“More of the same, and a lot of it,” says CFRA Research power analyst Stewart Glickman of a newly unveiled plan from Exxon Mobil to cut back its greenhouse fuel emissions. But Glickman, and others analysts much more crucial of Exxon, say there may be a logic and consistency to the oil large’s place that was reiterated on Monday.
Every week after a number of activist investor teams focused Exxon Mobil for current financial underperformance as properly as local weather change issues, the oil large has launched a new five-year plan to cut back greenhouse fuel emissions. The firm confused that the plan has been within the works for months — its earlier five-year plan via 2020 is drawing to a shut — nevertheless it additionally famous in outlining new carbon targets that the plan “includes input from shareholders.”
Whether Exxon Mobil’s new try to handle a lower-carbon future will fulfill shareholders seemingly relies on what a shareholder already anticipated of the corporate.
Investors keen to guess that there’s a decades-long roadmap for Big Oil with out a elementary rethinking of the enterprise mannequin will view the brand new steps as the incremental change wanted to maneuver into a future by which oil and fuel stays related, and they’re prone to stay essentially the most involved about Exxon Mobil’s capability to maintain funding its dividend throughout a tough monetary stretch.
Shareholders who assume the power transition goes to happen extra rapidly, and fossil gasoline demand stay on a downward trajectory, are prone to view the plan as extra of the identical — and not practically sufficient.
“Nothing suggests any change in strategy,” mentioned Andrew Logan, who heads the oil and fuel analysis program at Ceres, a sustainability nonprofit that works with buyers on local weather change. “They are just optimizing the path they are already on.”
Commitments associated to methane and methane flaring are sturdy, even when they aren’t the primary oil and fuel firm to sign this objective — Pioneer Natural Resources did weeks in the past.
“These are small but meaningful reductions for a company of their size,” Logan mentioned. “It puts them more in line with Chevron, which is not a leader in this either.”
“We respect and support society’s ambition to achieve net zero emissions by 2050, and continue to advocate for policies that promote cost-effective, market-based solutions to address the risks of climate change,” mentioned Darren Woods, Exxon Mobil CEO in a assertion saying the brand new plan.
The Houston power large, which up to now has known as emissions reductions targets “a beauty contest,” now has a said objective to achieve “industry-leading greenhouse gas performance across its businesses by 2030.”
Experts who reviewed the announcement mentioned it was tough to evaluate that objective, given the dearth of element on how Exxon Mobil would get there. And a number of pointed to the truth that the brand new five-year plan does to not any vital extent tackle emissions from the merchandise it makes or the long-term power transition problem.
While Exxon Mobil indicated it should report Scope three emissions — the emissions from the merchandise it sells, which might be farthest away from its personal operations — the corporate didn’t embody an emissions discount objective associated to this class and messaged the objective in a approach that advised it’s as much as customers and society to be answerable for this shift. “It is the biggest source of risk from carbon and they only begrudgingly talk about Scope 3,” Logan mentioned.
“ExxonMobil now says it will disclose these emissions, which make up the lion’s share — roughly 80% to 90% — of company emissions. However, in the same breath ExxonMobil attempts to shift their responsibility to the consumers using its products exactly as the company intends them to be used,” said the Union of Concerned Scientists in a response to the brand new plan.
Investment in know-how like carbon seize & storage and biofuels will proceed, although it was lately reported by Bloomberg that Exxon had suspended one main venture within the carbon seize space. The firm cited $10 billion in analysis and growth it has dedicated since 2000 to lower-emission applied sciences, although consultants say there has not been a nice degree of element on these investments and most are seemingly designed round better effectivity in present operations somewhat than breakthroughs.
Small bets on power moonshots, like turning algae into biofuels, have acquired funding from Exxon Mobil, however on a extra restricted foundation.
“It’s tough to know if they are spending enough on moonshots,” mentioned Stewart Glickman, power analyst at CFRA Research, who has had both a maintain or promote ranking on Exxon Mobil shares over the previous three to 4 years as its shares misplaced the premium that they had traditionally traded at versus oil and fuel friends.
He mentioned for activists it’s truthful to make the case that Exxon’s nods to R&D spending in new areas are “greenwashing.” But within the present power sector disaster, it’s also truthful for Exxon to be working in an all-out effort to guard the dividend, and it isn’t a shock that some initiatives could be frivolously funded or cancelled. Growth buyers have fled the power sector and the worth buyers that stay require the dividend to be maintained. The firm lately wrote down $20 billion in belongings and reduce its capital spending plans for the subsequent few years by billions.
It is difficult to disregard the timing despite the fact that Exxon’s plan was due for an replace: Exxon launched this plan proper after a newly shaped activist fund introduced its intentions to hunt as much as 4 board seats — one other activist hedge fund, D.E. Shaw, reportedly despatched its personal letter to Exxon administration expressing concern about monetary efficiency final week. But Glickman mentioned Exxon Mobil reveals no indicators it should deviate from the assumption that its greatest probabilities of success stay sticking as shut as it will probably to present core competencies.
