As oil broke above $80 on Thursday, I went and looked at ConocoPhillips (COP) and Exxon Mobil (XOM). They are an interesting case study in two companies who basically do the same thing, but their debt levels change how their stocks behave. I thought this example was interesting because many times people think of COP and XOM interchangeably, when they actually have different characteristics.
Of course, COP and XOM are very correlated, but if you look at both stocks over the last couple of years, you see that COP has been much more volatile than XOM. They both peaked in 2008 at about $96. However, when oil prices sold off and corporate debt was viewed as risk, COP sold off much harder than XOM. COP has a one-year low of $34.12, and XOM has a on- year low of $61.86.
Why would this happen? COP carries about $30 billion in debt, while XOM carries about $9 billion. This is a big difference because XOM has an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of more than double COP. Basically, COP has triple the debt and less than half the earnings.
Equity holders get whats left after interest payments. That means when oil prices are high, COP shareholders will have more equity (interest payments are fixed, while revenue goes up significantly), but when they are low, there will not be as much for equity holders (interest payments are fixed, but revenue declines significantly). This is why COP’s underlying equity moves more than XOM’s around oil price changes.
Because of this, if you are looking to trade one of these stocks based on your views of the price of oil in the short term, I would expect COP to move more than XOM. The options market gets this, so COP implied volatility, and thus premiums, are currently higher than those of XOM.
Theoretically, if you thought oil prices were not going to move, you might choose to sell premium in COP, since it is currently higher than XOM. Conversely, if you thought there was going to be an exceedingly large move higher in oil, you might consider buying COP calls rather than XOM.
COP is currently trading at $51, and XOM is currently trading at $74. When oil was at its highs, both of these stocks traded near the same price. If you thought crude was going back near its previous highs, and the stocks would behave the same way they did last time, COP should have a lot more room to the upside as it moves to catch up with XOM. Please be cautioned, however, that in any of these scenarios, past performance of both stocks is not an indication of future results.
There are a lot of other oil companies out there that are more leveraged than COP. It is a huge company that is vertically integrated, where others are just in Exploration and Production and therefore really exposed to the price of oil.
Photo by selva
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