The EconomistFebruary 6th 2021 Business 55T
wo americangiants, spooked by a crisis that has roiled oil
markets, fall into each other’s arms. The tie-up strings back to-
gether bits of Standard Oil—broken up in 1911 in the world’s most
famous trustbusting exercise. The year was 1999, and Exxon had
just completed an $81bn merger with Mobil. Might history repeat
itself in 2021? The world of corporate dealmaking is abuzz follow-
ing reports that last year the bosses of ExxonMobil and Chevron
discussed combining the two firms, clobbered by covid-19 along
with the rest of their industry. The talks are off, apparently. But
they could be rekindled. The resulting crude-pumping colossus
could produce enough to meet over 7% of global oil demand.
This time, though, the deal would not be a show of strength, es-
pecially for ExxonMobil. The company was under strain before the
pandemic. Despite a $261bn capital-spending splurge between
2010 and 2019, its oil production was flat. Its net debt has ballooned
from small change to $63bn, in part to maintain its sacrosanct div-
idend, which costs it $15bn annually. The company, which had a
market capitalisation of $410bn ten years ago—and in 2013 was the
world’s most valuable listed firm—is worth less than half that now.
In a symbolic blow, last August it was ejected from the Dow Jones
Industrial Average, after 92 years in the index.
Adding injury to insult, on February 2nd ExxonMobil reported
that a decade of gushing profits—which averaged $26bn a year be-
tween 2010 and 2019—had come to an end. The firm booked its
first-ever annual net loss, of a staggering $22bn. Much of that was a
one-off write-down of natural-gas assets. ExxonMobil is not the
only oil firm suffering; Britain’s bp also announced an annual loss
this week. Darren Woods, ExxonMobil’s chief executive, gamely
argued that the firm was “in the best possible position” to bounce
back. As rivals have talked about a new future of renewable-energy
investment, Mr Woods has been frank about doubling down on hy-
drocarbons. His firm’s strategic mantra is that demand for fossil
fuels will remain high for decades as consumers in emerging mar-
kets buy more cars, air-conditioning units and aeroplane tickets.
Shareholders are no longer so sure. Those concerned about
greenery are angered by ExxonMobil’s continued carbon-cud-
dling. Those who care more about greenbacks are irked by its capi-
tal indiscipline. Right now, both are pushing in the same direction.
D.E.Shaw, a big hedge fund, is urging ExxonMobil to spend
more wisely. The company’s return on capital employed in explo-
ration and production fell from an average of over 30% in 2001-10
to 6% in 2015-19. The fund has urged Mr Woods to be more like Mi-
chael Wirth, his opposite number at Chevron, who has focused
more on value and less on volume. More eye-catchingly, Engine
No.1, a newish fund with a stake of just 0.02%, is trying to green-
shame Mr Woods with a mantra as straightforward as ExxonMo-
bil’s: if the company continues on its current course, and demand
shifts quickly to cleaner energy, it risks terminal decline. The fund
has launched a proxy battle by proposing four new directors; the
current board, it complains, is long on blue-chip corporate creden-
tials but short on energy expertise. Engine No.1’s agitation for a
shake-up has won backing from, among others, Calstrs, which
manages $283bn on behalf of California’s public-sector workers.
Most important, the tone from ExxonMobil’s three biggest in-
stitutional shareholders—BlackRock, Vanguard and State Street—
has also shifted. Between them these titans of asset management
own around 20%. That understates their power. Many retail share-
holders who own the company’s stock directly do not bother to
vote, leaving the big guns that do with outsized sway. Where once
asset managers occasionally wagged a finger at climate-unfriend-
ly firms, they are starting to threaten to walk away.
In a recent letter to clients, Larry Fink, boss of BlackRock, talked
of greener stocks enjoying a “sustainability premium” and dirty
ones jeopardising portfolios’ long-term returns. He hinted that his
firm—the world’s largest asset manager—might divest from firms
that failed to appreciate the “tectonic shift” taking place. Van-
guard, too, has called out ExxonMobil for flawed governance.
Such badgering used to fall on deaf ears. Now, ExxonMobil
seems ready to make some changes. It has just added the ex-boss of
Petronas, a Malaysian energy group, as a director, as part of a
“board refreshment”. It also unveiled a $3bn effort to intensify its
work on carbon capture. The firm is paring back spending on new
rigs, and narrowing its focus to higher-return fields in places like
Guyana and to America’s Permian shale basin.Texas let ’em go
This is a start. But it looks unlikely to appease increasingly restive
shareholders. Some of the green-minded rebels think ExxonMobil
is too focused on carbon-capture technology, which is costly and
has yet to be deployed at scale by anyone who has tried, and not fo-
cused enough on reducing emissions. Unlike many peers, the firm
has set targets for bringing down only the intensity of emissions
from its operations, not their overall level—leaving room for more
belching if production rises. It lags behind rivals in targeting
“scope 3” emissions: those of customers burning its petrol and jet
fuel. ExxonMobil may also have to offer further concessions to
those shareholders who fret more about capital than carbon. A big
cut in capital spending in 2020 has gone down well, but its
planned annual outlay of $20bn-25bn in coming years still looks
splashy compared with that of parsimonious rivals.
The firm’s response “has only emboldened us”, says a member
of Engine No.1’s proxy-fight team. “They are still looking at the
world today, or in five years, not the long-term trajectory—which
is exactly what got them into this mess.” Last year Mr Woods sur-
vived a shareholder resolution, backed among others by Black-
Rock, to strip him of his dual role as ExxonMobil’s chairman. This
time around, as Davids and Goliaths gang up on him, the oilman
may be less lucky. 7Schumpeter The long squeeze
Shareholders are rebelling against ExxonMobil’s hydrocarbon-heavy strategy