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Will US and Iran Tension Hurt or Benefit Oil Companies?

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Oil companies have come into focus due to geopolitical tension. The tension got worse after a US drone strike killed Iran’s top general in Iraq. According to a report from The New York Times, President Trump approved the drone strike that killed General Qassem Soleimani. According to the report, the Pentagon said, “Suleimani was planning attacks on Americans across the region, leading to an airstrike in Baghdad.”

In the past two decades, the general led several vital operations for Iranian intelligence and military forces. Now, Iran’s Supreme Leader Ayatollah Ali Khamenei seeks retaliation for Soleimani’s death.

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Energy sector entangled in US and Iran tension

The rising tension has impacted the energy sector. While oil prices have risen, US oil stocks have fallen. The oil price has risen because oil is an alternative safe haven during periods of uncertainty. The tension could impact US oil companies’ operations in the region.

According to an advisory from the US Embassy in Baghdad, “Due to heightened tensions in Iraq and the region, the U.S. Embassy urges American citizens to heed the January 2020 Travel Advisory and depart Iraq immediately. U.S. citizens should depart via airline while possible, and failing that, to other countries via land. Due to Iranian-backed militia attacks at the U.S. Embassy compound, all public consular operations are suspended until further notice. U.S. citizens should not approach the Embassy.”

ExxonMobil’s operations in Iraq

ExxonMobil (XOM) has operations in Iraq. According to a Bloomberg report, there are four US citizens in ExxonMobil’s West Qurna-1 field in Iraq who were asked to leave. The field’s gross production was 465 thousand barrels of oil per day in June, according to a Reuters article. ExxonMobil is the lead contractor in the field. In comparison, in the third quarter, ExxonMobil produced 3,899 thousand barrels of oil equivalent per day.

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According to a CNN Business report, ExxonMobil said that it is “closely monitoring the situation.” The company has processes “in place to provide security to protect its people, operations and facilities.” ExxonMobil also said, “We are committed to ensuring the safety of our employees and contractors at all of our facilities around the world.”

Other oil companies

Chevron (CVX), BP (BP), Royal Dutch Shell (RDS.A), and Eni also have operations in Iraq. While BP has a stake in the mega Rumaila oil field in southern Iraq, Shell has an interest in the Basrah Gas Company. Chevron has stakes in the Sarta block in Iraq. Meanwhile, Eni has a presence in the Zubair field.

According to the Bloomberg report, Eni said that its operations are “proceeding regularly at the moment. However, we are keeping on monitoring the development of the situation in the country.”

According to the same report, Iraq’s Oil Minister Thamir Ghadhban said that “there is no withdrawal from any company.” He also said that the oil fields depend on Iraqi workers. So, the output from the country should be normal.

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Will oil companies gain or lose?

Oil companies could face supply disruptions due to the rising tension. However, since most of the workers in the fields are Iraqi or from other countries, the impact could be minimal.

Even if we assume that oil companies’ Iraq production will be impacted, the output from other regions will continue as usual. So, the overall impact of the disruption on oil companies’ total hydrocarbon production could be lower.

Nevertheless, oil companies could benefit from higher oil prices. WTI oil prices surged by 3.1% on the day of the strike. Also, the prices have risen by 5.3% sequentially. Better oil prices mean higher upstream realization and earnings for these companies, which should have a positive impact on their first-quarter earnings.

Overall, the negative impact of lower oil and gas production could be partly or wholly offset by the positive effect of higher oil prices.

To learn more about the energy sector, read Best Energy Stocks: Target Prices and Upside Potential.

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Oil stocks and markets’ performance

Despite weakness in the oil stocks on January 3, they yielded positive returns in the year. While ExxonMobil and Chevron have risen by 0.8% and 0.4%, respectively, YTD (year-to-date), other global oil stocks like Shell and BP have increased by 2.1% and 2.9%, respectively. Wall Street might expect oil companies to be impacted more by the rising tension than other oil companies.

The US and Iran tension impacted the equity market. The S&P 500 Index (SPY) fell by 0.8% on January 3. However, SPY has risen by 0.2% YTD. The markets have been rising since the trade tension eased between the US and China. However, emerging uncertainty on the US and Iran front could dent the positivity.

Fourth-quarter expectations

Besides the US and Iran tension, companies’ fourth-quarter expectations are impacting oil stocks. Wall Street analysts expect oil companies’ earnings to fall in the quarter. Analysts expect ExxonMobil and BP’s EPS to drop the most by 53% YoY and 33% YoY, respectively. They expect Chevron and Shell’s EPS to fall by 22% and 25%, respectively.

The lower expectations are likely due to weaker oil prices in the fourth quarter. WTI oil prices fell by 4.2% YoY to $56.9 per barrel. Oil prices were also weak in the year. The prices fell by 12.1% in 2019.

However, refining conditions improved in the fourth quarter. Refining cracks and the sweet-sour spread widened in anticipation of IMO 2020. Globally, shippers are required to use low-sulfur fuel starting in January 2020, which drastically changed the refining industry’s dynamics. The change will likely have an impact in 2020.

To learn more about oil stocks’ positioning in 2020, read The Best Dividend-Yielding Energy Stocks for 2020.

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