1. Given the earnings-related price declines in both Chevron (CVX) and Exxon Mobil (XOM) on Friday, I wasn't surprised to receive several follow-up emails to my recent posts addressing each company's dividend policy (although there was notably more interest in CVX than XOM). Most questions revolved around whether I thought the worst had been seen in the oil sector, and, more specifically, in these two individual names.
Both XOM and CVX are doing well in their downstream operations, but the massive decline in light crude oil has wreaked havoc on their upstream businesses. And unfortunately, the success in the downstream business cannot make up for the weakness in the much-larger downstream division. The real question is whether you believe crude oil is going to remain at a subdued level for the foreseeable future. If the answer is yes, then the struggling downstream divisions at these companies will likely make it difficult for price to move higher in any sort of meaningful way.
I realize everyone wants to nail the bottom in a stock or sector trapped in a bear market, but that's nearly always impossible. I haven't a clue whether we've seen the lows in these stocks, and frankly, neither does anyone else. We can analyze these companies based on current data. But unless you have a reliable method of determining where light crude oil will be trading in 12, 24 or 36 months, or what China's (state-declared) growth rate will be, or how Iran's future oil supply will affect global markets, I believe we need to treat the current decline in energy stocks as a protracted bear market -- rather than a run-of-the-mill correction.
Without a strong opinion on where crude oil will be in two or three years (or the concerns surrounding China and Iran), I'm forced to look back at prior bear markets in oil stocks and how they ultimately played out, and compare them with where we are now. Both XOM and CVX topped out around late-July 2014. Since that time, XOM has declined roughly 24%, while CVX is off around 34.5%
The two previous periods that seem most comparable to present day are the spring of 1973 to October 1974, and late 1980 to the fall of 1982. During those two time periods, XOM declined approximately 47%, and CVX declined between 55% and 59%. Based on these figures, I don't think it's unreasonable to suggest that the two stocks still have the potential to decline much further.
The most bullish scenario would require one to believe the current decline in crude is just about over, and, rather than oil coming to rest near fifty dollars for the foreseeable future, that it will, in fact, stage a meaningful comeback. If you believe this, you might consider that CVX has generally declined between 33% and 37% during more run-of-the-mill corrections.
For reference purposes, I am not considering the declines in 1987 and 2008, since both, in my view, were more akin to a crash -- not a protracted bear market.
The bottom line is that I believe investors that are following a dividend-growth model should track both stocks closely. Especially those that currently have little in the way of energy exposure. That said, if you are a trader -- and not simply a day-timeframe scalper -- I would continue to avoid these names as they're unquestionably trapped in higher-timeframe bear trends.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at email@example.com or posted to my twitter feed @ByrneRWS