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ExxonMobil: Bottom-Fishing in Energy

10/23/2014 8:00 am EST


Marvin Appel

President, Signalert Asset Management LLC

Oil prices have fallen 24% in the past four months, back to where prices were in 2011 and 2012, and energy stocks have followed suit; I think oil is near a bottom and it is time to start bottom fishing in energy, says Marvin Appel, technical expert and editor of Systems & Forecasts.

The cause of the decline is a change in the balance between supply, which is holding up, and demand, which is expected to decline as the world’s economies slow down (so far excluding the US).

The coup de grace was the recent policy statement from Saudi Arabia that it will not cut production to support prices and that $80/barrel oil (approximately where we are now) is satisfactory to them.

We expect that the $80 per barrel will be an area of support for oil prices. This level is approximately the cost of the newer sources of crude oil that are available from shale, oil sands, and very deep water.

If oil were to drop below $80/share, about 15% of current production would be barely profitable and future development would likely dry up.

So, at this price, the newest sources of oil are barely profitable, while Saudi Arabia continues to enjoy a large profit margin and can preserve its market share.

ExxonMobil (XOM), the largest oil company, has been more stable than other oil stocks. It has, on occasion, been a high dividend yielder relative to the majority of other components of the Dow Jones Industrial Average.

It has been my impression following the stock market over the past 18 years that when the dividend yield on XOM has made it into the top ten Dow Jones Industrials (i.e. when XOM has been among the “Dogs of the Dow”), it has been a good buying opportunity.

That is now the case and the $90 area looks okay as a support level. Conservative investors should wait for a retest of $85, which is a much stronger looking support area.

For our call writing strategy, we recommend buying XOM at $90 or lower and suggest writing calls expiring on December 20, 2014 at the strike price with the most time value. Recently, the calls were $3.70 bid, covering the price risk almost all the way down to the best support level ($85).

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