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Exxon's Suddenly Trouncing Chevron. Coincidence?

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Liam Denning
·2 min read
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(Bloomberg Opinion) -- Perhaps it’s nothing.

It’s hard to see in that chart, but Exxon’s relative outperformance versus Chevron since activist shareholder Engine No. 1 LLC showed up is actually the sharpest in the past decade, barring the mid-March stock-market meltdown when Covid-19-related panic set in.

Obviously, one shouldn’t read too much into nine-day moves for two oil companies, which, even after a year like this one, are still worth a combined $356 billion(1). Less than a week before that activist letter dropped, Exxon announced a big asset write-down (unwelcome) and another cut to its capex budget (very welcome). Run the same chart using that sort of time frame and you get a similar result. Exxon’s traditional premium has disappeared, so there’s a relative value argument, too. Moreover, having borrowed to cover its dividend, Exxon has also become more of a leveraged play on oil prices, so the recent rally — taking Brent back above $50 a barrel — there could be an explanation. On the other hand, Exxon’s correlation with oil prices doesn’t seem noticeably elevated (nor Chevron’s noticeably subdued).

In seeking causation, one thing to remember is that Engine No. 1’s letter, while aimed ultimately at overhauling Exxon’s energy-transition strategy, focused primarily on a problem that resonates more readily with investors: capital allocation and the incentives underlying it.

It’s an issue that’s been dogging Exxon (and the industry); analyst Doug Terreson at Evercore ISI has proselytized the message of aligning c-suite bonuses better with financial performance for years. Activists such as Kimmeridge Energy Management Co. have pushed it with various frackers recently. Engine No. 1’s small size and sustainability angle make it easy to dismiss the chances of its campaign actually succeeding. On the other hand, Exxon seems to be responding already on the environmental front.

Maybe that chart is nothing; maybe it’s just the oil price; maybe folks are getting excited at the prospect of an Exxon push into renewables (er, no). Another explanation: Even if the activists are small, they’re tapping into angst about strategic direction, management choices and board oversight — and raising the possibility of change.

(1) Fun fact: That was Exxon's market cap alone just over two years ago.

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.

For more articles like this, please visit us at bloomberg.com/opinion

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