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Exxon – Unsafe at Any Price!

I've mentioned in previous articles how ridiculous it is that Exxon is valued at  $423Bn, having added $200Bn in market cap since 2004

Heck, the company was trading at $57.50 in January of last year when oil was at $65 a barrel, on it's way to a summer high of $79.  In comments today Pitch78 mentioned how Cramer said he was "blindsided" by the COP disclosure of poor margins after saying "a lot of really good things at its meeting a few weeks ago."  

Yeah, well if my due diligence on a company consisted of listening to the management's outlook, I'd be "blindsided" a lot too!  The management of Conoco Phillips, Exxon, Chevron are no smarter than the people who run our government.  They stepped into the helm of huge, profitable mega-corps with the general instructions that they should not screw it up and they would keep making money just like the last 20 CEOs did.


They all just happened to be in the right place at the right time this decade when their commodity got hot. 

We won't get into the reasons behind HOW they got hot, let's just say that a confluence of global economic and political events came together and caused a fortuitous increase in the value of their commodity – and please ignore the man behind the curtain!

Let's just say that our pals in the oil industry took full advantage of the situation to maximize profits!

Now the party is winding down and suddenly the pressure is on for these guys to do something smart…  It ain't going to happen!  COP already did something monumentally stupid, buying Burlington Resources for $36Bn last December, when natural gas was trading at $14 (now $6) and, more importantly, paying a valuation that was THREE times higher than the valuation of Conoco's own reserves.  At $92 a share, COP bought Burlington at the top AND gave them an extra $6Bn.

What does that have to do with Exxon?  Well Exxon, since 2004 has gained the ENTIRE combined market cap of Conoco/Phillips/Burlington ($112Bn), plus Suncoco ($7Bn), plus Suncor ($12Bn), plus Valero ($30Bn), plus Halliburton ($29bn) plus Nabors ($9Bn) plus Chesapeake Energy ($12Bn) and still has enough left over to pay executive bonuses second only to Goldman Sachs!

What a company!!!  "How did they do it?" you may ask:

  • Did they discover more oil?  No, Exxon does less exploration than any major oil company.
  • Did they improve operations?  No, operating costs per barrel are way up.
  • Did they increase market share?  No, the majors are losing market share across the globe.
  • Did they produce more oil? No, Exxon's production is in steady decline.
  • Did they double their profits?  No, Exxon's profits are up 40% from 2004

So how do they do it?  Well, it seems the mighty mighty Exxon corporation has pursued a single, simple strategy to go from being a $200Bn company to being a $424Bn company (was $453Bn last week) in just 3 years-  Buying back $55Bn worth of their own stock!  In the past 4 quarters, in which Exxon generated an amazing $55Bn in cash by gouging the consumer finding the perfect price for their product, all but $3.5Bn of that money was spent on purchasing their stock (75%) and dividends (25%).


So when you wonder just what sort of nutjobs were buying XOM stock up to $79, even while the price of oil was plunging – now you know!  The biggest buyer of Exxon stock in 2004, 2005 and 2006 is Exxon and now, as Howie Mandel likes to say, let's see if they made a good deal:

They are already guiding flat sales ($398B vs. $3876B) for ‘07. They made $40Bn this year so let’s say costs are $350Bn.

RIG projects a 100% increase in profits, SLB expects a 20% increase in profits… so you know their costs will go up – let’s say just 10%, which will include labor, health, materials, shipping, rentals, inflation, the Dems actually making them pay their taxes… let’s say it’s all just 10%.

That’s still $35Bn in additional costs. That means they net out $388B in costs on $398Bn in sales, a far cry from $40Bn!

Since they sell oil, we can also assume that they were assuming oil would not drop significantly in price from this years average of $65. Oil averaged $55 in ‘05 and the company “only” had $370Bn in sales and $36Bn in profits.

So we have a few interesting things going on here: When XOM went from ’04s $298B/25B to ‘05 $370B/36B the stock rose from $50 to $60 (20%) but, this year as the stock goes from ‘05 $370B/36B to $387B/40B the stock jumped from $60 to $77 (28%).

Meanwhile they’ve been buying back stock but they’ve run their A/P up from $46Bn to $54Bn with total liabilities up $10Bn since last year.

In 3 quarters so far this year $29B in net income has only translated to $4Bn of cash flow, if this were my company I’d be asking a lot of questions about how come the money we make doesn’t seem to find it’s way into a bank!

Lastly – If the company took in $370Bn when oil was at $55, how come they “only” are taking in $387Bn with oil at $65, its an 18% increase. Conclusion: Unit sales are down!  What happens if the price increase doesn’t stick and unit sales don’t pick up?

