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

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Gas costs are displayed at an Exxon Mobil Corp. fuel station in Arlington, Virginia, U.S., on Wednesday, April 29, 2020.

Andrew Harrer | Bloomberg | Getty Pictures

Firm: Exxon Mobil Corp. (XOM)

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 section operates to probe for and produce crude oil and pure fuel. The downstream operates to fabricate and promote petroleum merchandise. The chemical section operates to fabricate and promote petrochemicals. The corporate has exploration and improvement actions in initiatives positioned in america, Canada/South America, Europe, Africa, Asia and Australia/Oceania.

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

Activist: Engine No. 1

Proportion Possession: 0.02%

Common Price: n/a

Activist Commentary: Engine No. 1 is a brand new funding agency based by Chris James, founding father of Companion 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 optimistic influence by means of lively possession. That is EN1’s first public marketing campaign.

What’s Taking place:

Engine No. 1 (“EN1”) despatched a letter to Exxon Mobil Corp’s (XOM) Board asserting that it has recognized the next 4 director candidates to be nominated, if essential, 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 Programs, a wind turbine manufacturing, set up, and servicing firm with extra put in wind energy worldwide than another producer. EN1 famous that CalSTRS, which owns over $300 million in worth of the corporate’s inventory, has acknowledged that it intends to help these candidates if nominated for election to the board. EN1 additionally referred to as on the corporate to impose higher long-term capital allocation self-discipline, implement a strategic plan for sustainable worth creation and realign administration incentives. 

Behind the Scenes:

Exxon Mobil is without doubt one of the most iconic corporations within the oil and fuel sector, which has seen steep declines lately. The corporate’s return during the last 10 years has been adverse 20% versus a 277% return for the S&P 500, and its complete shareholder return for the prior 3-, 5-and 10-year durations 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 parts, however is primarily financial, at the very least within the quick 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 mean 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 rather more conservative oil and fuel costs. They consider {that a} long-term dedication to raised capital allocation would doubtless improve free money stream, strengthen the corporate’s steadiness sheet, and assist safe its skill 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 proper facet of historical past with respect to renewable power. EN1 is just not asking the corporate to make fast modifications and acknowledges that change won’t come in a single day, however they need them to at the very least discover investments in net-zero emissions power sources and clear power 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 power business expertise and three of whom even have expertise is in renewables. Second, EN1 want to see a change in government compensation to raised 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 adverse 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 help of CalSTRS’s $300 million of shares, which is extra symbolic than anything. To have any likelihood of success right here, they must persuade massive stockholders like Vanguard (8.43%), State Road (5.17%) and BlackRock (4.97%) to not solely speak the speak, however stroll the stroll in relation to 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 fully ignore this marketing campaign. There’s 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 right down to the advice of ISS. Even with their help, 4 seats is a protracted shot right here, however one or two is feasible. A small investor like this going up in opposition to a behemoth like Exxon would have been remarkable ten years in the past. However with the evolution of shareholder activism mixed with the attract of ESG investing, it’s greater than doable right this moment. 

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.

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