War-Driven Production Disruptions Will Hit Big Oil Giants ExxonMobil and Shell in the First Quarter. Are They Still Worth Buying?
Key Points
Oil prices skyrocketed in the first quarter due to the war with Iran.
Iran caused significant disruptions to the oil market during the quarter.
Damaged facilities and production shut-ins impacted Shell and Exxon in the period.
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Oil prices skyrocketed during the first quarter. Brent oil, the global benchmark, rocketed 94% for its biggest quarterly gain since 1990. That surge in crude prices positions oil companies to reap a profit gusher in the first quarter.
However, not all oil stocks captured the full benefit of higher prices during the quarter. Oil giants ExxonMobil (NYSE: XOM) and Shell (NYSE: SHEL) both experienced disruptions to some of their operations due to the war in the Middle East, which will impact their production during the quarter.
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Experiencing a meaningful disruption
Israel and the U.S. launched military attacks against Iran last quarter. Iran retaliated by attacking ships in the Persian Gulf (effectively closing the Strait of Hormuz) and energy infrastructure in the Persian Gulf, including damaging facilities in Qatar. These attacks against the energy industry are having a direct impact on ExxonMobil and Shell.
Iranian attacks damaged two of Qatar's 14 liquefied natural gas (LNG) trains (representing 17% of its production capacity) and one of its two gas-to-liquids (GTL) facilities. ExxonMobil holds stakes in both LNG trains (34% in S4 and 30% in S6). Meanwhile, Shell is a partner in the damaged GTL facility. QatarEnergy estimates that it will take three to five years to repair the damaged LNG trains and up to a year to fix the GTL facility.
The LNG trains accounted for 3% of Exxon's annual production last year. Additionally, the company experienced production disruptions in the UAE due to the war and the closure of the Strait of Hormuz. Overall, its global oil and gas production will be 6% lower in the first quarter than at the end of 2025. Meanwhile, Shell's production will fall 7% during the quarter due to the impact of the Qatari outages on its global integrated gas business.
Other impacts and offsets
Lower production volumes aren't the only headwinds facing the oil giants in the first quarter. Global oil supply disruptions also affected Exxon's energy product operations (refining and chemicals), resulting in a 2% output reduction in the quarter. Exxon also expects to report a $4.9 billion loss on derivatives due to accounting rules. Meanwhile, Shell expects to take a $15 billion working capital hit.
However, higher oil prices and margins during the quarter will help offset these impacts. Exxon expects higher oil prices to boost its first-quarter earnings by $2.3 billion, while higher natural gas prices will add another $600 million. Meanwhile, analysts now anticipate Shell's earnings to be 10% higher than their initial expectations for the period.
Outages will have a long-term impact
Despite the recent ceasefire, the Strait of Hormuz won't normalize overnight. Additionally, it will be a while before QatarEnergy can repair its damaged facilities. These headwinds will continue to affect Exxon and Shell in the coming quarters. However, energy prices will also likely remain elevated, which should help offset this impact. The likelihood that prices will stay high keeps them looking like worthwhile investments.
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Matt DiLallo 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.
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