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Fate of Exxon Mobil hinges on shareholder climate change vote

For decades, Exxon Mobil has held a well-deserved reputation as one of the nation’s leading bulwarks against addressing climate change.

The giant oil company has done less than many of its peers to pivot away from fossil fuels and toward renewable energy sources. Its “advertorials,” placed in prominent newspapers, dismissed climate chance science as “unsettled.”

Its executives denigrated climate change research — including studies its own scientists conducted — as “based on completely unproven climate models, or, more often, on sheer speculation.” (Those were the words of then-CEO Lee Raymond in 1999.)

We conclude that the needs of society will drive more energy use in the years ahead – and an ongoing need for the products we produce.

Exxon Mobil CEO Darren Woods scoffs at the need to pivot to renewable fuel

The reckoning may now be at hand. At the company’s annual meeting, scheduled to be held virtually today, shareholders will be given the opportunity to replace as many as four of Exxon Mobil’s 11 outside directors with nominees of the activist hedge fund Engine No. 1.

Engine No. 1 argues that Exxon Mobil has taken a lackadaisical approach to shoring up its portfolio with renewable energy sources. Instead the company has effectively doubled down on developing more fossil fuel reserves even as demand for oil and gas is flattening out and is likely to go into steep decline.

“A refusal to accept that fossil fuel demand may decline in decades to come has led to a failure to take even initial steps towards evolution,” the firm observed in an investor presentation earlier this month.

“This strategy has contributed to significant share price underperformance in recent years and left ExxonMobil far more exposed than peers to demand declines” for petroleum products, the firm said.

In traditional circumstances, a behemoth like Exxon Mobil would have little trouble crushing a pipsqueak like Engine No. 1 like a bug. The hedge fund’s roughly $50 million in company shares is a pittance when weighed against the oil company’s market capitalization of nearly $247 billion.

But Engine No. 1 has lined up some powerful allies, all of whom have indicated they want to see Exxon Mobil pivot into the future.

They include hedge fund D.E. Shaw, which owns about $326 million in company shares, and three powerhouse public pension funds: the California Public Employee Retirement System (CalPERS), the California State Teachers Retirement System (CalSTRS) and the New York State Common Retirement Fund.

All three, which hold a combined $1.4 billion in Exxon Mobil shares, have said they will support the Engine No. 1 board slate. CalPERS said in a statement filed with the Securities and Exchange Commission that it believes the board needs “additional expertise…in renewable energy technologies” to help it manage “the transition to a low-carbon economy.”

CalPERS, stating that it would also support the insurgent movement, also has won the support of two crucial proxy advisory firms, which counsel institutional investors on annual meeting votes. Those firms are Institutional Shareholder Services and Glass Lewis.

ISS, which advised clients to support three of the four alternative board nominees, wrote in its advisory that the hedge fund had presented “convincing arguments” that Exxon Mobil hadn’t adequately positioned itself for a transition from fossil to renewable fuels in energy generation.

And just Tuesday, BlackRock, which with 6.7% of Exxon Mobil shares is the company’s second biggest shareholder (after Vanguard Group), said it would also vote for three of the four Engine No. 1 nominees.

The Exxon Mobil showdown comes at a critical moment in the evolution of the energy industry. Climate experts say a move away from carbon-based fuels — oil, gas and coal — grows more urgent by the hour. In a just-published roadmap to global net-zero carbon emissions by 2050, the International Energy Agency acknowledged that reaching the goal would require unprecedented cooperation among governments, industry and energy producers.

“There is no need for investment in new fossil fuel supply in our net zero pathway,” the roadmap states.

As a result of the “unwavering commitment” to reaching the 2050 goal, it says, coal demand would decline by 90% to just 1% of total energy use in 2050, gas demand would fall by 55% to 1,750 billion cubic meters and oil demand would fall by 75% to 24 million barrels per day from the current 90 million barrels per day.

Electrification of transportation and other sectors still dependent on fossil fuels would be crucial, with electric cars going from 5% of sales now to 60% by 2030. Accommodating the surging demand would require a rapid expansion of solar capacity, “equivalent to installing the world’s current largest solar park roughly every day” between now and 2030.

Even if those goals can’t be reached by the stated deadlines, they’ll place intensifying pressure on companies mired in fossil fuel production along the way, such as Exxon Mobil.

Once united in its fealty to oil and gas, the energy industry is fragmenting into two camps, one of which is beginning to shift its emphasis to renewable sources such as solar and wind, and another that still maintains that the age of oil has many more decades to run.

The first camp includes BP, formerly known as British Petroleum, and Royal Dutch Shell, which have announced the most aggressive pivots toward renewable energy generation among the big oil companies. Both have pledged to become “net-zero” emitters of greenhouse gases by 2050 — as Shell put it, to be “in step with society.”

