ICE profit up; stock drops as some avoid futures

NEW YORK (Reuters) - IntercontinentalExchange Holdings Inc (ICE.N) said quarterly profit rose 58 percent, but its shares dropped after it said clients were increasingly using options instead of the futures that trade on the exchange.

Clients are still trading ICE energy futures, helping the company meet Wall Street earnings expectations. Record trading volume on crude oil contracts brought the company's second-quarter earnings to $84.9 million, their second-strongest quarter.

But ICE Chief Executive Jeffrey Sprecher said oil companies have turned in greater number to options, which do not trade on ICE, to hedge their exposure, as crude prices fell the last few weeks.

"A lot of people, because of the choppy nature of the markets, have ... hedged those trends in the options market, which is not a market that we have," Sprecher said on a conference call with analysts and media.

ICE's shares fell $10.10, or 10.5 percent, to $86.10 in Monday trading on the New York Stock Exchange, after having risen about 5 percent before Sprecher's comments.

"Overall, I think it was a pretty good report, but the stock has acted poorly mostly because of some commentary on the conference call where management talked about a bearish tone to energy markets," said Edward Ditmire, an analyst at Fox-Pitt Kelton.

Oil futures have slid more than $20 a barrel in three weeks, a relatively steep drop that could make options, which have an up-front fee, more attractive as a hedge.

"IMPRESSIVE GROWTH"

ICE's shares have shed more than 50 percent so far this year, partly on expectations the credit crunch would curb trading by banks and hedge funds, thereby hitting the exchange's revenues.

ICE earned $1.19 a share, up from $53.7 million, or 75 cents a share, in the year-earlier period.

Adjusted to exclude a one-time expense related to ICE's failed bid for Chicago Board of Trade last year, earnings still grew by 40 percent. Chris Allen, analyst at Banc of America Securities, called it: "Impressive growth in any market, let alone in the current environment,"

The CBOT was later acquired by larger rival CME Group Inc (CME.O).

Revenue rose 44 percent to $197.2 million, just ahead of analysts' average forecast of $195.9 million, according to Reuters Estimates. Transaction revenue rose 42 percent in the second quarter, while market data revenue was up 61 percent.

The company partly credited "the entry of new participants in all markets" for higher revenues.

ICE said second-quarter futures volume rose 18 percent to 58.1 million contracts. July volume was up 5 percent from a year earlier, the Atlanta-based company said.

The company also updated its expectations for ICE Clear Europe, a clearing house ICE intends to start next month. Revenue is expected in the range of $20 million to $25 million for 2008, while operating expenses are expected to be between $6 million and $8 million.

SPECULATORS ARE SCAPEGOATS?

Crude oil rose to a series of record peaks in the quarter, helping two of ICE's oil contracts reach record volumes. In volatile periods, futures trading typically picks up as investors hedge more and speculators jump into the market.

In the last few weeks, U.S. lawmakers have debated legislation that would curb speculation in energy markets, a move that analysts say could hit volumes on ICE's U.S. and European futures markets.

Sprecher said legislators often blame speculators for rising prices when "faced with complex market conditions that are not easily explained."

"We believe that ICE's volumes are not the result of a different regulatory regime, nor are they the result of excess speculation," he said.

ICE -- which operates futures exchanges based in New York, London and Winnipeg, Canada -- has made acquisitions that have helped it delve deeper into Europe as its chief U.S. rivals, CME and NYMEX Holdings Inc NMX.N, head toward a merger.

The proposed merger is expected to heighten competition for energy derivatives trading.

ICE said on Monday it expects to complete its most recent acquisition, of Creditex, a processor of credit default swaps, in the third quarter. The company also said it would buy back up to $500 million in shares in the next 12 months.

(Editing by Dave Zimmerman, Andre Grenon, Leslie Gevirtz)