Oil major ExxonMobil — long the world’s most valuable company–released its fourth quarter and full fiscal year 2020 earnings report that revealed a loss of $20.1 billion, reporting oil-equivalent production of 3.7 million barrels per day for the quarter, and capping off a loss that Chairman and CEO Darren Woods attributed to “the most challenging market conditions ExxonMobil has ever experienced.”
But ExxonMobil’s latest loss–coming as it did amid reports that it held preliminary merger talks last year with another traditional U.S. oil major, Chevron–is fueling a mounting activist investor challenge to the company’s board composition and long-term direction.
During the quarter, ExxonMobil focused on aggressively cutting costs, slashing its annual cash operating expenses by $8 billion, with annual structural cost reductions of $6 billion anticipated by 2023, including large-scale workforce reductions.
The company says it expects 2021 cash flow to cover its expected capital expenditures, while maintaining the dividend and a strong balance sheet. These expectations, it says, are valid with Brent prices at $50 per barrel and the lowest annual margins for its downstream and chemical segments from 2010-2019.
It also announced the creation of a new business, ExxonMobil Low Carbon Solutions, to commercialize its low-carbon technology portfolio, and plans to advance more than 20 new carbon capture and sequestration (CCS) opportunities globally.
And it nominated a new executive board member, Tan Sri Wan Zulkiflee Wan Ariffin, former president and Group CEO of Malaysian oil company Petronas.
Engine
It’s clear that the ongoing energy transition and oil supply glut, combined with the demand shock of covid-19, took a bite out of energy sector earnings in 2020 and led to strategic soul-searching for many old-line oil producers. But Exxon’s actions may be too little, too late for the activist newly in their midst.
In December, Engine No. 1, a newly launched activist investment firm that plans to target (per its own description) “energy companies in transition,” announced that it would forward four of its candidates to Exxon Mobil’s board: Gregory J. Goff, CEO of Andeavor (the petroleum refiner formerly known as Tesoro), as well as three nominees from Nordic renewables and energy tech firms Kaisa Hietala, former EVP of Renewable Energy at the Finnish state-owned energy company Neste, Alexander Karsner, Senior Strategist at X (formerly Google X), and Anders Runevad, former CEO of Danish wind energy giant Vestas.
The nomination was accompanied by a formal letter to Exxon’s board of directors, stating emphatically, “It is clear…that the industry and the world [Exxon] operates in are changing, and that ExxonMobil must change as well.”
Engine No. 1’s brash challenge to the board of ExxonMobil–its first major activist target–has won renewed institutional support in the wake of this week’s dour earnings report.
On Wednesday, CalSTRs–the California state teacher’s pension that is the world’s largest educators-only pension fund and second largest pension overall, with $283.4 billion in assets under management–issued a sharp rebuke to Exxon through a public released titled, “Statement on Exxon Mobil’s loss of $22 billion in 2020.”
“ExxonMobil’s reported 2020 loss of $22 billion demonstrates the continued erosion of shareholder value and that incremental
“Piecemeal investments in carbon capture do not demonstrate a long-term energy transition strategy,” the firm added. “ExxonMobil’s plan to invest $3 billion over five years on carbon capture and lower-emission energy technologies is inadequate, as it represents a small percentage of ExxonMobil’s annual capital expenditures. We are concerned that this minor investment is not part of a bigger and more significant long-term strategy to remain competitive in a rapidly changing world.
“One director is not enough to drive the systemic change necessary at ExxonMobil,” they wrote. “ExxonMobil’s board must be strengthened to improve the company’s underperformance linked to declining returns on capital expenditures and undisciplined capital allocation. As shareholders of ExxonMobil, we believe the ExxonMobil board requires significant change to fulfill these goals, and the candidates submitted
Just over half (50.97 percent) of CalSTRs total investment portfolio is allocated to public equities, as of December 31, 2020. As of last June, CalSTRs owned 7,975,788 common shares in Exxon Mobil, valued at approximately $356 million. (By way of context, CalSTRs owns 3,674,111 shares of Exxon peer Chevron and 3,016,243 shares of ConocoPhillips.
Don’t blame covid
Per Engine No. 1, ExxonMobil’s issues can’t be blamed on covid alone.
In support of their case for change, the activist says ExxonMobil’s total shareholder return (including dividends) over the past 10 years has been -20 percent, versus +277 percent for the S&P, trailing its self-selected proxy peers as well as the index benchmark both before and after the onset of covid-19.
Additionally, they say, Return on Capital Employed (ROCE) for its upstream projects—traditionally more than 75 percent of ExxonMobil’s total capital expenditure–dropped from an average 35 percent from 2001-2010 to around 6 percent from 2015-2019, even during periods of higher oil and gas prices.
Additionally, Engine No. 1 wrote, while the company had no net debt, ExxonMobil currently has the highest debt level in its history and the highest net debt to cash from operations ratio (more than 3.0x) of all oil majors. Moreover, this debt has been downgraded by S&P twice since 2016, and remains on negative watch, contributing, Engine No. 1 noted to “market skepticism that it can maintain its current dividend.”
Along with its board candidates, Engine No. 1 made several pointed recommendations for change at Exxon: first, and foremost, ditching what it sees as a failed strategy of chasing production growth at the expense of returns and a failure to adapt to changing energy industry dynamics.
Second, it sees the lack of any long-term plan to “enhance and protect value:” little material exposure to newer growth areas with little inclination to change this position.
Additionally, the fund faults ExxonMobil for failing to maintain its history of industry-leading innovation. They acknowledge that while the company has dismissed carbon emission reduction targets (regrettably, in Engine No. 1’s view) as “a beauty competition,” these targets nonetheless have significant value to investors.
And finally, the activist points to ExxonMobil’s failure to align management compensation with value creation for shareholders.
In its own comment on ExxonMobil’s fourth-quarter numbers, Engine No. 1 issued a brief statement reading, in part, “For years ExxonMobil has pursued spending and strategic plans that position it to succeed only in the absence of a material long-term energy demand shift, and it remains positioned for continued value destruction for decades to come under alternate scenarios.”
Stay tuned.
