Higher Oil Prices Could Boost ExxonMobil's Profits By $5 Billion in the Second Quarter. Here's What Investors Need to Know.
Key Points
ExxonMobil is a giant energy company, so its earnings are directly impacted by rising and falling oil prices.
The second quarter should be a good one for Exxon, but the third quarter is still a question mark.
ExxonMobil (NYSE: XOM) provided additional information about its second-quarter operations to help Wall Street prepare for its actual earnings release. That isn't a normal event, but then these aren't normal times in the energy sector. Here's what investors need to know.
Oil: Big changes in a short period of time
The geopolitical conflict in the Middle East broke out late in the first quarter. The price of oil rocketed higher, but the financial benefit was minimal in the first quarter. The second quarter will see most of the impact from the energy price spike caused by the conflict. Exxon's pre-earnings update is meant to clarify the potential impact, with some estimates suggesting it could add as much as $5 billion to the company's bottom line.
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That said, investors need to take the update with a grain of salt. Oil prices have already fallen materially from their peak levels. So the second-quarter benefit could be huge, but at this point it is hard to get a read on what that might mean for the third quarter. This speaks to the real issue investors need to keep in mind when they buy an energy stock like ExxonMobil.
Energy prices are volatile, hard stop
The current geopolitical conflict is headline-grabbing, so investors are closely watching its impact on oil and natural gas prices. However, the energy sector has a long history of volatility. The current price swing isn't an outlier; it is the norm. That means that Exxon's earnings swing isn't abnormal, either. It is just par for the course.
Exxon is one of the world's largest energy companies. And it has long handled the industry's ups and downs in relative stride, highlighted by decades' worth of annual dividend increases. It also has a peer-leading debt-to-equity ratio of roughly 0.2x, so it is financially prepared to deal with falling energy prices. It is a through-the-cycle energy stock for those who want to buy and hold. One quarter of good earnings shouldn't be the driver of your investment decision.
Buy Exxon with your eyes wide open
That said, Exxon has been very clear about the current energy market. Despite the pullback in energy prices from their early conflict peak, Exxon doesn't believe oil prices fully reflect the fundamentals of the energy market right now. That hints that oil prices could rise again, even if the conflict comes to a close, which doesn't seem like it is in the cards right now. However, the really important takeaway from all of this is that oil prices are volatile, which means Exxon's earnings will be volatile, too.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.