Exxon Mobil Corp (NYSE: XOM), in a regulatory filing, revealed that it will end the exploration and research joint ventures with Rosneft of Russia due to the expanded US sanctions. The company stated that it would unwind from the joint venture projects this year. As explained below, the withdrawal will not monetarily affect the company in a big manner. However, the sentiment has turned bearish towards the stock of Exxon. Therefore, we can expect a short-term decline in the stock of Exxon Mobil.
The world’s largest publicly traded oil company expects to record an after-tax loss of $200 million due to write-offs related to the deal. It is a minuscule amount, compared to Exxon’s FY17 profit of $19.70 billion. Notably, Exxon has spent about $700 million drilling a deepwater well in Russia’s Kara Sea.
Exxon’s hopes of realizing huge returns from drilling wells in the energy-rich Russian Arctic have crashed with this exit. The deal with Rosneft was signed by Rex Tillerson, ex-Chairman and CEO of Exxon. Tillerson is currently the US Secretary of State. At the time of signing the agreement, analysts believed that Exxon’s technical expertise combined with Rosneft’s access to the Russian Arctic region would prove beneficial to each other commercially.
Following the Russian invasion of Ukraine and annexation of Crimea, the US and European Union slapped sanctions affecting the oil and gas sector. The sanctions did not hamper existing deals, but prohibited business with Igor Sechin, CEO of Rosneft. Tillerson had close ties with Igor Sechin, an influential oligarch in Russia. Exxon’s request for a waiver from the sanctions was not granted. Still, Exxon went ahead and signed a few more deals with Sechin in 2014. In doing so, Exxon was fined $2 million by the US government. The Irving, Texas-based company filed a lawsuit requesting the court to overrule the fine.
Following the alleged interference of Russia in the 2016 US Presidential elections, the US expanded its sanctions. The sanctions, however, will not stop Exxon from entering into other overseas deals. In a way, Exxon could gain from the withdrawal as crude oil inventories continue to remain above the five-year moving average. Furthermore, several OPEC members, including Kuwait and Iran, are planning to raise their production in the months ahead. The oil rig count in the US is at its two year high. Therefore, expansion in the Russian Arctic may add to the oil glut.
Additionally, Exxon has plans to invest more than $50 billion over the next few years in the US to increase production. Considering the recent tax overhaul, it may prove to be more profitable in the long-run. However, fundamentally, in the short-term, the withdrawal from Russian projects is expected to keep the stock bearish.
Technically, the stock is facing resistance at 80. Furthermore, the momentum indicator is declining with a reading below 100. That indicates weakness in the stock of Exxon. On the downside, the next major support exists at 69. So, it would be advantageous to go short in the stock at the current levels.
Alternatively, we may mimic a short position in the equity market by investing in a put option offered by a reliable binary broker. The contract should have a validity period of one week and the stock of Exxon should be trading near $77 in the NYSE.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
