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Exxon vs activists: can disenchanted traders pressure change?

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Twelve months in the past ExxonMobil chief govt Darren Woods mentioned his firm was able to “lean into” a softening market, spending huge when rivals wouldn’t.

“We make investments countercyclically,” he mentioned as he laid out an aggressive oil manufacturing progress plan and the hefty capital expenditure it might require.

His message as he updates traders once more on Wednesday might be very completely different — reflecting Exxon’s worst-ever efficiency final yr, when it recorded 4 consecutive quarterly losses and was ejected from the Dow Jones Industrial Common.

However it should additionally deal with the menace posed to Woods and his administration staff by an activist investor marketing campaign in search of a board-level upheaval and strategic redirection of the corporate.

Eschewing quantity progress, Woods will pitch Exxon’s “versatile” capital expenditure programme, narrower give attention to its finest belongings, capital self-discipline and new low-carbon enterprise.

“The corporate continues to be very dedicated to rising long-term shareholder worth,” Woods instructed the Monetary Instances. “So we’re not going to see the identical sort of progress in quantity that we had initially anticipated.”

The market has put a current tailwind behind Exxon’s new strategy. After its inventory value savaging throughout coronavirus-stricken 2020, the corporate’s shares are up nearly 40 per cent because the begin of this yr, outperforming the S&P 500 and the corporate’s supermajor rivals.

But shareholders are stressed. As company America’s “proxy season” of annual conferences approaches, the activist marketing campaign launched in December by Engine No 1 is tapping a deep nicely of investor disenchantment.

Line chart of Share prices rebased showing ExxonMobil has outperformed its rivals since the start of the year

“We’ve got efficiency points with the corporate,” mentioned Simiso Nzima, funding director and head of company governance at California Public Staff’ Retirement System, the biggest US public pension fund.

Exxon had carried out “a few years of destruction of company worth”, he mentioned, together with the current writedown of about $20bn price of belongings it now deemed non-strategic.

“It’s not stunning that you just’re seeing an activist investor,” he added. “What makes it stunning is the scale of the corporate — it’s Exxon.”

The message is comparable from a number of different huge traders. Resentment at Exxon’s perceived offhand therapy of shareholders and hostility to alter, coupled with the impression that it isn’t taking local weather change dangers as significantly as traders do, is breeding discontent.

“They haven’t performed the environmental recreation very nicely, and ticked off that crowd,” mentioned an govt at an asset supervisor with a big place within the firm. “And their returns are horrible. They’ve sort of spun money away and pissed off the pure-play monetary traders.”

Resentment at Exxon’s perceived offhand treatment of shareholders and the impression that it is not taking climate risks as seriously as investors is breeding discontent
Resentment at Exxon’s perceived offhand therapy of shareholders and the impression that it isn’t taking local weather dangers as significantly as traders is breeding discontent © Ken Jack/Getty

Engine has nominated 4 new administrators to Exxon’s board and referred to as for extra capital self-discipline, an overhaul of administration compensation and a brand new technique for a transition to cleaner power. It says Exxon should additionally undertake “a path to net-zero complete emissions by 2050”.

The fund’s number of folks with important power expertise — together with Gregory Goff, a former chief govt of refiner Andeavor — might show important.

“The funding neighborhood is on board,” mentioned Sam Margolin, managing director of Wolfe Analysis. “The board nominees have a extremely good likelihood of getting elected . . . all of them have very sturdy reputation, they’ve monitor data within the {industry}, and a few of them cross over into low-carbon fields.”

Exxon is preventing again — making some concessions, but in addition marking out its crimson traces.

Its proxy assertion on Monday said that “not one of the Engine director candidates meet the requirements or wants” of the corporate’s board. Woods mentioned the corporate had already screened and rejected a few of Engine’s nominees earlier than the fund nominated them.

The corporate as an alternative moved this week to nominate three new administrators of its personal: Wan Zulkiflee, former head of Malaysia’s state oil firm Petronas, and Michael Angelakis and Jeff Ubben, two personal traders.

ExxonMobil has come under fire for its capital allocation

Woods mentioned the trio would add worldwide imaginative and prescient, in addition to expertise of capital allocation and enterprise transition.

