eyeQ: massive energy company’s disconnect from oil price
Experts at eyeQ have used AI and their own smart machine to analyse macro conditions and generate actionable trading signals. This time it explains what’s wrong with this oil company.
30th July 2024 10:16
by Huw Roberts from eyeQ
"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ
ExxonMobil
Trading signal: long-term strategic model
Model value:$107.3
Fair Value Gap: +8.6% premium to model value
Model relevance: 76%
Data correct as at 29 July 2024. Please click glossary for explanation of terms.
Exxon Mobil Corp (NYSE:XOM), the largest publicly traded integrated oil and gas company, reports second-quarter earnings this Friday. The company appears poised to report a sequential earnings decline over the last quarter, based on analyst consensus estimates. The stock is currently 3% below its all-time highs, seen back in April. We also note that Exxon’s 12-month forward price/earnings multiple is close to a three-year high. In other words, the expectations’ hurdle for the stock is likely set quite high rather than low.
However, over July crude oil has sold off about 5%, around concerns on Chinese demand. China’s price action has been poor recently after some bad GDP prints and it has started to spill over into the broader macro complex. Only earlier this month, the International Energy Agency (IEA) downgraded global oil demand forecasts for 2024 and 2025.
Global growth, and in turn crude oil, needs China’s economy to perform and that’s not really happening right now. China remains in a balance-sheet recession. eyeQ’s model for Exxon highlights global economic growth expectations and crude oil both being among the top macro drivers.
We should also bear in mind the downside risks for crude oil because of potential Trump policies. In a scenario where the US imposes an across-the-board tariff on goods imports, that would likely hit oil prices into 2025.
The eyeQ machine is suggesting here that Exxon is over-extended in light of the drop in crude oil. Exxon is rich to eyeQ model fair value and macro relevance is high at 76%. In percentage terms, it’s about 8.5% rich to our model. See the chart below.
This dislocation is large relative to history. On the last two occasions Exxon was this extended (September 2023 and April 2024) it was a time to be reducing positions in the stock, not adding. History may well repeat if crude oil remains under pressure and earnings this Friday fail to excite.
Source: eyeQ. Past performance is not a guide to future performance.
Useful terminology:
Model value
Where our smart machine calculates that any stock market index, single stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.
Model (macro) relevance
How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.
Fair Value Gap (FVG)
The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.
Long Term model
This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.
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