Trading Caps Could Hurt Exxon: Is It Safe?
"Is It Safe?" looks at a company's risk-and-reward potential. Find out if your stocks are safe on Tuesdays and Thursdays.
IRVING, Texas (
) --
Exxon Mobil
(XOM) - Get Report
, 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) - Get Report
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.
The CFTC has been holding hearings to discuss restricting energy positions. In addition to the macroeconomic implications of high crude prices, it's in Washington's best interest to keep gasoline affordable for consumers.
While trading limits could damp crude prices, so could competition from cheaper natural gas, whose reserves are expanding because of shale discoveries and new extraction technology. Natural gas fetches about $3 for a thousand cubic feet, one-fifth of its peak price.
Exxon has been expanding its natural gas operations. Last month, the company agreed to supply liquefied natural gas to
PetroChina
(PTR) - Get Report
for 20 years. The natural gas will come from a
Chevron
(CVX) - Get Report
venture in Australia that's 25% owned by Exxon.
The shift to alternative energy could also pose challenges for Exxon. The U.S. government has put about $50 billion of stimulus funds toward efforts that "green the grid," along with $20 billion in energy-related tax breaks. Federal intervention in the auto industry has resulted in a rapid transformation of car design, with 2010 models, like the Chevrolet Volt, expected to achieve fuel efficiency of 200 miles per gallon.
We rate Exxon "hold." At the moment, there are too many uncertainties looming over this oil giant.
-- Reported by Jake Lynch in Boston
.
TheStreet.com Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.
Follow TheStreet.com on
and become a fan on
