(Bloomberg Opinion) -- Like the proverbial buses, we waited a while for an activist to show up at Exxon Mobil Corp. and then three came along.
The third is Jeff Ubben, founder and former head of ValueAct Capital Management, who is now reportedly raising an $8 billion ESG fund for his new firm, Inclusive Capital Partners. He arrives in the wake of Engine No. 1 LLC, a small new fund that kicked things off in December and is now engaged in a proxy battle, and D.E. Shaw & Co., whose own campaign became public soon thereafter.
Exxon is said to be considering inviting Ubben onto its board. That sentence is itself remarkable; the idea of Exxon bringing any activist, particularly one touting green credentials, into the inner sanctum would have seemed ridiculous until very recently. It’s a measure of how much pressure is on the company over its weak returns and foot-dragging on climate-change planning. A spate of actions over the past two months, including slashing spending plans, disclosing emissions data, updating emissions targets and bringing a new director onto the board, have led up to this point.
So what might a board seat for Ubben mean? He declined to comment for this column, but he has talked at length in public about his interest in the energy sector over the past year or so. Last March, being interviewed on CNBC , he spoke of investing in BP Plc in the wake of new CEO Bernard Looney’s announcement of a net-zero carbon strategy. While Ubben’s characterization of BP’s financials being “fine” was at odds with its weak returns and rising leverage, his premise that the collapse in valuation creates an impetus for change is sound.
But how far impetus translates into movement is a function of the object’s inertia.
One aspect of Ubben’s approach that may appeal to Exxon in relative terms — and this is all relative — is that he comes across as a friendlier type of activist. Speaking at a conference just over a year ago, Ubben drew a contrast between traditional shareholder activism (“get the right CEO”) and ESG activism: “Get the right investor base.” That doesn’t necessarily rule out a push to unseat CEO Darren Woods. But it contrasts with, say, Engine No. 1’s public criticism and push to get four candidates onto the board; one of whom, Greg Goff, is a respected ex-CEO from the oil business. D.E. Shaw, meanwhile, is said to support Ubben’s candidacy.
Ubben’s objective of changing the shareholder base is something he spoke of last year in connection with AES Corp. Ubben joined the board of what was a coal-heavy power generator in early 2018. AES had begun to move in a greener direction already, and Ubben worked with rather than against the existing CEO. In transitioning to renewable energy, selling assets, slowing dividend growth and paying off debt, AES doubled its price/earnings multiple.
Oil companies could certainly use new shareholders. The excesses of the past decade and the growing uncertainty about oil’s future in the decades to come have led many to desert the sector.
Exxon, however, appears more focused on keeping its existing base onside. About 70% of its shareholders consist of retail or long-term investors, an unusually high proportion. They prioritize the dividend, and Exxon spent much of its latest earnings call reaffirming its commitment to that, making it clear capex would be cut first. The company did also announce a new initiative in carbon capture, but this looks more like preserving the existing model rather than transforming it.
A clear test of Exxon’s willingness to shake up its approach concerns Woods’s position as chairman alongside being CEO. Ubben is generally against this structure: “Everybody has to have a boss,” he said last year. Exxon has often faced, and successfully opposed, shareholder resolutions calling for the roles to be split. Curiously, Exxon’s defense of keeping them combined actually tends to reinforce one of Engine No. 1’s primary criticisms — namely, that the independent directors mostly lack relevant experience, enhancing the relative power of the CEO/Chairman:
A combined Chairman and CEO role ensures items of greatest importance for the business are brought to the attention of, and reviewed by, the Board on a timely basis. As new issues arise, market dynamics change, or risk exposures evolve, the Chairman/CEO is best positioned, with deep Company knowledge and industry experience, to highlight those issues with the Board, ensuring appropriate oversight and discussion. [My emphasis.]
Exxon’s financial priorities and attachment to the combined CEO/Chairman position fit with its entrenched expectations about long-term energy demand. The high-spending strategy that finally came unstuck in 2020 reflects a view that long-term oil demand growth is secure (see this), which also underpins the commitment to maintaining and eventually growing that $15 billion-a-year dividend.
Exxon’s worldview may end up being correct, of course (even if that doesn’t bode well for the planet). But the flaw exposed over the past year or so is that this worldview has lost cachet in the capital markets that previously took it as gospel, mirroring (or anticipating) broader shifts in society at large. The faithful investors who agree with it haven’t gone anywhere; they don’t need convincing, just paying. It’s the ones who don’t believe that need a reason to take Exxon seriously (and thereby reflate the multiple).
That’s where signaling a real change in the company’s approach comes in. Exxon’s rock-solid self-confidence has been its almost parodic strength over long decades. Now, in an era of change for energy markets unlike anything since the dawn of the oil age, it risks being a liability.
That inertia is what any activist is up against; even as it is, along with Exxon’s totemic significance, what attracts them in the first place. Engine No. 1’s initial foray, along with D.E. Shaw’s, clearly jolted things loose to some degree. Indeed, it’s hard to imagine Exxon considering an Ubben nomination otherwise.
Yet Exxon’s moves to date look like rearguard actions rather than signaling an openness to wholesale change. The new financial framework is all about maintaining confidence in the dividend and still leaves Exxon reliant on higher oil prices and downstream margins to attract investors. On that front, the recent rally in oil likely reinforces Exxon’s confidence in weathering the storm just fine, even if that reflects more of a trading call than a longer-term investment thesis.
Meanwhile, the new board member, former Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin, certainly brings energy industry experience. But even if Petronas has also ventured into solar power, the former head of a state-owned oil champion from an OPEC+ country doesn't suggest a radical shift in boardroom conversation is coming. Similarly, the reorganized carbon capture business, while a natural extension of Exxon’s skills, looks like baby steps (3% of capex) forced by outside pressure.
In that context, an activist with a more diplomatic demeanor may persuade Exxon to open the door, but then struggle to make an impact once inside.
Originally broadcast on March 4, 2020.
Comments made at a Reuters Breakingviews conference on January 15, 2020.
According to comments made by CEO Darren Woods on Exxon's 1Q2020 earnings call on May 1, 2020.
Exxon Mobil 2020 proxy statement, page 60.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
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