Analysis Of Exxonmobil

Introduction

In every industry, there are a lot risks that cause many uncertainties regarding the financial security of different corporations; risks in the short run and in the long run. For that reason, large corporations often allocate a large amount of capital into competent risk managers who are tasked to identify the different risks faced by the company, and to develop efficient risk managing or hedging techniques to handle them.

In this report, the risks faced by energy companies will be studied. More specifically, this report will focus on the world's largest publicly traded international oil and gas company: ExxonMobil.

First, the main risks faced by ExxonMobil will be outlined, and then the risk management and hedging techniques of the company will be briefly explained. Finally an evaluation and recommendations for ExxonMobil will be provided as a conclusion to the report.

Risks Faced by the Company

The financial and operating results of every company in the oil and gas industry, including ExxonMobil, are subject to a variety of risks. The first risk factor to consider is supply and demand. The oil and gas businesses are fundamentally commodity businesses, which means they can be significantly affected by changes in oil, gas and petrochemical prices (ExxonMobil, 2014). ExxonMobil is also exposed to risks such as economic conditions: it is found that the demand for energy and petrochemicals is closely related to economic growth rates (ExxonMobil, 2014). Therefore, recessions or other periods of low or negative economic growth will generally have a direct adverse impact on the company’s performance (ExxonMobil, 2014). In addition, due to concern over the risk of climate change, a number of countries have adopted, or ar...

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...ging goals. Creating a proper risk management policy should be consistent with the company’s hedging objectives (Corley, 2010). Moreover, the senior managers should fully understand the company’s hedging strategies. Hull (2012) mentioned that many nonfinancial companies admit to not understand their trading strategies, which leads to a big loss. Thus, companies must have their own capability to value a hedging instrument, which is a method to make sure that instrument has been understood. Another important recommendation to ExxonMobil should be to continue avoiding speculations. Nonfinancial companies should never consider a hedging strategy as a source of income (Corley, 2010). Last but not least, oil companies should reconsider some of their hedges to avoid over-hedging, which we mentioned before, in order to avoid the extra risk brought by their excess contracts.