Exxon and Chevron Post profits outperform. The drop in oil prices continues to hurt.

This is a breaking news story. Below is a pre-published preview of the results.

A year ago, the war in Ukraine pushed Exxon Mobil and Chevron’s profits to new heights. But as companies prepare to report earnings on Friday, oil prices are set to fall even as the war drags on.

The forces that drove stocks higher last year have faded, and investors are waiting for the next catalyst. One of the possible options: the acquisition or two options that change the balance of power in oil.

At the most basic level, Exxon (stock ticker: XOM) and Chevron (CVX) are both strong. It has become more efficient than it was before the pandemic, and is constantly increasing its dividend and buying back shares. But they still have trouble attracting new investors because earnings are expected to vanish over the next few quarters.

Although first-quarter earnings are expected to exceed year-ago levels, this could be the last quarter for at least a year in which companies post annual gains. This is largely due to lower oil and gas prices, a factor that companies have no control over. Regardless, there’s no obvious reason for stocks to rise more this year absent a change in oil prices — especially after Exxon’s 80% rally and Chevron’s 53% rally in 2022.

Exxon is arguably entering the quarter in a better position than Chevron, given its heavy reliance on refining. Refining margins have remained strong so far this year given the global capacity shortfall. Exxon rose 8% versus a 5% drop for Chevron. Analysts expect Exxon to earn $2.60 a share, up from $2.07 last year, on $85.6 billion in revenue. They expect Chevron to earn $3.40, up from $3.36 last year, on revenues of $48.6 billion.

One of the biggest questions analysts have in the coming quarter will be about mergers and acquisitions. Both companies are flush with cash, and analysts are speculating about whether they will strike deals to consolidate the industry and boost their stocks.

“Many producers could be acquired in the coming quarters given the desire of many companies like Exxon to build inventory,” Truist analyst Neil Dingman wrote earlier this month. “2023 has already started off as a brisk year for initial M&A and we think things can stay busy throughout the year.”

Exxon spoke with shale drilling company Pioneer Natural Resources

(PXD), according to the reports, though neither company has publicly commented on a potential deal. Chevron made several acquisitions early in the pandemic, but has been quiet lately — focused instead on ramping up its stock buybacks and boosting its dividend. It now has a dividend yield of 3.7%.

Over the past three years, investors have mostly been negative about acquisitions because they were afraid that buyers would pay too much. However, that may change if they believe that the oil majors can buy attractive real estate at affordable prices.

Write to Avi Salzman at [email protected]