This does not sound like a good deal at all!  Now we come back to the old, reliable Roach Motel Theory where we have $424Bn worth of shareholders trapped in a company that may only be worth $300Bn.  What happens to those investors when Exxon stops buying back shares?  The company already spent almost $30Bn this year buying stock at an average of $68 per share.  If the stock drops to $61 that means Exxon blew $3Bn on a bad stock deal and the rest of the $26Bn (we'll ignore the $27Bn they spent in '04 and '05) is tied up in a very illiquid position.

It's not all bad news for Exxon though.  They managed to weasel out of paying for part of that Valedez oil spill after 15 years of appeals and they're making some great progress in the field of denying global warming so let's hear it for one of America's greatest corporations as they sink back to the levels they so richly deserve.

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  1. GM all! Tis a beautiful (slightlly cool…for us) morning here in FL. Need help with some mechanics… LEAPS at large premium due to long time O/S, but doesnt value decrease every day due to time erosion? Is there a golden rule how long they should be kept when underlying stock is decreasing or stagnant in price? As far as buying calls in soon-to-term options for the same (LEAP) stock…and rolling into next opt mos., why would this be advantageous with the added risk of being bare@ss for a relatively low premium (if close to expiration)?? As always, TIA

    How bout them Gators??!!!

  2. Morning Phil,
    it seems that here in Europe options on XOM are traded and, since the price of the underlying is the US stock, these options are a good deal, now that the oil price has sunk another two dollar and, all other things being equal, even not counting your above analysis, as yet unpublished on seeking alpha :) , the expectation is that oil stocks should not be too happy with the continuation in the selloff of crude futures. — I HOPE!
    As I speak, crude is down a mind boggling 2.15 and trading below $53, makes me even want to buy! (But I won´t)

  3. kustom or anyone, do you have tom2s email address?


  4. karmcon, what part of florida you in? Gators kicked it last night!

  5. Lil south of Tampa…..took the Gators +7 early and was already planning for the loss, what a shock, but a good one!

  6. From wikipedia (btw a great idea and company)--something I was´t quite sure of:

    LEAP is an acronym for Long Term Equity AnticiPation Security, a financial instrument more or less identical to a regular option except it has a much longer term before expiration. LEAPs are available on approximately 450 equities and 10 indexes. As with traditional short term options, LEAPS are available in two types, calls and puts.

    In this context, “option” refers to the listed option trading on an exchange such as the Chicago Board Options Exchange (CBOE). These differ greatly from the sort of options that employees of major corporations receive though their fundamental purpose is the same.

    Options were originally created with expiry cycles of 3, 6, and 9 months, with no option lasting more than a year. These sorts of options still constitute the vast majority of option activity. LEAPs were created relatively recently and typically extend 2 years out. Equity LEAPs always expire in January. For example, if today was November 2005, one could buy a Microsoft January call option that would expire in 2006, 2007, or 2008. (The further out the expiration date, the more expensive the option.) The latter two are LEAPs. A relatively small number (about 1,000) of the most actively traded companies trade LEAPs.

    LEAPs were formerly instruments solely for equities; however, more recently, equivalent instruments for indices have become available. These are also referred to as LEAPs.

  7. The CNBC talking heads will need to seek professional help to cope with this oil snafu. I am sure they have good insurance.

    Phil, I need your help. I am still holding the last 1/3 of XOM Jan 70 puts. I know you said to dump them, but I decided to let 1/3 ride as the price action has been getting very weak and they are pretty much a free ride.

    I will be out most of the day and want to set a sell order in the event this stock breaks down on the oil market today. Suggestion?

    I also doubled my Feb 65′s yesterday and I am very optimistic that I will be in the money by expiration, so I will hold these a while, or at least 1/2.

  8. wow, what happened to oil?

  9. Add the dollar decline since last year to the current oil price, and we are more or less at 50 dollars a barrel in terms of absolute value, oil is getting cheaper again, no denying, but how come GS puts their prognostic at $69 (say 70 with a psychological discount)? We are at the beginning of the year and their target is already 30% above market value.

    The major bullish argument for oil is that refinery capacities are stretched thin. Other than that and major crises of potential impact on oil supplies, I don t see how GS argues their target. I have no access to their analysis, so I can t really tell.

  10. Great piece on XOM Phil! You need a Wiki page so that things like the Roach Motel Theory get properly attributed. Just don’t put the VLO rule there!

    Looks like we’re going to have some fun in the oil patch today!

    BTW, GE bought a private but sizable oil service company for a lot less than what SLB BJS etc are trading for … not a good sign.

  11. Anyone buying oil stocks this morning ?

  12. *** Dow Jones AIG and Goldman Sachs commodity indexes announced reduced energy weightings.

