Two of the world’s largest oil companies, Exxon (XOM) and Chevron (CVX), are gearing up to release their quarterly profit reports this week. Let’s take a look at some of the reasons ($93/barrel oil) the numbers might be good and some of the rationale behind why some analysts believe the companies might come in lower than expected.
Audio Podcast:
An audio podcast of this article is available at: poweropt.com/podcasts/2007_10_29_OilEarnings.mp3
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The Good:
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As oil prices rise, it is natural to assume the commodity pump price is based on what the oil companies are paying for the crude, the cost of refining (fixed), the cost of transport and a percentage markup. Competition may limit what the oil companies can get for their refined petroleum, but it seems larger prices would equate to a larger net profit.
Sources indicate the price of gasoline is about 50% crude, 20% tax, 20% operating expenses and profits, and 10% distribution and marketing. If we assume refining cost to be relatively fixed and transport costs to be marginally variable, it stands to reason the companies will have a higher net profitability.
An emotive reason to back Exxon is a J.P. Morgan top analyst picking them as this week’s best bet.
The Bad:
Occidental Petroleum (OXY) exceeded their earnings estimates, while ConocoPhillips (COP) did not. The story behind Conoco is the company had increased marketing and operational expenditures. And, the sheer complexity of how a company expenses their capital makes one realize how short-sighted the “oil-costs-more-company-makes-more” argument presented above is.
While analysts are rosy on Exxon, some have been cutting their earnings estimates for Chevron since the company lowered their earnings estimates on October 9th.
The Skinny:
Analysts, as a group, seem to like Exxon and Occidental and they seem to be lukewarm on Chevron and Conoco.
In a broader news view, the Supreme Court began hearing the case against Exxon regarding the $3.4 Billion dollar finding against the company related to the Alaskan Valdez spill. The company hopes to overturn the ruling and maintains no punitive damages were warranted in the case.
Also, some news reports are suggesting higher oil prices are boosting the value of solar shares as investor’s hedge against apocalyptically high crude prices. Perhaps this is a topic for a blog entry later in the week?
Potential Trades:
Now, we turn to the powerful search engine found at PowerOptions to look for covered call trades in the oil sector. You may recall we published a similar article on September 29th of this year detailing the major oil companies. The companies listed in the table, Exxon, Chevron and British Petroleum (BP) have all made price advances. Let’s hope for similar results from this list.
We searched both the major companies and companies in the oil refining and marketing sector (as a bonus).
| Power Options Covered Call Search Data – Big Oil | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Symbol | Stock Price |
Option | Option Details |
Opt. Bid |
Net Debit |
% Dnsd Prot |
% if Unch |
% if Asgnd |
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| IOC | 23.25 (+0.03) | IOCLE | 07 DEC 25.0 (54) | 1.9 | 21.35 | 8.2 | 8.9 | 17.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FTO | 45.09 (-0.47) | FTOLJ | 07 DEC 50.0 (54) | 1.55 | 43.54 | 3.4 | 3.6 | 14.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| WNR | 37.80 (-0.35) | WNRLH | 07 DEC 40.0 (54) | 2.5 | 35.3 | 6.6 | 7.1 | 13.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IOC | 23.25 (+0.03) | IOCKE | 07 NOV 25.0 (19) | 1 | 22.25 | 4.3 | 4.5 | 12.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ALJ | 37.37 (-1.31) | ALJLH | 07 DEC 40.0 (54) | 1.45 | 35.92 | 3.9 | 4 | 11.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| TSO | 61.11 (-3.37) | TSOLM | 07 DEC 65.0 (54) | 2.65 | 58.46 | 4.3 | 4.5 | 11.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| IOC | 23.25 (+0.03) | IOCLX | 07 DEC 22.5 (54) | 2.95 | 20.3 | 12.7 | 10.8 | 10.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DK | 24.26 (-0.43) | DKLE | 07 DEC 25.0 (54) | 1.5 | 22.76 | 6.2 | 6.6 | 9.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OXY | 70.23 (-0.54) | OXYLO | 07 DEC 75.0 (54) | 1.7 | 68.53 | 2.4 | 2.5 | 9.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CVX | 92.88 (+1.23) | CVXLT | 07 DEC 100.0 (54) | 1 | 91.88 | 1.1 | 1.1 | 8.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COP | 84.63 (-0.18) | COPLR | 07 DEC 90.0 (54) | 1.65 | 82.98 | 1.9 | 2 | 8.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| XOM | 93.61 (+1.40) | XOMLT | 07 DEC 100.0 (54) | 1.3 | 92.31 | 1.4 | 1.4 | 8.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CVX | 92.88 (+1.23) | CVXLS | 07 DEC 95.0 (54) | 2.65 | 90.23 | 2.9 | 2.9 | 5.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OXY | 70.23 (-0.54) | OXYLN | 07 DEC 70.0 (54) | 3.6 | 66.63 | 5.1 | 5.1 | 5.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| XOM | 93.61 (+1.40) | XOMLS | 07 DEC 95.0 (54) | 3.2 | 90.41 | 3.4 | 3.5 | 5.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COP | 84.63 (-0.18) | COPLQ | 07 DEC 85.0 (54) | 3.7 | 80.93 | 4.4 | 4.6 | 5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BP | 78.20 (+0.42) | BPLP | 07 DEC 80.0 (54) | 1.9 | 76.3 | 2.4 | 2.5 | 4.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CVX | 92.88 (+1.23) | CVXKS | 07 NOV 95.0 (19) | 1.25 | 91.63 | 1.3 | 1.4 | 3.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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[tags] BP, British Petroleum Co., COP, ConocoPhillips, CVX, ChevronTexaco, OXY, Occidental Petroleum Corp., XOM, Exxon Mobil Corp., covered call investment strategy, investment strategy, poweroptions [/tags]