Climate Finance | May 26, 2021

Exxon’s shareholder drama is only beginning of the endgame for oil giant

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, May 26 – It’s showtime. ExxonMobil faces restive investors today in a test for CEO Darren Woods and his strategy for the sagging oil giant. 

Shareholders at Exxon’s (online) annual general meeting will vote to reelect – or not – Woods as chairman of the company’s board. Also on the ballot: an insurgent slate of directors promoted by an activist hedge fund, Engine No. 1, that has won support from powerful pension funds, proxy advisors and asset managers. The effort appears to have gotten a big boost from BlackRock, Exxon’s second-largest institutional shareholder, which is expected to vote for three of the four insurgent directors.

Key to the outcome may be the votes of the other two big asset managers, including Vanguard, Exxon’s largest institutional shareholder with a nearly 8% stake. The former chairman of State Street, the No. 3 institutional holder, sits on Exxon’s board. 

BlackRock is expected to stop short of voting against Woods or Exxon’s lead independent director, Ken Frazier, the CEO of Merck. That left critics unsatisfied. Activists delivered coal to BlackRock’s midtown Manhattan offices to protest its fossil fuel holdings.

“By voting to retain Woods and Frazier, BlackRock has failed to follow through on yet another key climate test,” said Sierra Club’s Ben Cushing. By splitting the difference, BlackRock is “supporting the insurgent candidates and handcuffing them at the same time,” Eli Kasargod-Staub of Majority Action tells ImpactAlpha

Regardless of the outcome, the monthslong campaign to shake up Exxon, and the accelerating momentum towards a net-zero future, have shifted the ground beneath the largest U.S. oil company, and disrupted the playbook it has deployed for decades to fend off climate concerns. That shift could become an earthquake if Engine No. 1 wins its fight to help determine the trajectory of Exxon and, by extension, other fossil fuel producers. 

Decarbonization imperative

Exxon has mounted a last-ditch defense. This week, it committed to add two board members of its own choosing. The company was earlier this year pressured to add Inclusive Capital’s Jeffrey Ubben and another director in an agreement with the hedge fund D.E. Shaw. Last year, as the pandemic cratered oil demand and prices, Exxon slashed capital expenditures and took on debt to pay its generous dividend.

The International Energy Agency declared this week that there is no room for new fossil fuel expansion if the world is to achieve net zero emission by midcentury. 

“There really is no going back for the Exxon board or for the boards of any other company in this sector,” Ceres’ Andrew Logan told ImpactAlpha

Investors will also vote on two shareholder proposals flagged by the influential group Climate Action 100+. One asks Exxon to assess its financial prospects in the event of a significant reduction in fossil fuel demand; the other demands a report on how the company’s lobbying efforts align with the Paris accord.

Exxon was under fire for its deteriorating financials even before the COVID disruption. Exxon’s market cap was halved between 2010 and 2020. The company lost $22 billion last year after a similarly sized writeoff of assets. The company chased growth with expensive projects to develop tar sands and liquid natural gas.

Exxon’s share price has rebounded with oil prices – it’s up about is 40% this year. And the company has slashed short-term spending plans. 

But Woods, who took over from Rex Tillerson after he became Donald Trump’s first secretary of state, has mostly followed in the path of his expansion-minded predecessors. The company has vowed to reduce its carbon intensity by 20% by 2025, but not its overall emissions. 

One example: The oil giant is pressing on with a massive new development in Guyana that will extract over 9 billion barrels of oil and trillions of cubic feet of gas off the coast of South America. Guyanese citizens have filed suit against the project. 

Such projects are increasingly untenable in light of the net zero imperative, as the IEA report confirmed. The world’s fifth largest greenhouse gas emitter is facing “an existential business risk” yet “still has no credible plan to protect value in an energy transition,” argues Engine No. 1 in an investor presentation. The firm, which holds just a $50 million stake in Exxon, calls for “gradually but purposefully” repositioning Exxon to succeed in a decarbonizing world.”

CalPERS, CalSTRS, the Church of England, the New York Common Retirement Fund, Norway’s sovereign wealth fund and asset manager Legal & General Investment Management have indicated support for at least some of Engine’s proposed directors. The influential proxy advisor Institutional Shareholder Services endorsed three of the four candidates. 

Exxon says it will invest $3 billion in the coming years in carbon capture and storage, hydrogen, and biofuels – a fraction of its own fossil fuel spending as well as the investment being made by rivals BP and Shell in transition technologies. It has floated the idea of a $100 billion carbon capture and storage “innovation zone” in Houston that would capture CO2 emissions from the area’s many petrochemical, manufacturing and power generation facilities and store the gas underground, including in depleted oil and gas reservoirs. Exxon says the project is not viable without generous subsidies from the government. 

Exxon is basing its strategy “on what appear to be overly optimistic demand and technology assumptions, and does not provide shareholders with enough information to fully understand how prepared it actually is for an energy transition,” proxy advisor ISS wrote in recommending a vote for three of Engine’s board candidates. 

Exxon’s European rivals are retooling to be leaders in the energy transition, putting their engineers, drillers and geologists to work on offshore wind and geothermal projects and long-term technologies like hydrogen. 

 “The transition is not a threat to our business, it’s an opportunity for us to take on the next chapter in our company’s histories,” BP chief Bernard Looney said this spring. 

Cash cow 

Carbon capture technology plays to oil companies’ strengths and experience.  Many of them, including Exxon, have captured carbon to force down holes and optimize oil and gas extraction. 

The technology will be needed to mitigate emissions from hard-to-decarbonize sectors like steel and cement production and long-haul transportation. Most of Exxon’s carbon capture experience, however, has been emissions from natural gas operations that it has injected into wells to extract more fossil fuels, rather than capturing industrial emissions and sequestering it. And the projects rely on uncertain government support. 

There’s another path open to fossil fuel producers who resist change: wind the company down over time while returning profits to shareholders. 

No matter which way today’s vote goes, Exxon will be pushed to change. “What matters most is the underlying change in Exxon’s behavior,” says Majority Action’s Kasargod-Staub. And the newfound shareholder empowerment will reverberate far and wide. 

“Anyone who wants to run a campaign like this, they basically now have a stamp of approval,”  said one person familiar with Engine No. 1’s strategy. “If you’re not taking climate change seriously, we can change board members. That in my mind is structural change that can apply to lots of companies.”