    *** Russia is talking production cuts in a threat I think meant to tell Belarus it’s serious. Russia has limited refining and storage capabilities so it said it may need to cut production very soon. This tells me their storage tanks are as full as ours.

  13. btw Phil Windows XP allows dual monitors to be setup (is easy if your PC has more than one vga/dvi output and you dont have an ATI video card (they dont support dual monitor function)

  14. I have some XOM Jan 08 72.50 puts. Should I sell some puts against them? Which ones do you recommend?

  15. Phil
    On AA I sold the Jan 30 at .3 yesterday against the April
    With today’s news should I be looking at buying the caller out or ride it out till expiration and hope for the best?

  16. Buy Sprint Jan 17.50s for a short term play .55 cents??

  17. Phil, what are the oil plays today??

  18. AA – I’m just holding mine, $30 is decent cushion, you never know with earnings.


    XOM selling puts – let’s wait and see a bit, NYMEX isn’t even open yet.


    Remind me of leap stuff over the weekend when we have time, today is too crazy watching all thies oils!

    I summarized the moves I liked in today’s post but it does boil down to “Always Sell into the initial excitement!” We can always buy more later but this is a huge gift!

  19. GS
    Got out of Jan 200 calls at $5.6

    Got out of Jan 75 calls at $5.1

    looking for possible re-entry later.


    Amazing read on the oils! Do you think the oil stocks can correct as severely as the techs corrected after 2000?

  20. Juilet and Happy trading
    Got this from a trading service I use. Might not happen to today but might help you fellow longs out later.
    GS (Goldman Sachs--$203.73; +4.68; optionable): Investment brokerage
    STATUS: Ascending base. Solid volume Monday as GS started to break
    higher from a 6 week base formed along the 18 day EMA. A short
    consolidation move after a nice run from October to late November, this
    lateral move gave GS a nice rest and it looks as if it has caught its
    breath based on the strong volume and solid gain off the 18 day EMA on
    Monday. Looking to move in as GS continues higher. The financials,
    a short rest, are back in action.
    Volume: 7.563M Avg Volume: 4.886M
    BUY POINT: $204.38 Volume=4.9M Target=$225.00 Stop=$197.95
    POSITION: GPY DT – Apr. $200c (63 delta) &/or Stock

  21. It appears that Phil is posting comments under “Terrible Tuesday (for Oil)” article.

  22. Thanks BillBigD!


  23. Hey, you guys are aware there’s a new post right?

    Oil correction – it depends how far the prices break down. Oil should be at $45, it could be held up around $50-55 and that means the average oil company is worth about 20% less than they trade for now.

    But if the growth story looks negative long-term, with all sorts of competition gettning into the game, investors may just move out of the sector entirely.


    OMG – XOM has gained .90 from open and turned positive!

  24. Posted by Eric Savitz
    Maybe he really does have big news to report: Apple (AAPL) CEO Steve Jobs is scheduled to be appear on ABC’s Nightline tomorrow night. (I wonder if they’ll ask him about the company’s stock-options backdating scandal.) Tomorrow morning, of course, Jobs will give his keynote address at Macworld.

    The Wall Street Journal is reporting that Apple could unveil its much discussed cell phone tomorrow, with AT&T’s (T) Cingular providing the service.

  25. thanks Michael!

  26. In XOM P April 65s at .95!

  27. BillBigD,

    Thanks for the info. I completely agree. Similar situation on FFIV, also.

    “But if the growth story looks negative long-term, with all sorts of competition gettning into the game, investors may just move out of the sector entirely.”

    I hope and do look for this to happen. Hoping that the money will start rolling into techs (and others) like you’ve mentioned somewhere before. I also think that the Asian Internets are picking up attention.


    ps. AAPL is gearing up! The Feb calls not moving, though, yet!

  28. LVS running away to the upside!

  29. GOOG
    Is starting to make a move. MACD (intraday, hourly) has flattened.

  30. BIDU
    Similar to GOOG, but, more momemtum! In with Jan 125 calls @ $2.9 (thought about it at $2.7, but, didn’t act fast enough).

  31. Phil,
    I know you like AXP but any thoughts on MA. Looking good.
    BIDU I hold the June 100′s

  32. What is Sir Issac doing to AAPL???

  33. Dont see any bad news on TM but it is getting spanked…..

  34. PBR really getting spanked

  35. Phil -

    did you get out of your ebay call ?
    I just went long the Feb 30 at 1.55
    Looking to sell the Jan 30 for 0.55

  36. BIDU
    I’m out of the Jan 125 calls @ $3.4, $3.2, and a few @$2.75. Don’t have as much time as your June 100s, BIllBigD.

  37. US Nuclear Sub collides w/ Supertanker in Persian Gulf

  38. Oil back over $55

  39. AAPL up 5% on new phone