Exxon Stock Price Just Dropped 5.7% in Pre-Market — A Ceasefire Did What Sanctions Never Could

This week, Exxon Mobil’s stock was already down almost 6% in pre-market trading before the majority of Wall Street had finished its first cup of coffee. Neither an unexpected regulatory decision nor a poor earnings report was the cause. There was a cease-fire.

The narrow Strait of Hormuz, through which a large amount of the world’s oil flows, has reopened to safe passage as part of a two-week cease-fire between the United States and Iran. The news caused Dow futures to jump 1,200 points. After sitting above $115 a few days earlier, oil prices fell below $95 per barrel. Additionally, Exxon, which as recently as March 30 had quietly ridden the geopolitical tension premium to a 52-week high of $176.41, found itself on the wrong side of positive global news.

Exxon Mobil Corporation

That has a slightly ironic quality that is worth pondering. Energy stocks have been one of the few safe havens in a volatile market for weeks as rising oil prices brought on by Middle East tensions have been squeezing household budgets and shaking inflation expectations. The steady increase in Exxon’s stock was indicative of a world where pricey oil seemed to be the norm. Then diplomacy took place, and the trade that had appeared so easy was almost immediately reversed. The peculiar reality of owning an energy major is that your stock occasionally gains from circumstances that are actually detrimental to nearly everyone else.

On April 7, the price of Exxon’s stock closed at $163.91, up slightly for the day and appearing stable. It was at $154.46 by the pre-market session the following morning. The events taking place in a small body of water thousands of miles away from Exxon’s headquarters in Irving, Texas, are almost solely responsible for that swing of almost ten dollars in less than twelve hours. It serves as a stark reminder that despite Exxon’s sophisticated balance sheet, which includes $323.9 billion in yearly revenue, a P/E ratio of about 24, and a dividend yield of 2.51% that investors have relied upon for years, the company is still heavily dependent on uncontrollable factors.

The context underlying the price movement is what makes the current moment truly fascinating. According to reports, Exxon lost about 6% of its worldwide production as operations in the Middle East were disrupted by the conflict. For a business of this size, that is a substantial amount. You can see how aggressively the market priced in sustained high oil prices and how quickly that calculus can change by looking at the fact that the stock continued to rise toward $176 even as output declined.

The calculations for Exxon’s short-term profits become more difficult because oil is currently below $95 and could drop further if the ceasefire is maintained. The question of what oil averaged during Q1 will be more important than nearly everything else on the income statement when the company reports on April 27.

Whether the ceasefire will last long enough to fundamentally alter the oil market is still up in the air. Excessive optimism is not typically rewarded in Middle East diplomacy history, and two weeks is a short window. The risk premium that had been built into energy stocks over the previous few weeks has been compressed by investors’ apparent belief that the worst-case scenario has been eliminated, at least for the time being. It is another matter entirely if that belief turns out to be enduring. With a beta of only 0.29, Exxon’s stock typically moves slowly in relation to the overall market. It has been the exception rather than the rule this week.

There’s a sense that Exxon’s long-term investor base, which includes pension funds and income-focused retirees who have owned XOM for decades through oil booms and busts, will view a $154 pre-market print as more of an opportunity than a cause for concern. There has been no change in the dividend. On a trailing basis, EBITDA is still higher than $62 billion.

For an industry that has historically heavily leveraged itself, the balance sheet’s debt-to-equity ratio of less than 17% is conservative. Investors typically follow Exxon’s lead because the company is not prone to panic. Although that number was calculated prior to the ceasefire announcement, the 1-year analyst price target, which is currently at about $160, indicates that the consensus opinion hasn’t changed significantly either.

What this week says about the connection between geopolitics and the energy sector is the deeper story here. When global flashpoints get hot, oil companies like Exxon have always priced in a risk premium; it’s practically built into the business model. On the other hand, peace—or even a brief form of it—tends to penalize trade. The decline in Exxon’s stock price was not caused by the company’s actions. It collapsed because the world became somewhat less dangerous for at least two weeks. It’s not common to have to explain that to shareholders, but here we are.