New York (CNN Business)For many years, ExxonMobil was an unstoppable machine and the envy of the oil business. Now that machine has damaged down — and Exxon’s critics are pouncing.
For the primary time in trendy historical past, Exxon (XOM) faces a reputable problem from pissed off traders looking for to overthrow its board of administrators.
That effort, led by a brand new activist investor agency known as Engine No. 1, requires Exxon to rein in its large spending ambitions, revamp government pay and discover a push into clear power. Engine No. 1 has acquired help from the Church of England and one in all America’s strongest pension funds: the California State Teachers’ Retirement System, or CalSTRS.
But that is not all. Activist hedge fund D.E. Shaw has constructed a bigger Exxon stake than the one held by CalSTRS and Engine No. 1 and is pushing the oil firm to slash spending to save lots of its dividend and enhance its poor efficiency, an individual acquainted with the matter, who was not licensed to talk publicly on the Exxon stake, instructed CNN Business. Bloomberg News first reported the D.E. Shaw marketing campaign.
These efforts present how far mighty Exxon has fallen. Once the world’s most respected public firm, Exxon’s market valuation has crumbled by a staggering $266 billion since mid-2014. Exxon is shedding cash for the primary time in many years and acquired kicked out of the Dow Jones Industrial Average after 92 years in that unique index.
“Historically Exxon hasn’t had to care too much about shareholders. Now they’ve got people rattling their cage,” mentioned Peter McNally, an analyst at Third Bridge Group.
Shareholder dissent has been percolating in recent times at Exxon, particularly on the local weather entrance, as activists pushed proposals looking for to power Exxon to reveal emissions targets, stress take a look at its local weather danger and separate the CEO and chairman roles.
But in contrast to these fights, Exxon is now dealing with a marketing campaign to take management of board seats. Engine No. 1 revealed 4 people with robust power business credentials who’ve agreed to be nominated, “if necessary,” to the Exxon board.
“For the longest time, Exxon was a machine. They were just churning out cash flow year after year,” mentioned Stewart Glickman, an analyst at CFRA Research. “When a company finds itself struggling in choppy waters, an activist will come along.”
Series of missteps at Exxon
Engine No. 1, whose government staff contains former JANA companion Charlie Penner and ex-BlackRock government Jennifer Grancio, known as out Exxon’s poor efficiency and recommended the corporate faces an existential disaster. In a letter despatched final week to Exxon’s board, the activist group factors out that the corporate’s whole shareholder return for the prior three, 5 and 10-year intervals path each its proxy friends and the S&P 500.
“We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation,” Engine No. 1 wrote within the letter.
Exxon lengthy prided itself on with the ability to spend correctly, even when the boom-to-bust oil market was not cooperating. But a collection of latest missteps have blown a gap in that argument and now threaten the corporate’s treasured dividend.
Last decade, Exxon was very late to the US shale oil increase — despite the fact that it passed off in its personal yard in Texas. The firm determined as an alternative to spend money on advanced abroad initiatives, a few of which, together with a three way partnership with Russian oil firm Rosneft, did not pan out.
And with the advantage of hindsight, Exxon’s 2009 takeover of pure fuel big XTO Energy has been slammed as an “epic failure.” Natural fuel costs are buying and selling at lower than half the degrees from the time of that $41 billion acquisition. Exxon lately mentioned it’ll write down the worth of its pure fuel properties by a shocking $17 billion to $20 billion.
Engine No. 1 slammed Exxon for its “poor long-term capital allocation strategy” and known as on the corporate to slash spending.
In a separate letter to Exxon, D.E. Shaw equally urged the corporate to chop capital spending to a upkeep stage of simply $13 billion, the particular person acquainted with the matter mentioned. That would mark a pointy drop from Exxon’s plan to spend $23 billion this 12 months.
Before the activist letters had been made public, Exxon introduced a retreat from its aggressive spending plans, although not by as a lot because the activists need.
Should Exxon diversify?
The local weather disaster continues to loom over the oil big. D.E. Shaw is pushing Exxon to enhance its environmental popularity and set clear and measurable emissions targets and embody them in its compensation plans, the particular person acquainted with the matter mentioned.
Engine No. 1 mentioned Exxon ought to “fully explore” methods to make use of its scale and experience by investigating development areas, together with “more significant investment in net-zero emissions energy sources and clean energy infrastructure.”
Unlike European oil majors together with Royal Dutch Shell (RDSA) and BP (BP), Exxon and rival Chevron (CVX) haven’t made huge investments in renewable power.
In an announcement, Exxon mentioned its administration and administrators “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,” Exxon mentioned.
Exxon is susceptible
In an indication of simply how a lot strain Exxon is dealing with, the corporate introduced Monday it’ll get rid of the flaring of methane by 2030 and lower the “intensity” of emissions from its oil-and-gas manufacturing by as much as 20% by 2025.
“We respect and support society’s ambition to achieve net zero emissions by 2050,” Exxon CEO Darren Woods mentioned in an announcement.
Exxon additionally promised to disclose emissions from its merchandise, referred to as scope 3 emissions. However, the corporate didn’t set any targets to cut back these oblique emissions and acknowledged that this reporting “does not ultimately incentivize reductions by the actual emitters.”
Climate teams weren’t happy.
“This set of commitments would have been leading edge five years ago,” Andrew Logan, senior director of oil and fuel at sustainability nonprofit Ceres, mentioned in an announcement. He famous that US rivals together with Occidental Petroleum and ConocoPhillips (COP) have gone additional by setting net-zero targets for his or her operational emissions.
“This effort from Exxon falls short,” Logan mentioned.
Engine No. 1 faces an uphill battle in successful seats on the Exxon board.
Even with the help of CalSTRS and the Church of England, the shareholders personal only a small slice of what’s nonetheless a $180 billion firm. The destiny of the proxy battle might be as much as Vanguard, State Street (STT) and BlackRock (BLK). The Big Three asset managers personal almost one-fifth of Exxon’s excellent shares.
But the activists do have one huge benefit: a deeply dissatisfied shareholder base. And if these pissed off shareholders staff up with environmental teams and socially-conscious traders, Exxon might be in bother.
“It’s unlikely to succeed,” mentioned Glickman, the CFRA analyst. “But it’s going to be close.”