A new activist takes on Exxon to reverse the oil giant's underperformance

Business: Engaged in the exploration, production, transportation and sale of crude oil and natural gas, and 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, chemical, and corporate and financing. The upstream segment operates to explore for and produce crude oil and natural gas. The downstream operates to manufacture and sell petroleum products. The chemical segment operates to manufacture and sell petrochemicals. The company has exploration and development activities in projects located in the United States, Canada/South America, Europe, Africa, Asia and Australia/Oceania.

Stock Market Value: $202.5 billion ($47.89 per share)

Percentage Ownership: 0.02%

Average Cost: n/a

Activist Commentary: 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 mandate is to create long-term value by driving positive impact through active ownership. This is EN1’s first public campaign.

Engine No. 1 (“EN1”) sent a letter to Exxon Mobil Corp’s (XOM) Board announcing that it has identified the following four director candidates to be nominated, if necessary, to the company’s board: (i) Gregory J. Goff, former CEO of Andeavor, a leading petroleum refining and marketing company formerly known as Tesoro; (ii) Kaisa Hietala, former EVP of renewable products at Neste, a petroleum refining and marketing company; (iii) Alexander Karsner, a senior strategist at X (formerly Google X), the innovation lab of Alphabet Inc; and (iv) Anders Runevad, former CEO of Vestas Wind Systems, a wind turbine manufacturing, installation, and servicing company with more installed wind power worldwide than any other manufacturer. EN1 noted that CalSTRS, which owns over $300 million in value of the company’s stock, has stated that it intends to support these candidates if nominated for election to the board. EN1 also called on the company to impose greater long-term capital allocation discipline, implement a strategic plan for sustainable value creation and realign management incentives. 

Exxon Mobil is one of the most iconic companies in the oil and gas sector, which has seen steep declines in recent years. The company’s return over the last 10 years has been negative 20% versus a 277% return for the S&P 500, and its total shareholder return for the prior 3-, 5-and 10-year periods trails its self-selected proxy peers, both before and after the COVID-19 pandemic. Engine No. 1’s (“EN1”) plan to reverse this underperformance has economic and social elements, but is primarily economic, at least in the short and mid-term.

EN1 points to capital allocation as the primary driver of this poor performance. Return on capital employed (ROCE) for upstream projects (which have historically accounted for over 75% of total capital expenditures (“capex”)) has fallen from an average of 35% from 2001-10 to 6% from 2015-2019. EN1 urges Exxon Mobil to adopt a more disciplined and forward-thinking approach to capital allocation strategy, including a long-term commitment to only funding projects that can break-even at much more conservative oil and gas prices. They believe that a 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 thing that EN1 focuses on is “a strategic plan for sustainable value creation in a changing world.” This part of the plan has less detail and is admittedly void of any quantitative analysis, but is a push by EN1 for the company to get on the right side of history with respect to renewable energy. EN1 is not asking the company to make immediate changes and acknowledges that change will not come overnight, but they want them to at least explore investments in net-zero emissions energy sources and clean energy infrastructure. While any change in this area could take many years, the company is used to looking out to the future in its E&P business as plants they invest in have lives of up to 20 years.

EN1 suggests two significant initiatives to accomplish these changes. First, they propose a slate of four directors for the board, all with energy industry experience and three of whom also have experience is in renewables. Second, EN1 would like to see a change in executive compensation to better align compensation with value creation for shareholders, as total CEO compensation at the company rose almost 35% from 2017 to 2019 despite Exxon Mobil’s negative cumulative total shareholder return (-12%) during that period.

EN1 makes some very compelling points, but as a 0.02% shareholder, has an uphill, yet achievable, path to success. They own substantially less than 1% even with the support of CalSTRS’s $300 million of shares, which is more symbolic than anything else. To have any chance of success here, they will have to convince large stockholders like Vanguard (8.43%), State Street (5.17%) and BlackRock (4.97%) to not only talk the talk, but walk the walk when it comes to ESG investing. While Exxon is somewhat of a poster boy for the need for environmental change, it will be hard for those large shareholders to completely ignore this campaign. There is already evidence that other shareholders are like-minded — D.E. Shaw & Co. (0.11%) also sent a letter to the company urging them to reduce costs and improve performance. This might end up coming down to the recommendation of ISS. Even with their support, four seats is a long shot here, but one or two is possible. A small investor like this going up against a behemoth like Exxon would have been unheard of ten years ago. But with the evolution of shareholder activism combined with the allure of ESG investing, it is more than possible today. 

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