The little engine that could, and the oil giant that couldn’t

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Last December, when a week-long hedge fund named Engine No. 1 challenged Exxon Mobil to change its ways, laughter echoed in Wall Street circles, the name of the fund being named after a famous children’s book. to its small $ 40 million stake in what was once the world’s largest publicly traded company.

Barely six months later, the fund struck a blow that spilled over into the entire oil and gas industry. The No.1 Engine campaign forced Exxon to accept new board members who could bring a calculation on its business strategy and deal with the risk of global climate change that many investors say Exxon has long been reluctant to take. approach.

Companies with a market value of $ 250 billion like Exxon rarely face, let alone lose, shareholder battles. But stakeholders familiar with Exxon’s thinking said Wednesday’s defeat has been going on for years due to ongoing low returns.

Institutional investors had become frustrated with the company’s approach to energy transition, behind its global rivals who had promised big spending in power generation, solar and wind power. Additionally, Exxon failed to understand just how more sensitive the investment community has become to climate change issues, which has helped the No.1 engine win over large pension funds in California and New York.

Sources close to the company’s strategy claim that Exxon was late in mounting a defense against the No.1 engine, and even when he did, he focused on the threat to the generous corporate dividend. But analysts have warned for months that Exxon’s high leverage could put that dividend at risk, making its warnings about the fund’s intentions less threatening.

“Exxon Mobil has worked very hard to lose this battle” for years of inattention to climate change, said Robert Eccles, professor of management practices at Said Business School at the University of Oxford. In December, Eccles said he believed activists had a chance of winning a fight on the board.

Exxon did not respond to requests for comment. Company executives said its scale and approach to investing has weathered boom and bust cycles. In a statement released Wednesday, CEO Darren Woods said Exxon “has engaged very actively with our shareholders, sharing our plans and listening to their views and key issues that matter to them.”

A spokeswoman for the No.1 engine declined to comment.

SOUGHT-AFTER ENERGY EXPERIENCE

When the New Engine No.1 announced its campaign in early December, Exxon Mobil was ending a disastrous 2020 due to the coronavirus pandemic that would end in losses of $ 22 billion.

The No.1 engine saw an opportunity to push for changes to the company’s board of directors, which until this year had no one – other than CEO Woods – with industry experience. energy, with arguments on Exxon spending and the lack of an energy transition plan.

Top fund executives Chris James and Charlie Penner went to lengthy efforts to recruit potential directors with the skills to challenge Exxon, people familiar with the matter said, ultimately choosing four people all with energy experience.

The fund was able to tap into investor dissatisfaction to turn the fight into a climate referendum that cost both sides at least $ 65 million. CALSters, the California Teachers’ Retirement Fund, supported the campaign from the start.

Exxon has sought to blunt the fund’s nominees by expanding its board of directors and adding director Jeff Ubben, who manages a sustainable investment fund. It has also sought to allay investor climate concerns by scaling up low-carbon initiatives and reducing the intensity of its greenhouse gas emissions in oil fields.

The company has also turned the tide of a massive oil and gas expansion program, although analysts expect it to pick up the pace of spending next year.

By April, however, the No.1 engine lined up more allies. New York’s $ 255 billion pension fund has announced that it will support the list of dissident directors, following California’s $ 300 billion teachers’ pension fund.

FOCUS ON DIVIDEND

Exxon took the threat more seriously in April, but focused on investor returns, warning in a letter to shareholders that the No.1 mover wanted the company to “pursue a vague and undefined plan – which we believe will implement jeopardize our future and your dividend ”.

The company has long enjoyed its dividend, which, during the lows in oil prices caused by the pandemic, reached a return of over 10%. With the company’s indebtedness reaching over $ 69 billion last year, analysts have often questioned whether the dividend can be sustained, with Exxon being encouraged to cut costs.

“Exxon’s biggest surprise was that the strategy of ‘defending yields’ didn’t work,” said a source close to the firm’s thinking.

The tide turned again against Exxon on May 14 after two almost simultaneous events. The first was the publication of a damning report by influential shareholder advisory firm ISS which criticized the company’s failure to adjust its spending plans.

“Investors have consistently raised concerns about preparing for an energy transition, but the board has failed to take any decisive enough action to garner market recognition before the dissident’s campaign launches,” ISS said. .

This was followed by Woods’ televised appearance on CNBC, where investors said he did not appear prepared for host David Faber’s questions about the ISS report, Exxon’s strategy and the lack of energy experience of the board of directors.

Exxon has for years relied on the size of the company and a steady dividend to blunt investor criticism, even as it made a series of risky investments such as its purchase of XTO Energy before a sharp drop in gas prices. natural gas and a 2017 purchase of Texas shale properties. oil prices were falling.

New York State Comptroller Thomas DiNapoli in a statement on Wednesday said the fund has wanted assurances for years that Exxon’s board of directors is taking the climate crisis seriously “and acting to put the company on the path to success in the low carbon economy, and for years received platitudes and gas fires in response. ”

Blackrock Inc, the world’s largest asset manager, which has backed three of the four dissident candidates, said in a statement on Wednesday that Exxon had only invested $ 10.4 billion in low-emission energy technologies. carbon over the past 20 years, compared to more than $ 20 billion in global spending. in 2020 alone.

On Wednesday, the company suspended its annual general meeting for an hour, as it continued to count the votes. Woods then answered shortlisted questions from investors for 40 minutes, much longer than at the annual meeting the previous year.

Among the questions was one on a report by the International Energy Agency which warned that investors should not fund new fossil fuel supply projects beyond this year if the world is to achieve net zero emissions. by the middle of the century. Woods, however, said that “if you look at the report, it highlights the continued need for investment in oil and gas.”


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