A brand new activist takes on Exxon to reverse the oil big’s underperformance

Enterprise: Engaged within the exploration, manufacturing, transportation and sale of crude oil and pure fuel, and the manufacture, transportation and sale of petroleum merchandise. Exxon additionally manufactures and markets commodity petrochemicals, together with olefins, aromatics, polyethylene and polypropylene plastics, and a spread of specialty merchandise. The corporate’s segments embody upstream, downstream, chemical, and company and financing. The upstream phase operates to probe for and produce crude oil and pure fuel. The downstream operates to fabricate and promote petroleum merchandise. The chemical phase operates to fabricate and promote petrochemicals. The corporate has exploration and improvement actions in initiatives positioned in the USA, Canada/South America, Europe, Africa, Asia and Australia/Oceania.

Inventory Market Worth: $202.5 billion ($47.89 per share)

Share Possession: 0.02%

Common Value: n/a

Activist Commentary: Engine No. 1 is a brand new funding agency based by Chris James, founding father of Associate Fund Administration and co-founder of Andor Capital Administration and Charlie Penner, former associate at JANA Companions. Their mandate is to create long-term worth by driving constructive influence by means of lively possession. That is EN1’s first public marketing campaign.

Engine No. 1 (“EN1”) despatched a letter to Exxon Mobil Corp’s (XOM) Board saying that it has recognized the next 4 director candidates to be nominated, if obligatory, to the corporate’s board: (i) Gregory J. Goff, former CEO of Andeavor, a number one petroleum refining and advertising firm previously often called Tesoro; (ii) Kaisa Hietala, former EVP of renewable merchandise at Neste, a petroleum refining and advertising firm; (iii) Alexander Karsner, a senior strategist at X (previously Google X), the innovation lab of Alphabet Inc; and (iv) Anders Runevad, former CEO of Vestas Wind Methods, a wind turbine manufacturing, set up, and servicing firm with extra put in wind energy worldwide than every other producer. EN1 famous that CalSTRS, which owns over $300 million in worth of the corporate’s inventory, has acknowledged that it intends to assist these candidates if nominated for election to the board. EN1 additionally referred to as on the corporate to impose better long-term capital allocation self-discipline, implement a strategic plan for sustainable worth creation and realign administration incentives. 

Exxon Mobil is among the most iconic corporations within the oil and fuel sector, which has seen steep declines in recent times. The corporate’s return over the past 10 years has been destructive 20% versus a 277% return for the S&P 500, and its complete shareholder return for the prior 3-, 5-and 10-year intervals trails its self-selected proxy friends, each earlier than and after the COVID-19 pandemic. Engine No. 1’s (“EN1”) plan to reverse this underperformance has financial and social components, however is primarily financial, a minimum of within the brief and mid-term.

EN1 factors to capital allocation as the first driver of this poor efficiency. Return on capital employed (ROCE) for upstream initiatives (which have traditionally accounted for over 75% of complete capital expenditures (“capex”)) has fallen from a median of 35% from 2001-10 to six% from 2015-2019. EN1 urges Exxon Mobil to undertake a extra disciplined and forward-thinking strategy to capital allocation technique, together with a long-term dedication to solely funding initiatives that may break-even at way more conservative oil and fuel costs. They imagine {that a} long-term dedication to higher capital allocation would doubtless enhance free money stream, strengthen the corporate’s stability sheet, and assist safe its means to cowl its dividend.

The second factor that EN1 focuses on is “a strategic plan for sustainable worth creation in a altering world.” This a part of the plan has much less element and is admittedly void of any quantitative evaluation, however is a push by EN1 for the corporate to get on the appropriate aspect of historical past with respect to renewable vitality. EN1 will not be asking the corporate to make instant modifications and acknowledges that change is not going to come in a single day, however they need them to a minimum of discover investments in net-zero emissions vitality sources and clear vitality infrastructure. Whereas any change on this space might take a few years, the corporate is used to looking to the longer term in its E&P enterprise as crops they put money into have lives of as much as 20 years.

EN1 suggests two vital initiatives to perform these modifications. First, they suggest a slate of 4 administrators for the board, all with vitality business expertise and three of whom even have expertise is in renewables. Second, EN1 wish to see a change in government compensation to higher align compensation with worth creation for shareholders, as complete CEO compensation on the firm rose virtually 35% from 2017 to 2019 regardless of Exxon Mobil’s destructive cumulative complete shareholder return (-12%) throughout that interval.

EN1 makes some very compelling factors, however as a 0.02% shareholder, has an uphill, but achievable, path to success. They personal considerably lower than 1% even with the assist of CalSTRS’s $300 million of shares, which is extra symbolic than the rest. To have any likelihood of success right here, they should persuade massive stockholders like Vanguard (8.43%), State Road (5.17%) and BlackRock (4.97%) to not solely discuss the discuss, however stroll the stroll in terms of ESG investing. Whereas Exxon is considerably of a poster boy for the necessity for environmental change, it will likely be exhausting for these massive shareholders to utterly ignore this marketing campaign. There may be already proof that different shareholders are like-minded — D.E. Shaw & Co. (0.11%) additionally despatched a letter to the corporate urging them to cut back prices and enhance efficiency. This would possibly find yourself coming all the way down to the advice of ISS. Even with their assist, 4 seats is an extended shot right here, however one or two is feasible. A small investor like this going up towards a behemoth like Exxon would have been unparalleled ten years in the past. However with the evolution of shareholder activism mixed with the attract of ESG investing, it’s greater than doable in the present day. 

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.