Why is Exxon Mobil's stock price dropping when the company made such huge profits recently?

[raccoon]

Stock price was $94 in April 2008, now it's around $78.

[rfranklin]

1. Prospects for raping the consumers are waning...

as they see McCain setting in the west.

[polichick]

2. Because the projected earnings were higher - they didn't meet expectations.

[On the Road]

3. My Understanding of Oil Company Stocks

is that prices are based largely on the value of reserves. A fall in oil prices makes the reserves less valuable. The change in price is based on changes in future expectations rather than last quarter's earnings.

[smoogatz]

4. It's all about what analysts expect, not what the company actually earns.

If earnings match or exceed expectations, the stock will go up. If it disappoints, down it goes.

http://www.forbes.com/markets/2008/07/31/exxon-mobil-closer-markets-equity-cx_mp_0731markets40.html

[OwnedByFerrets]

5. I actually heard it said a couple of days ago....

that investors were "disappointed" that the profits werent larger.

[Warpy]

6. Energy stock prices dropped across the board

over the last four months. Part of that might be people taking money out of energy stocks and putting it into energy futures for some fast profits; most of those will end up getting shafted.

As for the rest, I've given up trying to figure out how the market works, I am simply not privy to enough information.

[doc03]

7. I suspect traders are aware gas prices and profits

are going to drop in the near term in order to try and affect the November elections. The traders are probably also pricing in the possibility of a Democratic win in November. Stock and commodity traders are always anticipating what is on the horizon 6 months from now.

[madrchsod]

8. in the first 7 months we have driven-

40 billion fewer miles which equals a reduction of 4%....who has money to travel?

http://www.rockrivertimes.com/index.new.pl?cmd=viewstory&cat=13&id=20787

[leftofthedial]

9. they won't be able to keep screwing us and stealing money,

once their boys are evicted from the white house.

plus, they were expected to screw us out of even more money than they did.

[crazymans economics]

10. It's just more proof...

...that no matter how smart people are, it's all a big gambling game.

People are rolling the dice in trying to predict a non-predictable.

How many of us have that money to play with?

[Lucky Luciano]

11. All about expectations

The day before earnings, XOM was $84.75 or so due to a late day rally in the stock ahead of earnings. Stocks are valued based on the expected cash flows that they generate from now until the end of time discounted to a present value using an interest rate commensurate with the risk of the security. The riskier the security, the higher the interest rate used to discount those cash flows. Given that much of the price of oil and E&P companies is based on the current prices of oil and gas - which are finally showing how bubbly they have become, the risk in E&P stocks and major integrated oil companies like XOM have increased - which means that a higher interst rate would be appropriate for discounting the expected cash flows that XOM will receive in the future. Those cash flows are based on reserves. Those reserves are also dependent on the price of oil and gas. The higher the price, the more technology gets developed to extract the harder to reach oil and the more they will extract the tough to reach oil with current technology - e.g. many of the Canadian oil sand projects - see Suncor (ticker SU in both the US and Canada) or Canadian Oil Sands (Canadian ticker COS-U). Lower the price of oil and these companies are far less incentivized to extract oil from the oil sands. So, future earnings have been discounted more - this leads to the oft talked about concept of "multiple compression" where a stock's earnings today have not changed, but it price got smoked leading to a lower Price to Earnings ratio (P/E) (Another way for multiple compression to happen is for earnings growth to slow since one would be discounting smaller future cash flows).

Not only did the price of oil start to crack before XOM reported on July 31, but people still had high expectations that they would beat analyst estimates for earnings and guide to higher earnings. This did not occur. They missed and did not guide higher - so their growth slowed even though it was a record and it missed estimates - and their is higher risk in the underlying commodities that were driving the stock prices and earnings. All of these things lead to multiple compression and the stock got spanked.

Below is a chart for XOM going back 7 days. The first day has the run up in XOM in anticipation of earnings. The second day is after they missed and the rest is the tumble that ensued as oil tumbled. The second chart is the intraday price of oil over the last 20 trading sessions.

Happy trading...



Oil is fucking volatile - the close to close prices are volatile enough, but the intraday volatility is through the roof - far more than any average stock!!!

[A HERETIC I AM]

12. Predictably esoteric and fascinating answer.

How have you been, Lucky?

Haven't seen you post much lately.

Hope all is well with you.

[Lucky Luciano]

13. I have been jammed......

absolutely jammed....but I am finally taking a nice easy vacation to Hawaii tomorrow to forget about subprime mortgages, the price of oil and all that other crap. Every day in the office is a sprint from 6:45 am to 6:00 pm and I can barely breathe because it is so intense - particularly during this earnings season when the banks were reporting....got a little easier this week, but I still need that vacation badly. Hope all is well on your end.

[Yavin4]

14. Wait A Minute, Obama Is In Hawaii As Well.....hmmm...

conincidence? Or are you going to be his running mate?

[A HERETIC I AM]

15. On the chance you'll see this before you leave, Lucky....

You'll LOVE IT!
(If you haven't been before. Hell, even if you have!)

I was in Maui in 2004. Had a great time.

Pictures.

I wanna see pictures!

Enjoy, man.

PS. If you do go to Maui, take the bike ride down from Haleakala.
http://www.bikemaui.com/

I didn't do it, but my brother and his wife did last year and said it was well worth the early wake-up call (4:00 AM or so)