Trading Caps Could Hurt Exxon: Is It Safe?

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IRVING, Texas (TheStreet) -- Exxon Mobil(XOM Quote), the second-worst performing stock in the Dow Jones Industrial Average this year, is tempting value investors with its 12% drop. While oil might seem like a sure bet in a crude-dependent world, Exxon is vulnerable to regulatory reforms, cheap natural gas and competition from alternative energy.

The Commodity Futures Trading Commission, or CFTC, is expected to unveil new trading limits this fall aimed at reducing the influence of energy speculators and, presumably, lowering the cost of oil. While Goldman Sachs(GS Quote) expects oil prices to rise about 30% in the next year regardless of regulation, Germany's Commerzbank predicts that prices will decline by the same amount if new caps pass. Any price regression would dampen Exxon's business prospects.

After posting a record annual profit last year, Exxon has suffered from weak demand and plunging prices. The cost of crude has fallen by half in the past year as the U.S. economy struggles to recover from a brutal recession. While a rebound could lift demand, competition from natural gas and alternative fuels could complicate matters.

Second-quarter net income at Irving, Texas-based Exxon plummeted 66% to $4 billion, or 81 cents a share. The company's net margin, a key gauge of bottom-line performance, declined from 9% to 6%. During last year's lucrative third quarter, when crude prices hit a record $147.27 a barrel, its net margin touched 12%.

Leaders of the Group of Eight nations and the Organization of Petroleum Exporting Countries, or OPEC, want to curb the influence of hedge funds and financial firms by limiting the size of their trades. Oil futures were originally intended to reduce price uncertainty for commercial traders, such as airlines. But today, many energy investors are speculators, with no plans to use the oil they buy. G-8 and OPEC leaders blame these speculative purchases for last year's ballooning prices, and the painful bust afterward.