The appointments of Angelakis and Ubben had been sufficient to fulfill DE Shaw, one other hedge fund that had taken an activist place in December with related calls for to Engine’s. It should vote for the corporate’s slate of administrators at Could’s annual assembly, in accordance with folks accustomed to its considering.

The corporate has made different modifications sought by shareholders, reporting since January so-called Scope 3 emissions from the merchandise it sells.

Exxon says different developments, together with the capex cuts introduced in November and low-carbon enterprise unveiled in February, had been within the works lengthy earlier than the activists appeared, even when the outcomes tally with the goals of many shareholders.

The appointments of Michael Angelakis, pictured in 2015, and Jeff Ubben had been sufficient to fulfill hedge fund DE Shaw, which took an activist place in December © Scott Olson/Getty

Some traders say they’re now prepared to present the brand new board appointees an opportunity to work to impact the change they search.

“Relative to the place they had been six months in the past, Exxon is beginning to flip the supertanker round,” mentioned one asset supervisor. “It takes time to try this.”

However others say the proxy combat is way from over. Bess Joffe, head of accountable funding on the Church Commissioners for England, an Exxon shareholder that backs the Engine marketing campaign, dismissed the corporate’s current strikes as “whack-a-mole” presents to activists.

“It actually must be a way more wholesale sort of change,” she mentioned. On the power transition, Exxon was trailing its friends, she added, “and I don’t assume that’s one thing that traders giant or small will proceed to disregard”.

Whereas rivals in Europe have begun pivoting to cleaner power and introduced net-zero targets, Exxon believes its carbon-capture enterprise and different applied sciences provide a extra tangible emissions resolution.

Regardless of Wall Road’s rising local weather focus — together with amongst huge Exxon-owning asset managers akin to BlackRock — Woods continues to rule out a net-zero goal. The “options aren’t obtainable to us right this moment” that will permit the corporate to clarify the way it might attain such a aim, he mentioned.

Column chart of Net income ($bn) showing ExxonMobil records its first annual loss

And Exxon doesn’t plan to observe BP and different oil operators into clear electrical energy. “We’re not within the energy era enterprise,” he mentioned. “What can we carry to these alternatives aside from a cheque guide?”

This strategy and the current board modifications haven’t reassured different sceptical traders, together with the California State Academics’ Retirement System, an vital backer of Engine’s marketing campaign.

“All our conventional engagement instruments have failed,” mentioned Aeisha Mastagni, a portfolio supervisor on the fund. “What we’d like here’s a complete new technique, a complete new tradition, a complete new mind-set inside that boardroom.”

Within the absence of another compromise struck with Engine throughout proxy season, the activist’s nominees will go to a shareholder vote on the AGM. It’s a threat for Woods, say some analysts, as a result of this might be seen as a referendum on Exxon’s administration.

Nzima mentioned that whereas Calpers would wait to listen to all arguments throughout proxy season earlier than deciding methods to vote, the agitation amongst traders might spring a shock.

“Folks assume, you understand, voting in opposition to administrators and getting folks off the board is such a nuclear possibility . . . However that’s really the one means which you can get change,” he mentioned.

That makes Woods’ technique presentation to Exxon’s shareholders and analysts on Wednesday all of the extra important.

A rising share value and expectations of an earnings upswing as the worldwide economic system recovers have eased some stress on him.

And the proxy battle has compelled the supermajor to articulate its place extra clearly — on all the pieces from capex priorities to the power transition and the enterprise dangers posed by local weather change.

Woods says his firm is listening to shareholders and altering in response. And so he’ll reiterate that Exxon is on a post-pandemic restoration path that may restore the stability sheet, lower prices and ship industry-leading returns, all whereas slicing emissions and constructing a brand new low-carbon enterprise.

However the consequence of the proxy battle may also reveal whether or not Exxon’s larger traders — particularly the passive funds which have talked up their very own local weather commitments — imagine {that a} famously inflexible supermajor can really bend in keeping with shareholders’ new priorities across the power transition and emissions.

“We would like this firm to be extra resilient and strategic,” mentioned Mastagni, “as a result of the low-carbon transition is coming, the world is altering, and Exxon wants to alter with it”.

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