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Analysis

ExxonMobil and Chevron Just Reported Their Worst Quarter in Two Years. Their Best Quarter Ever Is Next.

ExxonMobil earned $4.2 billion in Q1 2026. Chevron earned $2.2 billion. Both numbers were down sharply — Exxon's net income fell 45%, Chevron's tumbled 36% — and both results landed against a backdrop of oil prices surging toward $100 per barrel due to the Iran war. If that…

Market Munchies·May 1, 2026·8 min read
May 1 news4

ExxonMobil earned $4.2 billion in Q1 2026. Chevron earned $2.2 billion. Both numbers were down sharply — Exxon's net income fell 45%, Chevron's tumbled 36% — and both results landed against a backdrop of oil prices surging toward $100 per barrel due to the Iran war.

If that sounds like a paradox, it is. The world's two largest publicly traded oil companies reported some of their worst quarterly profits in two years during the most favorable oil price environment in years. Understanding why requires looking past the headline numbers — and understanding that distinction is where the real investment opportunity sits.

Why Q1 Looked So Bad

 

The short answer: the hedges.

Both Exxon and Chevron use financial derivatives to manage the price risk on their physical oil and gas shipments. These instruments smooth out revenue volatility by locking in future prices — a standard risk management practice across the energy industry. Under normal market conditions, these hedges are roughly neutral in their effect on quarterly earnings. In the first quarter of 2026, they were catastrophic.

When the Iran war began on February 28 and oil prices surged suddenly and massively, Exxon and Chevron were caught with hedging positions structured for a more stable price environment. Both companies were effectively short oil on paper at the moment that oil spiked. Exxon's reported earnings included nearly a $4 billion loss from what the company described as an unfavorable "timing effect" — derivatives marked to market at the end of the quarter, before the associated physical oil deliveries were completed and recognized as revenue.

Chevron's exposure was similar. The company had warned investors in April that timing effects would adversely affect Q1 earnings by $2.7 billion to $3.7 billion. Chevron's refining segment swung from a profit of $325 million a year ago to a loss of $817 million — driven by unfavorable hedge timing on top of temporarily compressed refining margins. Chevron's 8-K filing stated plainly: "In a rising commodity price environment, timing effects are generally negative... the majority of these effects are in the Downstream segment and are expected to unwind in future periods."

That final phrase — "expected to unwind in future periods" — is the most important sentence in Chevron's Q1 filing. It is the entire investment thesis for Q2.

Strip out the timing effects and Exxon's earnings excluding identified items were $4.9 billion, or $1.16 per share — and excluding both identified items and unfavorable timing effects, earnings were $8.8 billion, or $2.09 per share. That last figure is closer to the company's true underlying economic performance for the quarter. It is also considerably better than the headline $4.2 billion that generated the alarming percentage-decline headlines this morning.

The Other Headwinds — and Why They Are Mostly Temporary

 

Beyond the hedging losses, both companies faced a second category of Q1 headwinds that are also largely one-time in nature.

Production was disrupted. Exxon's production segment posted $5.74 billion in profit, down 15% from a year ago, partly because the war created operational disruptions in the Middle East that temporarily reduced output volumes. Exxon pumped 4.6 million barrels per day — a slight increase over last year, but below what the war-price environment would otherwise have yielded. Scheduled maintenance, a routine Q1 factor in any year, added incremental volume pressure.

Refining margins were briefly compressed in the early weeks of the war, before the full oil price surge worked its way through to refined product pricing. Crack spreads — the difference between crude oil input costs and refined product sale prices — narrowed in the immediate aftermath of the February 28 attacks before recovering. That temporary compression hit Chevron's refining business in particular, driving the segment to an $817 million loss for the quarter.

Chemical margins also weakened, as higher energy-related feed costs hit both companies' petrochemical operations before product pricing could adjust. Exxon's Chemical Products segment earned just $110 million, down $163 million from a year ago.

All three headwinds — hedging timing effects, production disruptions, and refining margin compression — share a common characteristic: they are largely absent or reversed in Q2. The derivatives unwind, production stabilizes, and refining and chemical margins expand as high oil prices flow through to final product pricing.

Why Q2 Is Going to Be Dramatically Different

 

The forward earnings trajectory for both companies is built on one variable above all others: the oil price.

Brent crude averaged somewhere in the $75 to $85 range during Q1 — the war only began on February 28, meaning prices spent most of January and February in the low-to-mid $70s before the late-March surge pushed the quarterly average higher. As of this morning, Brent is trading near $120 per barrel. WTI is above $100. The Iran war's effect on oil prices was front-loaded in geopolitical fear and back-loaded in actual supply disruption. Q1 captured some of the fear. Q2 will capture the full supply disruption — and the full revenue benefit that comes with it.

Analysts expect ExxonMobil's second-quarter earnings to more than double from a year ago, with full-year 2026 earnings projected to rise 46%. Chevron's Q2 profits are expected to more than triple year over year, with full-year earnings rising 56%. Both outcomes would represent the companies' best annual performance since 2022, when Russia's invasion of Ukraine drove the average U.S. gas price to a record $5.02 per gallon.

The mechanism is straightforward. Every additional dollar per barrel of oil price above the hedged baseline flows through Exxon's and Chevron's upstream production segments at extremely high margins. Both companies have already spent the capital to develop their production capacity — the Permian Basin, Guyana, the Gulf of Mexico. The incremental cost of producing an additional barrel from existing infrastructure is a fraction of the $120 per barrel it currently sells for. At $120 oil, both companies are printing cash.

What This Tells Investors About Cyclical Timing

 

The Exxon and Chevron Q1 story is a textbook illustration of one of the hardest lessons in cyclical investing: the worst quarterly results often arrive at the beginning of the best cycles.

The worst-looking quarterly earnings for both companies — in terms of year-over-year percentage decline — are being reported this morning, on the day when the oil price environment is the most favorable it has been in four years. Investors who react to the headline earnings decline without understanding the mechanism behind it risk selling at precisely the wrong moment.

The same pattern has appeared in previous oil cycles. In Q2 and Q3 2020, both companies reported massive losses as oil prices briefly went negative — and investors who bought during those quarters were rewarded with some of the strongest oil sector returns in a decade when the cycle turned. In late 2021 and 2022, when oil was surging post-pandemic, investors who waited for "confirmation" of the earnings recovery missed the bulk of the move.

The Q1 2026 Exxon and Chevron reports are not evidence that big oil is struggling. They are evidence that big oil is in a temporary accounting trough while sitting at the base of what analysts expect to be one of the most profitable earnings runs in the sector's history. The hedging losses that crushed Q1 will mathematically contribute to Q2 profits as they unwind. The production disruptions are stabilizing. And the oil price is $120 per barrel.

Whether $120 oil lasts long enough for both companies to collect the windfall analysts are projecting depends on the Iran negotiations — the same variable determining the trajectory of every other asset class this week. A Hormuz reopening would be bearish for oil prices and, by extension, for the scale of the energy sector's Q2 and Q3 earnings. A prolonged blockade means the windfall compounds.

For investors with energy sector exposure, the Exxon and Chevron Q1 prints are not a warning. They are, in the language of cyclical investing, a green light with a timing caveat attached.

Sources

 

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