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“We are committed to playing a leading role in greenhouse gas reductions consistent with the goals of the Paris agreement...”
Thus spoke Exxon (XOM) CEO Darren Woods at Exxon’s investor day this week. For most chief executives, supporting the Paris climate agreement at this point is a no-brainer. For the CEO of Exxon—a company that has spent untold millions over decades lobbying against climate change—to make that statement is nothing less than shocking.
Woods’ capitulation is less surprising though if you think about where America’s largest oil and gas company finds itself, which is to say under siege. After a dismal 2020, the company is being called to account by analysts, activist hedge funds and even traditional investors.
“Exxon is in a tough spot,” says Randy Nelson, president of Sanguine Gas Exploration, a Tulsa-based, independent oil and gas company. “What [Exxon does] really well is managing complex projects at scale. But the market isn't sure about that now because of disappointing results and you're entering into a period of uncertainty about what demand is going to be after 2030.”
In other words concerns about climate change are causing industries and consumers to shift from hydrocarbons (oil, gas, gasoline etc.), into alternative fuels and products (solar and wind power on the wholesale side and Teslas and solar power on the consumer side.) This massive changeover, delicately referred to as “the energy transition,” poses nothing less than an extensional threat to Exxon.
And let’s not forget, it’s facing off against a new, less friendly administration in Washington. “All of a sudden you have political forces lined up towards what’s increasingly inevitable: Regulation of carbon emissions and regulated climate disclosure,” says Tim Mohin, who founded and led Apple’s Supplier Responsibility program and later served as chief executive of the Global Reporting Initiative.
It may surprise you that Exxon, until recently an impregnable, aircraft-carrier-of-a-company, had considered existential threats as far back as the 1960s. But back then the concerns were newly formed OPEC (founded in 1960), jacking up prices or the world running out of oil, (called peak oil theory).
That there would be an evaporation of demand for oil—the massive threat the company faces today—wasn’t even considered, but to be fair nor was it really on anyone’s radar.
Paradoxically though, those historical threats, (higher prices and no more oil to drill), would have had the same effect as today’s risk from a lack of demand, which was neatly articulated by a chemical engineer working at Exxon at the time, who according to NPR asked: "What can we do if we can't be in the oil business at all? We've got to diversify." And that thinking was the genesis of Exxon pursuing an alternative energy strategy 50 years ago.
In 1969, though a chance meeting with an employee of the Rockefellers (whose patriarch, John D., was the founder of Standard Oil, Exxon’s mighty ancestor), a chemist named Elliot Berman came to Exxon with an idea for solar photovoltaic technology (aka solar panels.) Exxon began to work with Berman and they created Solar Power Corp. to produce the cells, which ended up mostly being used on oil rigs in the Gulf of Mexico. I tracked down Berman, 91, now living in New York City. “It was fun,” he told me. “At the time Exxon was interested in all kinds of other businesses, like nuclear power and office machines. But there was real interest in solar.”
You can guess how the Solar Power Corp. story goes though. Oil prices didn’t rise, they fell, (or really were all over the place.) Anticipated government subsidies for solar became scarce during the Reagan years. Meanwhile Berman decamped from the company. “I got in a fight with an Exxon executive,” he says. “I wanted to run the company at a $250,000 loss to reinvest in the business. He wanted it to break even. So I left.” Exxon shut the business down in 1984 and sold the assets to another oil giant, Amoco, which itself was subsequently bought by another oil giant BP, which eventually shuttered its BP Solar unit in 2011.
In other words, Exxon (and the other major oil companies), while prescient when it came to solar power (and the same is true with wind and hydro), never really developed a taste for building alternatives into sustainable businesses. Indeed why should they have? For decades alternative energy was little more than a costly distraction.
Not anymore. Even after Tesla (TSLA) stock has taken a beating in recent weeks and Exxon shares rallying nicely (more on that in a minute), TSLA’s market value is $554 billion, while XOM’s is $253 billion.
Is the market telling us that in the not too distant future, oil will no longer be sine qua non for Exxon, or even that Exxon will be driven out of business? Maybe to both, though not quite yet.
Indeed the signals are mixed. Exxon stock is up 43% year-to-date versus 2% for the overall market, but over the past five years, (even taking into account the recent rally), and XOM is down 28%, while the S&P is up 90%.
That disparity is worth drilling down into (hah) briefly. The stellar year-to-date performance of Exxon stock reflects an anticipated, cyclical post-pandemic economic snapback, (i.e. more demand.) The run-up is also a response to a pullback in oil production—which declined last year for only the second time in a decade—(i.e. less supply), which has driven Brent crude prices from as low as $20 a barrel last April to a recent price of $67.
