A new investment firm is taking aim at US energy giant Exxon Mobil Corp, pressing it to reinvent itself by focusing more on clean energy to improve its financial performance.
Reuters said on Monday that Engine No. 1 is being supported by pension fund California State Teachers’ Retirement System (CalSTRS) as it pushes the energy company, valued at US$176 billion, to spend its cash better, preserve its dividend, and revamp its board.
“The industry and the world it operates in are changing and … Exxon Mobil must change as well,” Engine No. 1 wrote to Exxon’s board, adding “given the company’s long-running underperformance and the challenges it faces, it is time for shareholders to weigh in.”
Exxon is reviewing the hedge fund’s letter, an Exxon spokesman said.
Reuters noted that the U.S. oil company this year reversed course on a massive oil and gas expansion programme, slashing 30% from its spending plan and proposing a budget next year that is US$4 billion to US$7 billion below its outlays this year. It also plans to cut its workforce by 14,000 people over the next two years as losses this year reached US$2.37 billion.
Engine No. 1 faces a tough fight, Reuters said, noting that Exxon has beaten back past activist efforts to change its climate stance and to split the roles of chairman and chief executive.
But, according to Reu-ters, industry analysts say that the time may be right for traditional activists’ interest to overlap with climate activists’ interest and force Exxon to act.
“There is a need for a fairly active reset right now,” said Andrew Logan, senior director of oil and gas at Ceres, a non profit organization that works with institutional investors and companies. “Everyone starts at the bottom of the hill with Exxon but Engine No. 1’s director nominees is not a list of flaky people.”
The activist investment firm, unveiled last week by two hedge fund industry veterans, said it plans to nominate four directors to Exxon’s 10-person board who have expertise in clean technology and running energy companies: Gregory Goff, Kaisa Hietala, Alexander Karsner, and Anders Runevad.
“Exxon’s refusal to adequately address climate risk is of serious concern to many shareholders and is a sign of significant governance issues. The company’s board needs overhauling. We’re looking forward to reviewing the slate of new directors,” said New York State Comptroller Thomas P. DiNapoli, whose fund owns a roughly US$300 million stake, according to Refinitiv data.
Relevant
Besides pushing Exxon to appoint directors with more relevant energy industry experience to the board, Reuters said that the investment firm also wants Exxon to cut costs on projects that are unlikely to earn money, devise a better plan for success in the renewable energy sector and to rejig management compensation to better align with shareholder value creation, the letter said.
Reuters said that Exxon has long faced investor pressure to reduce greenhouse gas emissions but this is the first time an activist firm is mounting a proxy contest that could attract both institutional investors concerned about the company’s direction and retail investors worried about dividends, analysts said.
This was the first year since 1982 that Exxon has not raised its dividend and its share price has crashed 41% in 52 weeks. Its US$15 billion a year dividend should be cut because it eats up cash that could restructure the business, some analysts said.
Engine No. 1 is headed up by Chris James, best known for technology investing but who also has considerable energy investment experience, and Charles Penner, who led activist investment firm Jana Partner’s campaign against iPhone maker Apple to let parents limit children’s phone in 2018.
Engine No. 1 owns roughly US$40 million worth of stock in Exxon, according to a person familiar with the investment, while CalSTRS owns roughly US$334 million, according to Refinitiv data. The campaign’s success will depend largely on how Vanguard Group, BlackRock and State Street, the country’s biggest index funds that are also Exxon’s top three shareholders, respond.
Reuters said that BlackRock and State Street are members of Climate Action 100+, an investor group pressing the largest greenhouse gas emitters to act on climate change. BlackRock this year pressured Exxon by voting against two directors and voting to split the chairman and CEO roles on the board, but the campaign failed.
D.E. Shaw
Meanwhile, Bloomberg yesterday reported that another investor D.E. Shaw & Co. is calling on the company to cut spending to improve performance and maintain its dividend.
Bloomberg said that D.E. Shaw on Tuesday sent a letter to Exxon arguing that changes are needed because the oil major has consistently underperformed rival Chevron Corp. D.E. Shaw believes Exxon is overspending, and that its current path is unsustainable and puts its dividend at risk, sources said.
According to Bloomberg, D.E. Shaw believes Exxon’s failure to adapt has erased over US$100 billion in shareholder value over the past five years. It has urged Exxon to cut capital expenditure to a maintenance level of about US$13 billion from a planned US$23 billion this year, and to cut its operating expenses by as much as US$5 billion. It could do so by lowering its head count, reducing its real estate footprint and other measures, persons familiar with the matter added.
Representatives for D.E. Shaw and Exxon declined to comment on the letter.
The investor, which held a 0.06% stake in Exxon at the end of September, has significantly increased its stake since then.
Paul Cheng, a New York-based analyst at Scotia Capital, told Bloomberg he wouldn’t be surprised to see more activism in the oil sector. Across the industry “performance has been so poor in the last eight years, if companies don’t change then we should not assume there will be better results,” he said.
Bloomberg said that D.E. Shaw also wants Exxon to improve its environmental reputation and implement other changes. That encompasses setting clear and measurable emissions targets and incorporating those into its long-term incentive compensation plans, they said. That comes in addition to the natural reduction the other changes would have on its carbon footprint, they said.
Environmental concerns are rising across the investment world, Bloomberg noted. On Wednesday, the $226.4 billion New York State Common Retirement Fund pledged to reach net-zero greenhouse gas emissions across its investments by 2040, and said it may divest from the riskiest oil and gas companies by 2025.
D.E. Shaw has a history of lobbying for changes at large companies, including Marathon Petroleum Corp., Emerson Electric Co., Lowe’s Cos., Bunge Ltd. and others.
