Exxon Mobil Corporation’s Risk Associated With Interest Rates, Changing Prices and Self-Insurance
The management report included in the company’s annual report for the year ended December 31, 2019, provides its assessment of various risks that affect ExxonMobil’s operations and profitability. The report indicates that the company’s business results could be negatively affected by adverse changes in interest rates that could increase its borrowing cost. It is stated that ExxonMobil was exposed to interest rates on its short-term borrowing and also its floating-rate long-term debt. However, the management claimed that even a one percent change, which was very unlikely, would not have a material impact on the firm’s profitability. The company often manages this risk by carrying out hedging activities, including derivatives.
Moreover, the management’s assessment of changing prices highlighted its potential significant effect on the firm’s profitability. Since the company’s business is based on commodity trade, its earnings can change sharply with unfavorable price movements. The company operates at an international level, which means that the decline in the global demand for fossil fuels can cause gas and oil prices to fall. It can have a devastating impact on its upstream and downstream operations and financial position. The company deals with price risk by using commodity-based contracts and derivatives.
The enormous size of ExxonMobil’s operations and significantly large value of its business assets make it impossible to cover all aspects of its operations through comprehensive insurance contracts. The possibility of high risks in the company’s business implies that it faces a high degree of potential financial risk as insurance companies applied policy limitations to cover all financial losses that it may incur.