“More of the same, and a lot of it,” says CFRA Research energy analyst Stewart Glickman of a newly unveiled plan from Exxon Mobil to reduce its greenhouse gas emissions. But Glickman, and others analysts even more critical of Exxon, say there is a logic and consistency to the oil giant’s position that was reiterated on Monday.
Source: ExxonMobil
A week after multiple activist investor groups targeted Exxon Mobil for recent financial underperformance as well as climate change concerns, the oil giant has released a new five-year plan to reduce greenhouse gas emissions. The company stressed that the plan has been in the works for months — its previous five-year plan through 2020 is drawing to a close — but it also noted in outlining new carbon goals that the plan “includes input from shareholders.”
Whether Exxon Mobil’s new attempt to address a lower-carbon future will satisfy shareholders likely depends on what a shareholder already expected of the company.
Investors willing to bet that there is a decades-long roadmap for Big Oil without a fundamental rethinking of the business model will view the new steps as the incremental change needed to move into a future in which oil and gas remains relevant, and they are likely to remain the most concerned about Exxon Mobil’s ability to keep funding its dividend during a difficult financial stretch.
Shareholders who think the energy transition is going to occur more quickly, and fossil fuel demand remain on a downward trajectory, are likely to view the plan as more of the same — and not nearly enough.
“Nothing suggests any change in strategy,” said Andrew Logan, who heads the oil and gas research program at Ceres, a sustainability nonprofit that works with investors on climate change. “They are just optimizing the path they are already on.”
Commitments related to methane and methane flaring are strong, even if they are not the first oil and gas company to signal this goal — Pioneer Natural Resources did weeks ago.
ConocoPhillips and Occidental Petroleum remain ahead of Exxon on broader carbon reduction goals.
“These are small but meaningful reductions for a company of their size,” Logan said. “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,” said Darren Woods, Exxon Mobil CEO in a statement announcing the new plan.
The Houston energy giant, which in the past has called emissions reductions targets “a beauty contest,” now has a stated goal to reach “industry-leading greenhouse gas performance across its businesses by 2030.”
Experts who reviewed the announcement said it was difficult to judge that goal, given the lack of detail on how Exxon Mobil would get there. And several pointed to the fact that the new five-year plan does not to any significant extent address emissions from the products it makes or the long-term energy transition challenge.
While Exxon Mobil indicated it will report Scope 3 emissions — the emissions from the products it sells, that are farthest away from its own operations — the company did not include an emissions reduction goal related to this category and messaged the goal in a way that suggested it is up to consumers and society to be responsible for this shift. “It is the biggest source of risk from carbon and they only begrudgingly talk about Scope 3,” Logan said.
“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,” stated the Union of Concerned Scientists in a response to the new plan.
Exxon Mobil carbon moonshots
Investment in technology like carbon capture & storage and biofuels will continue, though it was recently reported by Bloomberg that Exxon had suspended one major project in the carbon capture area. The company cited $10 billion in research and development it has committed since 2000 to lower-emission technologies, though experts say there has not been a great level of detail on those investments and most are likely designed around greater efficiency in existing operations rather than breakthroughs.
Small bets on energy moonshots, like turning algae into biofuels, have received investment from Exxon Mobil, but on a more limited basis.
“It’s tough to know if they are spending enough on moonshots,” said Stewart Glickman, energy analyst at CFRA Research, who has had either a hold or sell rating on Exxon Mobil shares over the past three to four years as its shares lost the premium they had historically traded at versus oil and gas peers.
He said for activists it is fair to make the case that Exxon’s nods to R&D spending in new areas are “greenwashing.” But in the current energy sector crisis, it is also fair for Exxon to be operating in an all-out effort to protect the dividend, and it is not a surprise that some projects would be lightly funded or cancelled. Growth investors have fled the energy sector and the value investors that remain require the dividend to be maintained. The company recently wrote down $20 billion in assets and cut its capital spending plans for the next few years by billions.
It is hard to ignore the timing even though Exxon’s plan was due for an update: Exxon released this plan right after a newly formed activist fund announced its intentions to seek up to four board seats — another activist hedge fund, D.E. Shaw, reportedly sent its own letter to Exxon management expressing concern about financial performance last week. But Glickman said Exxon Mobil shows no signs it will deviate from the belief that its best chances of success remain sticking as close as it can to existing core competencies.
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 the mantle. It’s a balancing act.
Stewart Glickman
CFRA Research analyst
“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 said. “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 could be proven right. If the company were to stop all upstream investment in fossil fuels and put the majority of its capital into alternative technologies but fail to have a commercial breakthrough, it and the world could be looking at an energy deficit in the decades to come. The odds are long to make a breakthrough technology work, and making it commercially scalable and economically viable, is hard. If Exxon Mobil bet heavily on the wrong technology, then shareholders could be up in arms over that form of value 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 the mantle. It’s a balancing act,” Glickman said. “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.”
Decision time for energy shareholders
Critics of Exxon’s approach say even if emissions reductions are an important goal, it is still investing too little in a rapidly changing world and not diversifying its investments.
In its letter to Exxon Mobil last week, newly formed activist investor company Engine No.1 said the company needs to prepare a long-term business plan for scenarios other than oil being back above $60 for the next several decades.
“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 part of its reasoning for placing energy transition experts on Exxon board. “
The activist investor said in a statement after Exxon’s new climate plan was released on Monday that while reducing emissions intensity is important, nothing in ExxonMobil’s stated plans better positions it for long-term success in a world seeking to reduce total greenhouse gas emissions and nothing in its Scope 3 disclosure will lead to the reduction of such emissions.
Spending on methane leakage and improving efficiency of operations is commendable, but not transformative. “What they are investing in makes sense if you believe we have 100 years to transition away from oil and gas. It is logical from that point of view,” Logan said.
While Exxon said the goals were in line with the Paris Agreement, its emissions reductions are for operating assets, and not total emissions including non-operated assets and fuel use at the Scope 3 level, which experts said was a loose interpretation by the oil company of committing to the framework targets.
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 understand ExxonMobil is aware of many of the points we have raised and has fundamental differences of opinion with respect to many of them. We also acknowledge that there are good faith debates to be had about these topics, as is the case in every industry facing long-term change. We believe, however, that given the Company’s long-running underperformance and the challenges it faces, it is 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 more growth has cost 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 peers are beginning to come to terms with the reality that the Paris Agreement requires absolute reductions in fossil fuels, Exxon plans to up its production by 1 million barrels per day over the next five years. Averaging down a minority of its lifecycle emissions by a minority is the thinnest of fig leaves for a big increase in overall emissions and a bet on continued business as usual.”
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. All of these companies are finding it difficult to find the right pace of change in the energy transition — Shell experienced an exodus of top clean energy officials earlier this month, reportedly due to frustration that the company’s latest plan is not moving fast enough to shed the legacy business model. The balancing act that Exxon Mobil is playing right now with its new plan is not only related to its long-term strategy, but fending off the activist investors.
“Seems like it is aimed pretty narrowly at a small number of large shareholders they want to keep on their side if it comes to a proxy fight over the board,” Logan said. “Exxon is feeling the pressure to do something more than they otherwise would have, even if the announcement falls short.”
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 were worried about Exxon before the announcement, about their positioning, you are still worried now,” Logan said.
