XOM in Spread Squeeze; PTR protected by China Government

The market plunge today resulted from trader panic over more bad news about credit (surprise!), the Fed’s reservations about further cuts (surprise!), and Exxon’s missed numbers (surprise!). Surging oil prices and profit declines by the big Oils would have been enough on their own to cause panic among market movers. It is hard to understand why the obvious always catches the markets by surprise, but it sure does. Trader concern is largely knee jerk, and worry about Exxon is hardly rational; the company’s dip in profits will shake out in a relatively short time as the “crack” or spread between producing and selling widens. This is an opportunity for the investor, not a time to short or run for cover.

XOM share pries dropped almost 3.8% following their announcement of a 10% decline in third quarter profits. Even Fast Money got this right last night. It doesn’t take a genius to realize that increased prices for crude and steady or declining prices for gasoline means trouble in the short term for companies like XOM that both produce and refine. But Exxon is a huge company with a net income in the third quarter of $9.4 billion – yes that’s net and billion. It is also a company that continues to invest heavily on capital and exploration ($5.4 billion this quarter) and well as (and this is the most telling strength) continues to buy its shares back, i.e., to invest in itself ($24 billion worth of shares in the first three quarters). And when one realizes that fuel costs will rise and oil prices will decline somewhat, Exxon should do very very well very soon. Do not cry for Exxon my friends.

China’s government saw this coming and just today abruptly raised fuel prices to ease the spread squeeze between production and fuel charges. While PTR dropped by 5% today, it too was caught in the hysteria here and in our downward momentum. Tomorrow, it will regain the 5% lost and probably add another 5% on the upside. So too will XOM do well.

Both these companies are buys. XOM is a particularly strong buy under $90 a share; it closed today at $88.50.