Sell Exxon Now: Too Much Uncertainty Exists In Iraq

| About: Exxon Mobil (XOM)

Exxon (NYSE:XOM) shares are currently trading around $86. Its last 12-month earnings per share of $8.28 places its shares on a trailing price-to-earnings ratio of 10.32. This compares with the sector average of 11.68. Analysts’ mean expectations are for the shares to rise to a price of $91.32 over the next twelve months, and they have risen from a 52-week low of $67.03 as better-than-expected economic growth figures from the United States have given big oil companies an extra push.

The withdrawal of US troops from Iraq gave further impetus to an improving atmosphere for business, though this also poses security problems for XOM as it seeks to develop oil fields in the south of the country. Already insurgency against the current Iraqi government has increased, and it seems that not a day goes by without news of further bombings in the country.

An increase of production from these oil fields is expected as they are further developed, though such plans could come under question if security problems spread. Perhaps this is why XOM has recently signed an agreement with the more northerly region of Iraq’s autonomous Kurds.

Iraq’s Parliament speaker, Osama al-Nujaifi has described this deal giving XOM the right to explore for oil in territory that is disputed between Iraq and the Kurds as 'an unacceptable violation of administrative boundaries’. It may be that the agreement could pressure the Iraqis into withdrawing existing agreements with XOM, though this is, perhaps, unlikely as Iraq needs the investment that XOM has promised in order to deliver oil production that will be the bedrock of economic growth in the country.

With the final withdrawal of US troops from Iraq, Iran has been flexing its military muscles. Naval exercises in the Strait of Hormuz, and testing of surface to surface missiles have flown in the face of international sanctions against the country, which is a would-be nuclear power. Iran has warned against the United States returning an aircraft carrier to the area.

An alliance between Iraq’s Shiite controlled government and Iran (not beyond the realms of possibility) would be bad news for XOM, and may be followed by a withdrawal from the region to rival the troop withdrawal. Though it has to be hoped that such a scenario does not happen, the risks should be considered. If political differences in the region were to spread further – for example to include the Sunni dominated Saudi Arabian neighbours of Iraq – then ramifications for the oil price might be felt for years to come.

Whilst such fears would point to a higher oil price, and on the face of it good news for companies such as XOM, XOM could lose production from the area and demand be adversely affected by higher oil prices dampening economic recovery.
Another cloud on the immediate horizon is the worsening situation in Europe, where debt problems persist and are now being tackled by increasingly strict austerity measures. These will inhibit any economic growth in the region (the world’s largest trading zone),whilst dampening the oil price will lead to lower sales for XOM.

For now, at current levels, the risks to sustained world economic growth and increasing political uncertainty in a key region for XOM’s production capacity tend to outweigh potential upside. Thus, I disagree with big buyers like John Hussman. With the shares near 52-week highs, and only around 12% below five-year highs, it looks to be time to take profits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.