“Molecules, that is the sandbox they play in, not atoms. They are looking into algae and that’s molecule- based. They don’t see themselves as a wind or solar or energy storage proponent,” Glickman mentioned. “They think they can make the biggest difference elsewhere. They are not signing onto a brave new world of renewables or bust. They believe there is a place down the road for continued fossil fuel demand and they are trying to straddle those two worlds.”
Exxon Mobil might be confirmed proper. If the corporate had been to cease all upstream funding in fossil fuels and put the bulk of its capital into different applied sciences however fail to have a business breakthrough, it and the world might be an power deficit within the many years to return. The odds are lengthy to make a breakthrough know-how work, and making it commercially scalable and economically viable, is difficult. If Exxon Mobil guess closely on the mistaken know-how, then shareholders might be up in arms over that type of worth destruction.
“For the time being, the fossil fuels remain in the driver seat for what they are focused on, and renewables being added to mix, but not taking over mantle. It’s a balancing act,” Glickman mentioned. “They want to cater to some degree to activists and investors with an ESG bent, but they also want to say ‘don’t rule us out because of our name and fossil fuel history. We are making improvements.”
Critics of Exxon’s method say even when emissions reductions are an vital objective, it’s nonetheless investing too little in a quickly altering world and not diversifying its investments.
In its letter to Exxon Mobil final week, newly shaped activist investor firm Engine No.1 mentioned the corporate wants to arrange a long-term marketing strategy for situations aside from oil being again above $60 for the subsequent a number of many years.
“Change will not come overnight, but ExxonMobil should fully explore ways to leverage its scale and expertise in delivering energy by exploring growth areas, including more significant investment in net-zero emissions energy sources and clean energy infrastructure,” wrote the activist investor group as half of its reasoning for putting power transition consultants on Exxon board. “
Spending on methane leakage and improving efficiency of operations is commendable, but not transformative.
“What they’re investing in is smart in case you imagine we’ve 100 years to transition away from oil and fuel. It is logical from that time of view,” Logan mentioned.
Flames come from the flare stack at an ExxonMobil facility on October 4, 2020, in Cowdenbeath, Scotland, an unplanned flaring event which was part of a series of flaring events that led to community anger and a government investigation.
Ken Jack | Getty Images News | Getty Images
How major shareholders vote in the 2021 proxy season remains a major unknown as activists press for board changes at Exxon Mobil.
CalSTRS chief investment officer Chris Ailman told CNBC last week that his first communication after joining a recent activist campaign against Exxon Mobil’s board was an email to the CEO of the world’s largest asset manager, BlackRock, which has indicated in its own recent statements that it may support more shareholder resolutions in 2021 on climate issues.
Engine No. 1 stated in its letter to Exxon, “We perceive ExxonMobil is conscious of many of the factors we’ve raised and has elementary variations of opinion with respect to many of them. We additionally acknowledge that there are good religion debates available about these matters, as is the case in each business going through long-term change. We imagine, nonetheless, that given the Company’s long-running underperformance and the challenges it faces, it’s time for shareholders to weigh in.”
The economy holds the potential for a rebound that could benefit the energy sector, and Exxon ahead of its annual meeting in May. Crude prices recently topped $50 for the first time since Covid-19 pandemic began and energy shares have rallied in recent weeks, but they remain one of the market’s worst sectors with an uncertain near-term and long-term outlook, and Exxon has underperformed peers.
“Exxon’s pursuit of ever extra progress has value shareholder returns dearly,” said Andrew Grant, head of oil, gas and mining at London-based Carbon Tracker, which studies the impact of climate on financial markets. “While European friends are starting to return to phrases with the fact that the Paris Agreement requires absolute reductions in fossil fuels, Exxon plans to up its manufacturing by 1 million barrels per day over the subsequent 5 years. Averaging down a minority of its lifecycle emissions by a minority is the thinnest of fig leaves for a massive improve in total emissions and a guess on continued enterprise as ordinary.”
There is no visibility beyond five years in the new plan, while some U.S. peers like ConocoPhillips have been more willing to discuss a net-zero emissions future and a world of lower oil demand.
An even bolder shift like some European peers, including BP and Shell, have announced is not in the cards, and that is not a surprise. The balancing act that Exxon Mobil is playing right now is not only related to its long-term strategy but fending off the activist investor base.
“Seems like it’s aimed fairly narrowly at a small quantity of massive shareholders they need to carry on their aspect if it involves a proxy battle over the board,” Logan said. “Exxon is feeling the strain to do one thing greater than they in any other case would have, even when the announcement falls quick.”
For investors that doubt Exxon’s long-term strategy, the announcement signals that they are remaining consistent with the path they are on, and that might lead some investors to sell shares or press for change in leadership.
“If you had been nervous about Exxon earlier than the announcement, about their positioning, you’re nonetheless nervous now,” Logan mentioned.