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

Fuel prices will be displayed at an Exxon Mobil Corp. gas station in Arlington, Virginia, USA on Wednesday, April 29, 2020.

Andrew Harrer | Bloomberg | Getty Images

Company: Exxon Mobil Corp. (XOM)

Business: Engaged in the exploration, production, transportation and sale of crude oil and natural gas and in the manufacture, transportation and sale of petroleum products. Exxon also manufactures and markets commodity petrochemicals including olefins, aromatics, polyethylene and polypropylene plastics, and a range of specialty products. The company’s segments include upstream, downstream, chemicals, and corporate and finance segments. The upstream segment searches for crude oil and natural gas and extracts them. The downstream produces and sells petroleum products. The chemicals segment produces and sells petrochemicals. The company has exploration and development activities on projects in the USA, Canada / South America, Europe, Africa, Asia and Australia / Oceania.

Market value: 202.5 billion USD ($ 47.89 per share)

Activist: Engine # 1

Percentage ownership: 0.02%

Average cost: n / A

Activist Comment: Engine No. 1 is a new investment firm founded by Chris James, founder of Partner Fund Management and co-founder of Andor Capital Management, and Charlie Penner, former partner at JANA Partners. Their mission is to create long-term value by creating positive impact through active ownership. This is EN1’s first public campaign.

What’s happening:

Engine # 1 (“EN1”) sent a letter to the board of directors of Exxon Mobil Corp. (XOM), announcing that the following four Board nominees have been identified to be nominated to the Company’s Board of Directors if necessary: ​​(i) Gregory J. Goff, former CEO of Andeavor, a leading oil refining and Marketing company formerly known as Tesoro; (ii) Kaisa Hietala, former EPP for renewable products at Neste, a petroleum refining and marketing company; (iii) Alexander Karsner, Senior Strategist at X (formerly Google X), Alphabet Inc’s innovation lab; and (iv) Anders Runevad, former CEO of Vestas Wind Systems, a wind turbine manufacturer, installation and maintenance company with more installed wind power worldwide than any other manufacturer. EN1 noted that CalSTRS, which owns over $ 300 million in shares in the company, has stated that it intends to endorse these candidates if they are nominated for election to its board of directors. EN1 also called on the company to introduce greater long-term capital allocation discipline, implement a strategic plan for sustainable value creation, and realign management incentives.

Behind the scenes:

Exxon Mobil is one of the most well-known companies in the oil and gas sector that has seen a sharp decline in recent years. The company’s return over the past 10 years has been negative by 20% versus a 277% return for the S&P 500, and the total return for shareholders over the previous 3, 5, and 10 year periods is below what we picked Proxy colleagues before and after the COVID-19 pandemic. Engine # 1’s (“EN1”) plan to reverse this underperformance has economic and social elements, but is primarily economic, at least in the short and medium term.

EN1 points to capital allocation as the main driver of this poor performance. The return on investment (ROCE) for upstream projects (which historically accounted for over 75% of total investments (“Investments”) decreased from an average of 35% between 2001 and 2010 to 6% between 2015 and 2019. EN1 urges Exxon Mobil to take a more disciplined and forward-looking approach to its capital allocation strategy, including a long-term commitment to only fund projects that can break even on much more conservative oil and gas prices. They believe that long-term commitment to better capital allocation would likely increase free cash flow, strengthen the company’s balance sheet, and help secure its ability to cover its dividend.

The second that EN1 focuses on is “a strategic plan for creating sustainable value in a changing world”. This part of the plan is less detailed and while it does not include quantitative analysis, it is a push by EN1 to get the company on the right side of history when it comes to renewable energy. EN1 does not urge the company to make immediate changes and admits that changes will not happen overnight, but rather that they should at least investigate investments in zero-emission net energy sources and clean energy infrastructure. While any change in this area can take many years, the company is used to looking to the future in its E&P business because the assets they invest in have a lifespan of up to 20 years.

EN1 proposes two important initiatives to achieve these changes. First, they propose a list of four directors for the board, all with experience in the energy industry, three of whom also have experience in renewable energy. Second, EN1 would like executive compensation to be changed to better align compensation with shareholder value creation as total compensation for the company’s CEO changed from 2017 to 2019 despite the negative cumulative total return of Exxon Mobil shareholders (-12%) rose almost 35%. during this period.

EN1 makes some very convincing points, but as a shareholder of 0.02% it has an uphill yet achievable path to success. They own well less than 1%, despite the support of the $ 300 million shares in CalSTRS, which is more symbolic than anything else. To be successful here, they need to convince large shareholders like Vanguard (8.43%), State Street (5.17%) and BlackRock (4.97%) to not only have the conversation but also lead the way go investing when it comes to ESG. While Exxon is a poster child for the need for environmental change, it will be difficult for these major shareholders to completely ignore this campaign. There is already evidence that other shareholders are like-minded – DE Shaw & Co. (0.11%) also sent a letter to the company urging them to cut costs and improve performance. This could be due to the recommendation of the ISS. Despite their support, four seats is a long way to go here, but one or two are possible. A small investor like this one who competes against a giant like Exxon would have been unknown ten years ago. But with the development of shareholder activism coupled with the appeal of ESG investing, this is more than possible today.

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

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