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Why Integrated Oil Giants ExxonMobil, Chevron, BP, Total, and Shell Took Off Today

By Reuben Gregg Brewer – Jun 5, 2020 at 2:23PM

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Oil is an economically sensitive commodity. With good news from OPEC and the U.S. government, investors got excited. Perhaps too excited.

What happened

Shares of integrated oil and natural gas giant ExxonMobil (XOM -0.10%) rose 8.6% in early trading on Wall Street on June 5. That's a really big move for what is usually a pretty boring energy company, but it wasn't alone. U.S. peer Chevron (CVX -0.21%) was up as much as 5.5%, France's Total (TTE 1.38%) 6.5%, the United Kingdom's BP (BP 0.73%) 8.3%, and Europe's Royal Dutch Shell (RDS.B) 6.9%. Relatively small South African integrated energy player Sasol even got into the act, actually leading the early gains with a hefty 13.3% price jump at the start of the trading day.

So what

There were two notable pieces of news in the energy sector today and both got investors excited about the future. But the past is important here. The industry has been attempting to muddle through a period of historically low oil prices. There are a number of factors involved in this predicament, including the long-term trend of growing U.S. onshore oil production, a pricing spat between OPEC and Russia (since resolved, with the help of the United States) that increased supply at the worst possible time, and the impact of the worldwide effort to contain the spread of COVID-19, which has dramatically reduced demand for energy. 

A man standing in front of an oil rig with tablet in his hand

Image source: Getty Images.

Every one of the integrated energy companies here has felt the impact. It even led Shell to cut its dividend, something it hadn't done since World War II. The hit was notable in first-quarter earnings, with companies like Exxon and Chevron reporting worrying revenue declines driven by falling oil prices. Both cut back on their spending plans as a result, as did most peers. Total, interestingly enough, decided to make yet another big electricity investment in the first quarter as it looks to diversify its business into a different energy space. But it was perhaps BP CEO Bernard Looney who summed it up best, explaining to investors that "Our industry has been hit by supply and demand shocks on a scale never seen before."   

In short, it's been a terrible time to be an energy company. But, as the saying goes, this too shall pass. And that is exactly what appears to be happening. For starters, OPEC seems to have gotten everyone on board for the production cuts it thinks are necessary to help stabilize supply and demand in the global energy market. That includes both Russia and smaller player, but significant holdout, Iraq. It now looks like the group will be able to push forward a planned meeting and get the cuts implemented relatively quickly. Oil prices jumped on the news. Higher oil prices are clearly a good thing for companies that rely on the commodity to support their top and bottom lines. Investors liked the news and it helped push oil-related names higher.   

But that wasn't the only positive today. One of the big problems for oil has been the swift decline in demand driven by the worldwide economic shutdowns used to slow the spread of COVID-19. There's been a pretty big question mark about how quickly the global economy can recover from the hit. Heading into today, investors had been anticipating bad news on the employment front in the United States, expecting the May unemployment rate to hit roughly 20%. Instead, it came in at 13.3%, down from April's reading of 14.7%. In other words, the world's largest economy is doing much better than many on Wall Street thought. That, in turn, could mean a swift return of oil demand, which would support higher commodity prices. Investors got pretty excited about that news, taking a risk-on approach and pushing the broader stock market higher, integrated energy companies included.  

Now what

While there was definitely good news to be read today, investors shouldn't get too exuberant. The unemployment numbers in the United States weren't really good, they were just less bad. So a global recession, which wouldn't be very positive for energy demand or this group of companies, still isn't out of the question. And OPEC's members have a bad habit of ignoring the things they agree to, so there's no way to tell if the plans the group lays out will actually help anything. Moreover, even with all of this good news, oil prices are still trading at levels that make it hard to turn a profit for many oil companies -- all of the companies here included. There are, indeed, silver linings showing up on the clouds, but investors shouldn't forget that the clouds are still there.

Reuben Gregg Brewer owns shares of ExxonMobil. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Exxon Mobil Stock Quote
Exxon Mobil
XOM
$110.43 (-0.10%) $0.11
Chevron Stock Quote
Chevron
CVX
$180.64 (-0.21%) $0.39
BP Stock Quote
BP
BP
$35.57 (0.73%) $0.26
TotalEnergies Stock Quote
TotalEnergies
TTE
$61.83 (1.38%) $0.84
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDS.B
Sasol Stock Quote
Sasol
SSL
$17.27 (2.07%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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