Exxon is in crisis. Angry shareholders rebel

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For the first time in modern history, Exxon (XOM) faces a credible challenge from frustrated investors seeking to topple its board of directors.

The effort, led by a new activist investor firm called Engine No. 1, calls on Exxon to harness its massive spending ambitions, revamp executive compensation and explore a push towards clean energy. Engine No. 1 has received support from the Church of England and one of America’s most powerful pension funds: the California State Teachers’ Retirement System, or CalSTRS.

But that’s not all. Activist hedge fund DE Shaw has built a larger stake in Exxon than that held by CalSTRS and Engine No. 1 and is pushing the oil company to cut spending to save its dividend and improve poor performance, a familiar person not allowed to speak publicly from the Exxon stake, told CNN Business. Bloomberg News first reported on the DE Shaw campaign.

“Historically, Exxon hasn’t had to worry too much about shareholders. Now they have people snapping in their cages, ”said Peter McNally, analyst at Third Bridge Group.
Shareholder dissent has spread in recent years at Exxon, particularly on the climate front, as activists pushed for proposals to force Exxon to disclose its emissions targets, test its climate risk and separate the CEO and chairman roles.

But unlike those fights, Exxon now faces a campaign to take control of the council seats. Engine # 1 revealed four people with strong credentials in the energy industry who have agreed to be appointed, “if necessary”, to Exxon’s board of directors.

“For a very long time, Exxon was a machine. They just generated cash flow year after year, ”said Stewart Glickman, analyst at CFRA Research. “When a business finds itself in trouble in rough waters, an activist shows up.”

A series of missteps at Exxon

The No.1 Engine, whose management team includes ex-JANA partner Charlie Penner and ex-BlackRock executive Jennifer Grancio, denounced Exxon’s poor performance and suggested the company was facing a existential crisis. In a letter sent last week to Exxon’s board of directors, the activist group points out that the company’s total return to shareholders for the previous three, five and ten year periods follows both its proxy peers. and the S&P 500.

“We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it needs to better position itself for sustainable, long-term value creation,” writes the No.1 engine in the letter.

Exxon has long boasted of being able to spend wisely, even when the booming oil market does not cooperate. But a series of recent missteps have shattered that argument and now threaten the company’s precious dividend.

The past decade, Exxon has lagged far behind in the shale oil boom in the United States – even though it took place in its own backyard in Texas. Instead, the company decided to invest in complex projects overseas, some of which, including a joint venture with Russian oil company Rosneft, failed.

And in retrospect, Exxon’s 2009 takeover of natural gas giant XTO Energy has been called an “epic failure.” Natural gas prices have been trading at less than half of the levels since the time of this $ 41 billion acquisition. Exxon recently announced that it would reduce the value of its natural gas properties by $ 17 billion to $ 20 billion.

The No.1 engine criticized 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 also urged the company to reduce capital spending to a maintenance level of just $ 13 billion, the person familiar with the matter said. That would mark a steep drop from Exxon’s plan to spend $ 23 billion this year.

Before the activists’ letters were made public, Exxon announced a withdrawal from its aggressive spending plans, but not as much as activists want.

Should Exxon diversify?

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

The No.1 Engine said Exxon should “fully explore” ways to use its scale and expertise by studying areas for growth, including “greater investments in net-zero energy sources and clean energy infrastructure ”.

Unlike the European oil majors, in particular Royal Dutch Shell (RDSA) and BP (BP), Exxon et rival Chevron (CVX) haven’t made big investments in renewables.

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

“We continue to invest and research cutting-edge technologies that will play a key role in solving important issues related to climate change,” said Exxon.

Exxon is vulnerable

In a sign of the pressure Exxon is facing, the company said on Monday it would phase out methane flaring by 2030 and reduce the emissions “intensity” of its oil and gas production by up to 20% d ‘by 2025.

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

Exxon has also promised to reveal the emissions of its products, known as Scope 3 emissions. However, the company has not set targets to reduce these indirect emissions and acknowledged that this report “does not ultimately encourage reductions by actual issuers ”.

The climate groups were not satisfied.

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

“This Exxon effort is failing,” Logan said.

Engine # 1 faces an uphill battle to win seats on the Exxon table.

Even with the backing of CalSTRS and the Church of England, shareholders only own a small portion of what is still a $ 180 billion company. The fate of the proxy battle will depend on Vanguard, State Street (Non) and Black rock (BLK). The Big Three asset managers own almost a fifth of Exxon’s outstanding shares.

But activists have a big advantage: a deeply dissatisfied shareholder base. And if those frustrated shareholders team up with environmental groups and socially conscious investors, Exxon could be in trouble.

“This is unlikely to be successful,” said Glickman, the CFRA analyst. “But it’s going to be close. ”

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