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Can ExxonMobil Still Pump Up Your Profits? + Vic Wisemann’s Thoughts on Covered: XOM, CAL, AAI, CVX, COP, BP and More...

Vic Wisemann
InvestorsObserver
Featured Contributor

It certainly does not seem to matter where you look, the forecast for energy demand in 2009 is weak. OPEC has once again lowered its estimate for world oil demand by an additional 400,000 barrels per day (b/d) to 84.18 million b/d, vs. 85.55 million b/d in 2008. The International Energy Agency (IEA) announced it expects an additional drop of 1 million b/d in oil demand from its earlier estimate and believes demand could fall even more due to the global economic slump. The Energy Information Administration (EIA) predicts that U.S. Oil demand will be down 2.2% this year.

This lack of demand has caused U.S. oil supplies to rise sharply to levels not seen since the fall of 1990, as the weekly EIA energy stocks report showed U.S. crude inventories increased by 3.9 million barrels from the previous week. At 370.6 million barrels, U.S. crude oil inventories are above the upper boundary of the average range for this time of year.

 Read on to see how to pump some nice profits into your portfolio.

Refineries have begun responding to the anemic demand for fuel by cutting refinery utilization sharply. U.S. refineries were recently operating at 80.4%. Lower refining rates have affected U.S. gasoline supplies, with the EIA reporting that U.S. gasoline inventories increased by 0.8 million barrels last week. This is above the upper boundary of the average range with finished gasoline inventories falling while gasoline blending components inventories increased during this same time.

Though the U.S. currently has ample gasoline supplies on hand, one of the biggest fears is what will happen if the economic recovery comes earlier than most expect. Will refineries be able to ramp up production soon enough to meet any increase in demand? Will the U.S. be able to import enough gasoline to buffer domestic stocks? This issue could be critical to any economic recovery attempt, as a rapid rise in gasoline costs is the last thing a struggling economy needs when it’s trying to get back on its feet.

After crashing for several months, the price of oil reached a bottom and has been climbing steadily for several weeks and is likely to continue. There are three reasons why the price for crude is rising.

The first is in anticipation of higher seasonal demand, which begins once the summer driving season begins in the U.S. The second is that the U.S. dollar has been falling. Since oil is traded in dollars, a lower greenback translates into higher prices. The third is the ever-present demand from large foreign economies. In this case I am speaking mainly of countries like India and China. Countries with many people and lots of developmental potential will keep demand from falling too far.

The problem ahead is that gasoline prices are about to be impacted by higher taxes. In his 2010 budget, President Obama laid out his plans to raise up to $400 billion over the next ten years by getting rid of tax breaks for oil companies. Obama wants to impose a new excise tax on production in the Gulf of Mexico and he also wants to repeal the industry's eligibility for a manufacturing tax credit. Finally, his plan to put a price on greenhouse-gas emissions via the cap and trade proposals is anticipated to push costs up significantly.

What company, and what stock, is the big winner from the fall and rise in oil prices over the past several months? Hands down, the big winner is ExxonMobil (XOM). You can't find another company as well positioned for this environment and so prepared to take advantage of the current turmoil to increase its profits in the future.

For most individuals and companies, falling oil prices are a mixed blessing. That's because what the slowing global economy gives in the way of falling demand for oil and lower energy prices it takes away in the form of slumping sales and plunging profits.

Almost all of us, for instance, are paying less to fill up the tank or to heat a house, which is great as long as the recession hasn't cost us our jobs. Airlines, to take an example from the business sector, are glad to see their fuel costs plunge, but they aren't exactly ecstatic about slumping passenger miles. Lower fuel prices helped Continental Airlines (CAL) and AirTran Holdings (AAI) post quarterly results above Wall Street estimates, despite lower traffic and falling demand.

Still, the call on crude is a difficult one, with integrated oil companies trying to guess ahead at both potential demand and the price per barrel while making their production schedules. Chevron (CVX), for example, has announced cost cuts, yet still sees production growth for this year; while ConocoPhillips (COP) has stated it intends to keep production steady and BP PLC (BP) will keep its spending level. Another major player, Royal Dutch Shell, said it might benefit from lower costs in its Kashagan oil fields -- a potentially significant savings.

Investors should keep in mind that Exxon is still a dominant player even among the big oil companies. It has nearly three times the market cap of even the other oil giants, but it is hardly a lumbering, stumbling giant. The company is still in the mix of all phases of upstream and downstream operations, and its portfolio of exploration and production projects should make it able to continue to weather these lean times. It already has.

A hedged play on Exxon that allows for some nice profits with decent downside protection would be a call calendar spread. Look at selling an October 65 call while simultaneously buying a January 2010 50 call for a net debit around $11.25. If all goes well, the trade has a potential return of just over 33%.

This is a very bullish play on XOM. The stock has to fall less than 3% to be below the sold call strike price, but as long as it stays above 50 you still have options. If the stock is below 65 at the October expiration, you can sell another call and bring in more cash. This can be done over and over until the January 2010 expiration when the trade has to be closed.

This aggressive trade is not for everyone. You should be certain you understand the risks and reward before you enter any trade. If the trade does not fit into your personal goals and tolerances, then stay away; but if it does, then have some fun with it.

If you have had any additional thoughts, ideas or insights into the future of energy in this country, please e-mail me at vwisemann@InvestorsObserver.com.