Exxon faces ‘existential’ risk over fossil fuel focus, activist investor warns

ExxonMobil faces an “existential business risk” by pinning its future on fossil fuels as governments move to slash emissions, an activist hedge fund will tell investors in the final push to overhaul the oil major’s board.

“ExxonMobil still has no credible plan to protect value in an energy transition,” said an 80-page investor presentation seen by the Financial Times, in which Engine No 1 excoriated the company’s “value destruction” and “refusal to accept that fossil fuel demand may decline”.

The energy company “touts its efforts in areas like carbon capture and biofuels”, the document said, but those efforts have “delivered more advertising than results”.

Exxon has captured less than 1 per cent of its own emissions once the pollution from its sold products was included, Engine No 1 said.

Engine No 1 was started last year by hedge fund manager Chris James, best known as a tech investor, and Charlie Penner, who previously agitated against Apple while at Jana Partners and is behind the Exxon campaign.

The effort to overhaul Exxon’s board is among the most-watched US shareholder proxy battles in years and highlights a broader test for corporations and Wall Street as climate change risks rise up investors’ agendas.

In December, Exxon announced a target of a 15 to 20 per cent reduction by 2025 of its greenhouse gas “intensity”, a measure of pollution per barrel produced, alongside plans to curb methane emissions and flaring. The plans were “consistent” with the Paris climate pact goals, it said.

But Engine No 1’s document claimed Exxon’s total emissions, including from the products its sells, will rise by 2025.

“Arguing that reducing emissions intensity . . . while ExxonMobil continues to pursue production growth and thus increases overall emissions, puts it on a ‘Paris consistent’ path, fails the basic test of logic,” the document said.

Institutional investors including BlackRock and Vanguard, Exxon’s two largest shareholders, have been vocal about making climate concerns central to their investing strategies. Neither has publicly disclosed its position on the Exxon fight.

In response, Exxon cited a recent letter to shareholders warning them not to be “deceived by a months’ old hedge fund” with a “vague plan” that threatened the company’s future. The company said it would keep investing in “low-cost, high-return” oil assets to protect its dividend, repay debt and invest in its low-carbon plans.

Engine No 1, which holds a $50m stake in Exxon, launched its proxy battle in December, proposing four board members for election at the company’s shareholder meeting in late May. It won support from Calstrs, a large pension fund, and the Church Commissioners for England.

Exxon has made much of the public running lately, announcing board appointments, including Jeff Ubben, an activist social investor, and a low-emissions business line and endorsing industry calls for a price on carbon. In January, the company began disclosing its scope 3 emissions, or pollution from the products it sells.

Hedge fund DE Shaw also took an activist position in Exxon last year, calling for steep spending cuts. It will vote for the company’s slate at the AGM, said people familiar with its thinking.

But on Friday, New York state’s pension fund, the third-largest public pension fund in the country, announced it would back the Engine No 1 board candidates.

“Exxon’s board needs an overhaul,” said the New York State Comptroller Thomas DiNapoli. “We continue to be deeply concerned about Exxon’s failure to manage climate risk and refusal to heed calls to transition to a lower carbon future.”

Engine No 1’s investor presentation also sought to tap shareholder discontent with the company’s financial performance, including years of heavy spending and mounting debts.

As the pandemic shattered crude markets last year, Exxon — the world’s most valuable company by market capitalisation less than a decade ago — recorded four straight quarterly losses, was booted from the Dow Jones Industrial Average and wrote off almost $20bn of assets.

But the fund claimed that Exxon destroyed $175bn of value in the decade before the pandemic, while total shareholder returns were 28 per cent, compared with an average of 85 per cent for Chevron, Shell, Total, and BP.

The company last year sharply reduced planned capital spending and has announced slower production growth targets.

Exxon’s share price has risen about 35 per cent since the start of the year, outperforming both the S&P 500 and Exxon’s main peers.

But while rivals such as BP have begun a pivot to cleaner energy, the US major has staked its future on large oil projects in the US shale patch, offshore oilfields in Guyana and Brazil and refining and petrochemicals.

Exxon argued that even as the world moves to decarbonise, oil and gas will remain crucial to the global economy, rewarding its investments in production. It also remained sceptical of the renewables and net-zero emissions commitments made by rival oil companies including BP.

“What can we bring to those opportunities other than a cheque book?” chief executive Darren Woods said to the FT in March, referring to renewables.

Last week, Exxon floated the idea of a $100bn carbon capture project on the US Gulf, but said a carbon price would be necessary to make it work.

The investor deck from Engine No 1 described the “theoretical” project as an “advertising blitz” that “lacked any real substance”.

“The entire concept is reliant on the concept of a carbon tax, which has little chance of passage currently in the US, and would decimate oil and gas demand if it did,” the fund’s document says.