The Run-Down of Oil Earning

XOM, VLO, MRO All Beat Estimates

Dear Bottarelli Research Member,

Some of the biggest names in the oil sector are out with earnings this morning — and the vast majority of companies are beating the reduced earnings estimates. For example:

Exxon Mobil (XOM — NYSE) reported fourth-quarter earnings of $10.25 billion, or $1.76 a share. Although this was down from a year-ago profit of $10.71 billion, or $1.71 a share, the average estimate of analysts polled by Thomson Financial was for a profit of $1.51 a share.

Valero Energy Corp. (VLO — NYSE) reported fourth-quarter earnings of $1.11 billion, or $1.80 a share. Although that was down from a year-ago profit of $1.35 billion, or $2.06 a share, the average estimate of analysts polled by Thomson First Call was for a profit of $1.37 a share.

Marathon Oil Corp. (MRO – NYSE) reported fourth-quarter net income of $1.08 billion, or $3.06 a share. Although this was down from a year-ago profit of $1.27 billion, or $3.43 a share, the average estimate of analysts polled by Thomson was a profit of $2.25 a share.

As you know, the mild weather we experienced in the forth quarter drove oil prices down under $50 a barrel — and many analysts predicted that these reduced price levels would serve as a big-time drain on the earnings of companies like Exxon, Marathon, Chevron, ext. In fact, since investors were so used to blowout earnings from these names, there was a heightened level of downside fear going into these announcements. But as I write you today, it’s clear that fear was overblown. In fact, the reduced earrings expectations are actually helping the big oil names!

A good example of this is yesterday’s trade in Hess Corp. (HES – NYSE). As you know, we entered the HES March 55 Calls (IGG CK) for $1.65 and sold them the next day for $2.20, good for a quick 33% gainer. The upside spike in HES was due to them reporting earning that were down from the year-ago period — but well above the consensus estimate — which is literally the same situation we have today in XOM, VLO, and MRO (as noted above). So what I’d like to do is let the early-morning action in the oil patch sector sort itself out — and then I’ll look to enter a new upside oil play (similar to HES) on the best possible candidate. So stay tuned for that.

In the meantime, Titanium Metals (TIE – NYSE) is roaring back into play this morning, as the TIE February 30 Calls (TIE BF) that we’re holding with a cost basis of $2.00 have now traded as high as $2.20 in early action — so the position is finally breaking into profitability! Given the road we’ve taken on this play, I’m willing to take any sort of profits off the table, even if that means a modest gainer.

PLAY: Depending on your entry price, sell your TIE February 30 Calls (TIE BF) at a profit, good for the rest of the week.

I’ve also received some emails from Charter Members saying that they continued to hold their Archer Daniels Midland March 35 Calls (ADM CG).If that’s the case, then you’ll be quite happy today — as ADM reported a 20% pop in second quarter profits — driven by a jump in their corn-processing profit. On the news, ADM is roaring higher, and these calls are trading for $1.60 per contract. Given our original $0.95 entry price, that’s a nice 68% gainer. If you’re still holding this position, then lock in your profits now!

And finally, we have Google (GOOG – NASDAQ) which is not giving us the big upside or downside move we were looking for. As I write, GOOG is down $3.00 after yet another blockbuster earnings report — which signals that the upside momentum could be leaving the stock. As you know, our combination of March calls and puts was designed to work if GOOG moved up or down $30 in today’s action, but today’s small $3.00 move is certainly not giving us what we need. So for now, let’s utilize our March expiration and maintain each side of the trade for any upcoming moves.

And one final note: We’re now at 137 days (and counting) since the Dow has dropped over 2% in one day — making this the longest calm-period in history. This is why I still think it’s a good idea to carry some sort of cheap downside protection. When its’ time to enter a new round of DIA puts, you’ll be the first to know. Until then…

Lock and load!

Sincerely,