BP and Royal Dutch Shell both slashed their stock dividends in 2020 — BP cutting its quarterly payout in half to 5.25 cents per share and Shell cutting its payout by two-thirds to 16 cents per share. Both said they aimed to conserve cash as they make capital-intensive shifts in strategy.

Those companies and other European energy firms are striking deals to supply big customers with renewable energy. In February, Shell announced a deal to supply Amazon with power from an offshore wind farm in the Netherlands, thus serving Amazon’s goal of relying on 100% renewable energy by 2030. BP’s Lightsource solar subsidiary has lined up Amazon and the Commonwealth of Pennsylvania as customers.

Exxon Mobil hasn’t made that sort of commitment. Quite the contrary: In a letter to employees issued last October, CEO Darren Woods questioned what he termed a growing public belief that the drop in energy demand during the pandemic reflected “an accelerating response to the risk of climate change” amid suggestions that “our industry won’t recover.”

Instead, he wrote, “we conclude that the needs of society will drive more energy use in the years ahead — and an ongoing need for the products we produce.” That means more investment in oil exploration, not less.

Woods has shown no inclination to follow the lead of BP and Shell by cutting Exxon Mobil’s dividend. As he said in an investor presentation on April 27, the company’s financial strategy includes paying shareholders “a reliable and growing dividend.”

Woods was also patronizing, during a January conference call with Engine No. 1 executives, about the commitments by BP and Shell to net-zero carbon emissions. According to the Wall Street Journal, he implied that the rival oil companies were posturing about their goals and hadn’t set forth plans for how to achieve them.

But he also moved to project a greater commitment to climate change expertise on the board, announcing over the weekend that Exxon Mobil would appoint two new directors over the next 12 months, “one with energy industry experience and one with climate experience.”

Engine No. 1 rejected the commitment. “This is a Board that continues to only be open to new directors that it approves, rather than trusting the shareholder vote,” it stated. “What the Board needs are directors…who can help turn aspirations of addressing the risks of climate change into a long-term business plan, not talking points.”

Other signs have emerged that the ground is shifting beneath oil executives’ feet. Last May, a majority of shareholders of Chevron — which like Exxon Mobil has a reputation for resisting the inevitable evolution of the energy industry — passed a resolution asking the company to issue an annual report disclosing its lobbying expenditures on climate change and explaining how they align with the goals of the 2015 Paris climate agreement.

The Paris agreement set goals of holding the increase in the global average temperature to less than 2 degrees Celsius above preindustrial levels and pursuing policies to limit the increase to 1.5 degrees.

A similar proposal is on this year’s Exxon Mobil meeting agenda, along with one asking for an audited report on how the IEA’s roadmap would affect the company’s financial position. Management is asking shareholders to reject both. Even if they passed, they would have no mandatory effect, only advisory.

Engine No. 1 is surely correct in maintaining that Exxon Mobil’s commitment to fossil fuels has poorly served its shareholders. The company’s shares have been dead money, in investment parlance, for much of this young century. It stock price closed at $58.26 Tuesday, about its same level, accounting for dividends, on Dec. 1, 2007.

The company lost $22.4 billion last year on revenue of $178.6 billion, while its total debt exploded to $67.6 billion, up from $37.8 billion in 2018. At least some of that borrowing presumably went to maintain the shareholder dividend, which cost $14.9 billion in 2020.

Although Exxon has announced some initiatives in sustainable energy production, such as investments in carbon capture and biofuels technology, but its critics say these mostly pay lip service to the concept. “Such efforts have mostly generated advertising,” Engine No. 1 scoffed in its investor presentation.

As a group, the hedge fund’s nominees combine experience in conventional energy production and entrepreneurship in renewables to a degree that big institutional investors evidently find appealing.

They’re Gregory Goff, the ex-CEO of Andeavor (formerly Tesoro), a conventional oil producer and refiner; Kaisa Hietala, a Finnish renewables executive; Alexander Karsner, a former Google executive with a background in clean tech investing; and Anders Runevad, former CEO of the Danish wind power company Vestas. BlackRock and ISS support the nomination of all but Runevad, though their reasons for leaving him off their roster isn’t clear.

Staging an insurgent run at the board of a major corporation is no easy task, but this vote is widely seen as a referendum on Woods’ leadership of Exxon Mobil. If the slate is victorious, that will send a clear signal that shareholders want Exxon Mobil, as well as other oil producers, to revise business models that once placed them among the biggest and most powerful enterprises on the globe.

If they fail, and Exxon Mobil takes that outcome as a signal to continue business as usual, that won’t mean that the old model is sustainable. Shareholders may not be able to force Exxon Mobil onto a new course, but then Mother Nature will have her way, and the company will end up in the same unhappy place it’s heading for now.



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