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Tuesday, October 10, 2006

Does Goldman's Downgrade of Exxon Hint at a Bottom?

Stock Tickers: XOM, DVN, APC, MUR, VLO

Are oils trying to put in a bottom? If you believe analyst calls can be a reverse indicator then maybe so.

Last week we covered Valero (VLO) after it came clean and issued lower guidance. What we discussed was that this may actually be ok for the group since the level that they were coming out with were actually quite generous for earnings multiples. There have even been the LBO rumors out there on Valero.

Obviously oil stocks are going to be at the mercy of oil price directions, although the oil has been feeling like it wants to find some equilibrium for the time being. Has it? With Iran rattling their sabres and with North Korea testing nukes and with Nigerian issues and with OPEC promises to cut production and with speculated "fake production cuts" it is just impossible to know. It may even depend more on commodity funds and their inflows or outflows of investor capital than anything, so who really knows what "equilibrium" is in oil prices.

This morning Goldman Sachs issued an oil patch coverage swap where it downgraded Exxon Mobil(XOM) and Murhy Oil (MUR), and Murphy was another that gave guidance last week. The ratings went from Buy to Neutral. It raised the ratings on Anadarko (APV) and Devon Energy (DVN) from Neutrals to Buys.

Maybe there was justifcation in the upgrades if everything stabilizes. Afterall, DVN had fallen from over $70.00 at the start of September down to the low $60's and APC had fallen from $50 at the same period down to under $42.00. Recommendations like that actually seeem to make sense in a stabilization trend, but with XOM having fallen from $70+ to $64 before some stabilization and with MUR having fallen from $57 to as low as $45 recently you just have to wonder.

Valero (VLO) has also been acting like it wants to stabilize afterfalling from its $67+ highs to around $50 recently. It is quite frequent that analysts come out and catch the bottom with downgrades, and that keeps things par for the course. This was on commodity exposure and chances for a recovery in Q4 and Q1 2007. We'll see if this ends up being a near-term bottom or not, and even companies to the tune of Goldman Sachs may not be immune from an analyst being a reverse indicator at a near-term bottom.

Always remember that regardless of P/E multiples shoing 6 times earnings or any other easy investor metrics, these are going to follow the larger trend of oil prices. So if there is a substantial drop in oil prices again, then you know which direction these would likely follow. Here is how all these stocks are faring today after the call:

Tick Price Change Mkt Cap
APC $42.36, +$0.73; $19 Billion
DVN $63.30, +$1.75; $28 Billion
MUR $48.20, -$0.13; $9 Billion
XOM $66.75, +$0.20; $396 Billion
VLO $50.10, +$0.27; $30 Billion

Jon C. Ogg
October 10, 2006
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