Exxon is in crisis. Angry shareholders revolt

For the first time in modern history Exxon (XOM) faces a credible challenge from frustrated investors seeking to overthrow the board of directors.
That effort, led by a new activist investor firm called Engine No. 1, calls on Exxon to rein in its massive spending ambitions, renew executive pay and make an effort to boost clean energy. Engine No. 1 has received support from the Church of England and one of America’s most powerful retirement funds, the California State Teachers’ Retirement System, or CalSTRS.

But that is not everything. Activist hedge fund DE Shaw has built a larger stake in Exxon than that of CalSTRS and Engine No. 1 and urges the oil company to cut spending to save its dividends and improve its poor performance, a person familiar with the issue, which was. not authorized to speak publicly about the Exxon ring, CNN told Business.

“Historically, Exxon didn’t have to worry too much about shareholders. Now they have people rattling their cage,” said Peter McNally, an analyst at Third Bridge Group.

Shareholder disagreement has permeated Exxon in recent years, especially in the climate area, as activists pushed proposals to force Exxon to disclose emissions targets, stress test climate risk, and separate the roles of CEO and chairman.

But unlike those battles, Exxon is now facing a campaign to take over the board seats. Engine No. 1 revealed four individuals of strong standing in the energy industry who agreed to be nominated “if necessary” to the Exxon board.

“For the longest time, Exxon was a machine. Year after year they just generated cash flow,” said Stewart Glickman, an analyst at CFRA Research. “When a company is struggling in troubled waters, an activist comes along.”

Series of missteps at Exxon

Engine No. 1, whose executive team includes former JANA partner Charlie Penner and ex-BlackRock CEO Jennifer Grancio, cited Exxon’s poor performance and suggested the company faces an existential crisis. In a letter sent to Exxon’s board last week, the activist group points out that the company’s total shareholder returns for the previous three, five, and 10-year periods are lagging behind both its proxy peers and the S&P 500.

“We believe that in order to avoid the fate of other once iconic US companies, ExxonMobil should better position itself for long-term sustainable value creation,” wrote Engine No. 1 in the letter.

For a long time, Exxon took pride in being able to spend money wisely, even when the oil market was uncooperative from top to bottom. But a string of recent missteps has blown a hole in that argument and now threatens the company’s precious dividend.

In the last decade, Exxon was very late to the US shale oil boom, even though it took place in its own backyard in Texas. The company decided instead to invest in complex overseas projects, some of which, including a joint venture with Russian oil company Rosneft, failed to materialize.
The climate crisis is looming on Wall Street
And in retrospect, Exxon’s acquisition of natural gas giant XTO Energy in 2009 has been labeled an “epic failure”. Natural gas prices are trading at less than half the levels since that $ 41 billion acquisition. Exxon recently said it will write off the value of its natural gas properties by an astonishing $ 17 billion to $ 20 billion.

Engine No. 1 turned down Exxon for its “poor long-term capital allocation strategy” and called on the company to cut spending.

In a separate letter to Exxon, DE Shaw similarly urged the company to reduce capital expenditures to a maintenance level of just $ 13 billion, the person familiar with the matter said. That would mean a sharp drop in Exxon’s plan to spend $ 23 billion this year. Bloomberg News first reported the DE Shaw campaign.

Before the activist letters went public, Exxon announced a withdrawal from its aggressive spending plans, though not as much as the activists want.

Should Exxon Diversify?

The climate crisis continues to loom over the oil giant. DE Shaw is urging Exxon to improve its environmental reputation and establish clear and measurable emissions targets and include them in its compensation plans, the person familiar with the matter said.

Engine No. 1 said Exxon should “fully” explore ways to use its scale and expertise by exploring growth areas, including “more significant investments in zero-emission energy resources and clean energy infrastructure.”

Unlike European oil companies, including Royal Dutch Shell (RDSA) and BP (BP), Exxon and Rival Chevron (CVX) have not made major investments in renewable energy.

In a statement, Exxon said management and directors “regularly engage with our shareholders on a range of topics and value their constructive perspective.”

“We continue to invest in and research breakthrough technologies that will play a key role in addressing the important issues related to climate change,” said Exxon.

Exxon is vulnerable

As a sign of how much pressure Exxon is undergoing, the company announced on Monday that it will eliminate methane flaring by 2030 and reduce the “intensity” of emissions from its oil and gas production by 20% by 2025.

“We respect and support society’s ambition to achieve net zero emissions by 2050,” Darren Woods, Exxon CEO, said in a statement.

Exxon also pledged to disclose the emissions of its products, known as scope 3 emissions. However, the company has not set targets to reduce those indirect emissions and acknowledged that this reporting “does not ultimately lead to reductions by the actual issuers”.

Climate groups were not satisfied.

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“This set of commitments would have led the way five years ago,” Andrew Logan, senior director for oil and gas at nonprofit sustainable Ceres, said in a statement. He noted that American rivals, including Occidental Petroleum and ConocoPhillips (COP) have gone further by setting net zero targets for their operational emissions.

“This Exxon effort is inadequate,” Logan said.

Engine No. 1 faces an uphill battle in winning seats on the Exxon board.

Even with the support of CalSTRS and the Church of England, shareholders own only a small portion of what is still a $ 180 billion company. The fate of the proxy battle is up to Vanguard, State Street (STT) and Black rock (BLK). The three largest asset managers own nearly a fifth of Exxon’s outstanding shares.

But the activists have one big advantage: a very dissatisfied shareholder base. And if those frustrated shareholders team up with environmental groups and socially conscious investors, Exxon could run into trouble.

“It is unlikely to succeed,” said Glickman, the CFRA analyst. “But it comes close.”