I haven't engaged in the world of academia (thick books, studying, flash cards, tests) in many years, but my Chartered Market Technician test this Friday has compelled me to return to that world. I've got a foot-thick stack of books I've been going through preparing for it. I'm reminded now why I got through college in 2 1/2 years. Studying isn't my cup of tea. I prefer doing.
I was staring at my monitor this morning, not "doing" much of anything, and not knowing what to write, when Slope's intrepid Energy Analyst made a delivery into my electronic in-box. I herewith offer his thoughts.......
There was a modest short covering rally in energy stocks
after the Fed rate cut yesterday as the statement was not as explicitly
hawkish on inflation as some expected. DUG, in particularly, moved lower as the
big-cap names (XOM, CVX and COP) rallied on the close. The reaction by energy
names yesterday was a false move, in my opinion. The sector will open lower
this AM, as XOM missed the consensus forecast by 5% ($2.03 per share versus
estimate of $2.14).
More significantly, XOMs production volumes were down almost
6% y/y. Media pundits are focusing on the decrease in the companys refining
earnings y/y, but Wall Street analysts are going to raise more concern over the
production shortfall. The volume numbers were not good, and this has been a
nagging issue for the company. The 19% decline in XOMs African oil volumes y/y
will be a major source of investor concern, in my view. Recall that XOM
missed on earnings and production in July of 2007 and this set off a major
correction in both XOMs shares (from almost exactly the same price level) and
the oil sector. A similar move could now unfold. It is not insignificant that
hedge funds begin a new monthly performance period today, having realized big
monthly gains in energy in April.
DUG is already up 3% in pre-market. DUG lagged yesterday
because of the last hour move in XOM, which accounts for 23% of the value of the
ETF. XOM did raise the dividend by a higher than trend 14% yesterday afternoon,
which gave some investors hope of an earnings beat, but another interpretation
may be that it was more of a cover for todays earnings and volume miss. One
final note: XOMs results this AM underscore the investment case for OXY, where
EPS were up 137% y/y, versus the obviously more modest 25% increase in XOM
profits y/y. Oil may pause near-term, but OXY represents a much more direct
vehicle to capture the higher longer-term price with much less volume and
refining risk.
