With Big Oil Stocks Riding High, It's Time to Take Profits
Exxon Mobil (XOM) shares are now selling near $87, just below where they were during the 2008 oil price spike, and the world's largest oil company is expected to post earnings per share of $2.25 when it makes its next quarterly report. That's up from an EPS of $1.33 last year. Chevron (CVX) and ConocoPhillips (COP) are also trading near multi-year highs. Even BP (BP) shares have done well recently, although its most recent earnings were helped by asset sales.
But it may be time to sell your shares in the big oil companies. They face a growing number of challenges which are likely to more than offset the rise in crude prices which have pushed their stock prices higher.
The most obvious source of risk to big oil stock values is that the price of crude could drop.
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Brent crude is now selling above $120 a barrel. If demand slackens in China, or there's an increase in exports from OPEC -- particularly Saudi Arabia -- prices could go into a tailspin. Also, given that much of the current run-up has been blamed on the strife in Libya, Syria and other parts of the Middle East, if violence in the region settles down, fears about interruptions in crude production will dissipate.
New taxes may also threaten big oil's profits. Windfall profit taxes have been levied in the past, and President Obama recently suggested that Congress should repeal tax breaks for oil firms. Some Republicans are not convinced that's a good idea, saying that lowering profit margins at oil companies could cost American jobs. But oil company profits are an easy target for politicians. Americans are already deeply concerned about gas prices, and Congress will face an angry electorate in 2012 if gas remains high.
Oil stock values could also take a hit from increased costs related to oil exploration. High crude prices often lead companies to boost their exploration and drilling activities. However, since many of the untapped large reserves are in deep water or north of the Arctic Circle, the costs of attempting to exploit these new sources could be higher than in the past.
Exxon's share price is up 54% from its 52-week low. It's time to take profits.
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