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ICE Strengthens Energy Portfolio - Analyst Blog
4/4/2012 7:10:00 PM
Yesterday, operator of regulated futures exchanges IntercontinentalExchange Inc. ( ICE ) announced its plan to launch 26 fresh cleared over-the-counter (OTC) energy products. With the announcement of these contracts yesterday, the company will now be offering over 700 OTC energy contracts and includes more than 608 new cleared OTC contracts since the launch of ICE Clear Europe in November 2008.
Accordingly, the energy contracts include global crude oil and refined petroleum products coupled with North American power and natural gas liquids. ICE also introduced American-style options on futures for heating oil and RBOB gasoline on ICE Futures Europe. All the new swap and options contracts will begin trading on April 30, 2012, subject to regulatory approval.
In an effort to strengthen its market holding, ICE is employing its strategy to launch cleared OTC energy contracts. The company is aware of changing market needs, and attempts to evolve through its hedging strategies, product modification and innovation, in turn supporting volumes and the top-line growth in the long run.
So far, ICE has launched about 35 OTC cleared energy contracts in this year. Last year, the company had formerly announced that it will launch more than 100 OTC products, which will propel growth in the long term. However, about 142 OTC cleared energy contracts alone were launched in the second half of 2011.
ICE launched 68 global OTC cleared natural gas products in May 2011. The company even launched 15 global OTC cleared oil products in April last year, while in February 2011 ICE had also initiated the trading of 21 new gas oil contracts and three new contracts in US thermal coal futures through ICE Clear Europe.
The launch of contracts by ICE in the rapidly expanding energy sphere further boosts the company's competitive leverage in the derivatives and OTC areas, where presence of arch rivals CME Group Inc . ( CME ) and CBOE Holdings Inc. ( CBOE ) provide a challenging operating environment. Particularly, ICE's newly-introduced American-style options on futures for heating oil and RBOB gasoline directly compete with CME Group's NYMEX.
Alongside, the company's recently announced the introduction of non-deliverable forward foreign exchange ( FX ) OTC contracts to its clearing services, an official launch of which is scheduled in the second quarter of 2012.
ICE has been growing through product novelty and expansion in the global emerging markets over the past few quarters. Strong trading volumes in ICE's crude oil and energy futures and OTC markets, new product introduction along with increase in credit default swap (CDS) clearing revenues drove the top- and bottom line in 2011. The strengthening of this portfolio is further expected to drive growth in the future.
Overall, we believe that based on the current volatile macro environment, ICE has a strong revenue-generating product portfolio, high earnings visibility, consistent cash generation, disciplined investment and limited balance-sheet risk. These factors are expected to drive strong earnings potential in the long run. Hence, ICE carries a Zacks Rank #1, implying a short-term Strong Buy rating, while the long-term stance remains Outperform.
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