"Trick or Treat" came last week. Trading the energy space through the equity markets had already been tricky enough. Then the treat came on Friday. This space now becomes murkier thanks to U.S. imposed sanctions on Iran, thanks to what might have been a speculative/supply side selloff across the oil patch, thanks to forward looking projections for global production, and thanks to the best earnings season for the big oil exploration and production names that we have seen in four years.
It was Friday that both Exxon Mobil (XOM) , and Chevron (CVX) pretty much shot the lights out in terms of profitability, revenues, and cash flows. In fact, Chevron seems to executing at a level above the rest of the industry. Profits doubled, while production hit a new record for the firm at 2.96M barrels per day. This 8.8% year over year boost in production came through a significant increase in both Australia and the U.S. Permian Basin. You already know that I am long Royal Dutch (RDS.A) , British Petroleum (BP) , and Exxon Mobil. Is Chevron, even if it is functioning at perhaps the highest level worth adding?
CVX is a dividend stock, as most big oil stocks tend to be, sporting a yield of 3.79%. That puts it in a payout class with XOM (3.99%), but not close to BP (5.69%), and RDS.A (5.93%). That said, from an equity performance point of view, XOM has out-performed. Can it continue? Is broader exposure necessary?
As for pricing the underlying commodity, it was not long ago that we were talking about the potential for $100 oil. Suddenly inventories have soared. Saudi Arabia is now producing 11 million barrels per day, and other producers are stepping to the plate. U.S. firms continue to unscrew the bottlenecks in Texas and New Mexico, though that remains a work in progress. Still, the removal or partial removal of Iran will eventually work to balancing the marketplace. Iranian oil exports were down 800K BPD from April through September, and will tighten further. Iran is OPEC's third largest producer, and tighter conditions should become apparent before the new year. Oh, and let's not forget that OPEC nations will meet this weekend with non-OPEC oil producers such as Russia in order to discuss their limits on output. They may simply see opportunity.
The idea would be to add CVX (last sale: $118.07) to a portfolio already holding XOM (last sale: $81.93), in a dollar neutral trade that ends up with long positions in both names. You ready? This is how the big kids sometimes play (slowed down a bit). You may have to adjust these published last sales slightly by the time you read this. One share of CVX is worth 1.44 shares of XOM. One share of XOM is worth 0.69 share of CVX. The current gap between share prices is $36.14,
So, the mission should the trader choose to accept it, is to try to add 69 shares of CVX for every 100 shares of XOM sold. The challenge of this effort will be to try to take advantage of the up and down swings of the day, by doing so by executing the trades at an average difference in share price that comes to less than $36.14. You'll have to leg into one side or the other first. This is the kind of performance that actual floor traders are often judged on by their clients when those clients rotate holdings, but obviously on much grander scale. Have fun with it. Makes it interesting. Forces better execution.