and the correlation at 0.88 is better than I would have expected.
OXY has Middle East operations, and the California operations (spun off late last year) were also sensitive to the price of Brent, which gave a slightly better correlation than WTI.
NatGas is a puzzler: the formula suggests that a lower price is better for OXY than a high one. It could be that the Chemical segment uses it for feedstock. At any rate, that's what the software developed as a relationship.
A weakness of this approach is that OXY has been divesting assets, to include US mid west gas assets as well as the California operations that now trade separately as CRC. So going forward the equation developed may not be as useful as the correlation implies. Also, they have been working on selling other assets, which may enhance market expectations and lead to rapid share price moves on rumors.
Brent would need to be in the $80 area to support the current OXY share price, according to the formula. After tinkering with various hypothetical levels for Brent and scratching my head for a while, I plan to sell August 87.5 calls over my existing LEAPS position. Brent would need to be at $90 to drive OXY up to the strike price, according to the formula.
Demonstrably the share prices of OXY and XOM respond to the short term moves in the price of Crude. Factually the value of the shares depends on oil prices extending out decades into the future, which are unknowable. If we can't predict the next 3 months, how can we do better for the nest three decades?
On a common sense basis, existing wells and fields will continue to decline, while emerging middle classes and economic growth globally can be expected to increase demand. With that in mind, holding the majors while extracting income by means of covered calls seems like a sensible strategy.
Disclosure: The author is long OXY.