May 8, 2021


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Exxon vs. activists: can disillusioned investors force change?

6 min read

Twelve months ago, ExxonMobil chief executive Darren Woods said his company was ready to “lean” into a slowing market, spending a lot when its competitors would not.

“We are investing counter-cyclically,” he said, outlining an aggressive oil production growth plan and the significant capital expenditures it would require.

His message as he briefs investors again on Wednesday will be very different – reflecting Exxon’s worst performance last year, when it posted four consecutive quarterly losses and was kicked out of the Dow Jones Industrial Average.

But he will also tackle the threat posed to Woods and his management team by a campaign of activist investors seeking board-level upheaval and a strategic reorientation of the company.

Avoiding volume growth, Woods will kick off Exxon’s “flexible” capital spending program, focusing more narrowly on its best assets, capital discipline and new low-carbon businesses.

“The company continues to be very committed to increasing long-term value for its shareholders,” Woods told the Financial Times. “So we’re not going to see the same type of volume growth we originally anticipated.”

The market has recently put a tailwind behind Exxon’s new approach. After its share price was all the rage during the coronavirus-hit 2020, the company’s shares have risen nearly 40% since the start of this year, outperforming the S&P 500 and the company’s rival supermajors. .

Still, shareholders are worried. As “proxy season” for annual US business meetings approaches, the activist campaign launched in December by the No.1 Engine is tapping into a deep well of investor disenchantment.

“We have performance issues with the company,” said Simiso Nzima, chief investment officer and head of corporate governance at the California Public Employees’ Retirement System, the largest US public pension fund.

Exxon had carried out “many years of destruction of the value of the company,” he said, including the recent depreciation of around $ 20 billion in assets that it now considered non-strategic.

“It’s no surprise that you see an activist investor,” he added. “What makes it surprising is the size of the company – it’s Exxon.”

The message is similar to that of several other large investors. Resentment over Exxon’s perceived flippant treatment of shareholders and hostility to change, coupled with the perception that it is not taking climate change risks as seriously as investors do, are fueling discontent.

“They didn’t play the environmental game very well and ticked off that crowd,” said an executive of an asset manager with a prominent position at the company. “And their feedback is terrible. They kind of got the money back and pissed off diehard financial investors.

Resentment over Exxon's perceived flippant treatment of shareholders and the perception that it does not take climate risks as seriously as investors fuel discontent

Resentment over Exxon’s perceived flippant treatment of shareholders and the perception that it does not take climate risks as seriously as investors fuel discontent © Ken Jack / Getty

Engine has appointed four new directors to Exxon’s board and called for more capital discipline, an overhaul of executive compensation and a new strategy for a cleaner energy transition. He says Exxon must also adopt “a path to total net zero emissions by 2050.”

The fund’s selection of people with significant energy experience – including Gregory Goff, former CEO of the Andeavor refinery – could prove significant.

“The investment community is on board,” said Sam Margolin, chief executive of Wolfe Research. “Candidates for the board have a very good chance of being elected. . . they all have a very good reputation, they have a track record in the industry, and some of them are in low carbon areas. ”

Exxon retaliates – by making a few concessions, but also by marking its red lines.

His proxy circular on Monday said that “none of the mover’s leadership contestants meet the standards or needs” of the company’s board of directors. Woods said the company had already screened and rejected some of the No.1 engine applicants before the fund nominated them.

Instead, the company decided this week to appoint three new directors: Wan Zulkiflee, former head of Malaysia’s national oil company Petronas, and Michael Angelakis and Jeff Ubben, two private investors.

ExxonMobil has been criticized for its capital allocation

Woods said the trio will add international vision, as well as experience with capital allocation and business transition.

The appointments of Angelakis and Ubben were enough to satisfy DE Shaw, another hedge fund that took a militant stance in December with demands similar to those of the No.1 engine. He will vote for the company’s board of directors. at the annual meeting in May, according to people close to his thinking.

The company has made other changes that are shareholder-wanted, since January reporting so-called Scope 3 issues of the products it sells.

Other developments, including the investment cuts announced in November and the low-carbon activities unveiled in February, were in the works long before the activists appeared, even though the results align with the goals of many shareholders, Exxon said.

The appointments of Michael Angelakis, pictured in 2015, and Jeff Ubben were enough to satisfy hedge fund DE Shaw, which took an activist stance in December © Scott Olson / Getty

Some investors say they are now willing to give new board members a chance to work towards making the change they seek.

“Compared to what they were six months ago, Exxon is starting to run the supertanker,” said one asset manager. “That takes time.”

But others say the proxy fight is far from over. Bess Joffe, responsible investment manager at Church Commissioners for England, an Exxon shareholder who supports the Engine No 1 campaign, dismissed the company’s recent initiatives as “fucked up” offers to activists.

“It really has to be a much bigger change,” she said. On the energy transition, Exxon was lagging behind its peers, she added, “and I don’t think that’s something investors big or small will continue to ignore.”

As its competitors in Europe have started to shift to cleaner energy and announced net zero targets, Exxon believes its carbon capture and other technology businesses offer a more tangible emissions solution.

Despite Wall Street’s growing attention to the climate – including among large Exxon-owned asset managers such as BlackRock – Woods continues to rule out a net zero target. The “solutions are not available to us today” that would allow the company to explain how it could achieve such a goal, he said.

Column chart of net profit (in billions of dollars) showing that ExxonMobil records its first annual loss

And Exxon does not plan to follow BP and other oil operators in the area of ​​clean electricity. “We are not in the power generation business,” he said. “What can we bring to these opportunities besides a checkbook?”

This approach and recent board changes have not reassured other skeptical investors, including the California State Teachers’ Retirement System, a major supporter of Engine No 1’s campaign.

“All of our traditional engagement tools have failed,” said Aeisha Mastagni, portfolio manager of the fund. “What we need here is a whole new strategy, a whole new culture, a whole new way of thinking inside this boardroom.”

In the absence of another compromise made with the No.1 engine during proxy season, the activist’s nominees will go to the shareholder vote at the AGM. This is a risk for Woods, some analysts say, because it will be seen as a referendum on Exxon leadership.

Nzima said if Calpers waited until he heard all the arguments during proxy season before deciding how to vote, the turmoil among investors might come as a surprise.

“People think, you know, voting against directors and removing people from the board is such a nuclear option. . . But that’s actually the only way to get change, ”he said.

This makes the presentation of Woods’ strategy to Exxon shareholders and analysts on Wednesday all the more meaningful.

Rising stock prices and expectations of higher earnings as the global economy recovers have eased the pressure on him.

And the proxy battle has forced the supermajor to articulate its position more clearly – on everything from investment priorities to energy transition and the business risks posed by climate change.

Woods says his company is listening to shareholders and changing in response. And so, he will reiterate that Exxon is on a post-pandemic recovery path that will repair the bottom line, cut costs, and deliver top notch returns, all while reducing emissions and creating a new low-carbon business.

But the outcome of the proxy battle will also reveal whether Exxon’s biggest investors – especially passive funds that have expressed their own climate commitments – believe that a deemed rigid supermajor can really bend to new shareholder priorities in matters. energy transition and emissions. .

“We want this company to be more resilient and strategic,” said Mastagni, “because the low-carbon transition is coming, the world is changing and Exxon must change with it”.

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