The five years of flagging by Exxon’s stock speaks of course to the anticipated, secular contraction of the oil and gas business as the world moves away from hydrocarbons and fossil fuels. (Secular in this context refers to a trend that supersedes normal up and down business cycles.)
Leaving aside its recent stock melt-up, Exxon is in irrevocable decline. That sounds bald, but truthfully it’s hard to imagine otherwise. Either the company winds itself down with falling fossil fuel use, or it transitions to less profitable alternatives businesses.
As someone who’s covered business news for five decades, Exxon as a debilitated entity is almost unthinkable. (I’m old enough to remember when its ubiquitous gas stations were branded, Esso, a phonetic spelling of “S” “O” which stood for Standard Oil.) Exxon, and its predecessor forms, has been a cornerstone—maybe even the cornerstone—of the American economy for over 100 years, particularly since the 1950s. With the decline of U.S. Steel and GM and more recently GE and IBM, Exxon was really the last iconic, old-school American company standing tall.
Just to give you an idea: In 2011, Exxon recorded peak revenues of nearly half a trillion dollars and had a better credit rating than the U.S. Treasury. Its highest market capitalization, which came in 2014, was also nearly half a trillion. The company still delivers billions of gallons of gasoline to U.S. consumers each year from 11,000 (mostly franchised now) gas stations.
Pulitzer Prize-winning writer and dean of the Columbia University Graduate School of Journalism, Steve Coll, described Exxon’s scale in his 2012 definitive tome, “Private Empire:”
“Exxon’s size and the nature of its business model meant that it functioned as a corporate state within the American state. Like its forebearer, Standard, Exxon proved across decades that it was one of the most powerful businesses ever produced by American capitalism. As it expanded, Exxon refined its own foreign, security, and economic policies. In some of the faraway countries where it did business, because of the scale of its investments, Exxon’s sway over local politics and security was greater than that of the United States embassy.”
That was almost a decade ago at the height of Exxon’s powers, but its map of major global facilities here still suggests the potential for its executives to accumulate endless frequent flier points post-pandemic, that is if they’re flying commercial.
And of course the leaders of this enterprise, white men (of course) like Lawrence Rawl, Lee “Iron Ass” Raymond—vehemently skeptical of climate change—and Rex Tillerson all behaved as heads of state, the latter of course actually was Trump’s Secretary of State for a time.
But now it’s all going, going gone. Just look at 2020, which was particularly ignominious. The company lost a staggering $22 billion and was unceremoniously kicked out of the Dow Jones Industrials, where it had roosted for 92 years prior. Now Exxon finds itself defending its capital spending—$20 billion-$25 billion per year through 2025 according to the company—while reducing operating expenses—by 15% in 2020 it says—and seeking to maintain the $15 billion a year in dividends it pays out. (The company’s crazy-high dividend yield of 6.2%, serves as a warning to investors that the payout is at risk.)
Higher oil prices provide air cover for the time being. “Forty dollar oil is borderline economical and at $60 you’re starting to make a decent amount of money,” says Stewart Glickman, energy analyst at CFRA Research. “It’s not the $90 oil regime that we had between 2011 and 2014 but it’s better than where we were. A lot of the near term concerns about can we fund our capital expenditures and afford the dividend, those near term pressures are alleviated a little bit.”
I asked Coll about the decline of Exxon’s core business. (It’s worth noting here that Coll pointed out Exxon seriously overpaid when it spent $41 billion buying fracking company XTO in 2009.)
“Well, it's inevitable, but the harder thing to be content about is when demand will decline,” he said. “And so, yes, at some point, the secular change has to happen. And there's no question that there's something new under the sun, which is that secular change is accelerating, but it's accelerating at the bottom of a price cycle.” Meaning that one should expect all kinds of mixed signals like the recent run up in XOM’s stock price.
Speaking of signals, indicators of a coming post-petroleum world flash across the business wires on a daily, almost hourly basis. Just this week for instance we have: Volvo to go fully electric by 2030. And: Top oil and gas lobbying group close to backing a carbon tax And: Bay Area city becomes first in the US to ban new gas stations.
Regarding that last story: Woody Hastings, co-coordinator of the Coalition Opposing New Gas Stations (CONGAS), who spoke with Yahoo Finance Live on Tuesday says: “... if you're going to take a climate emergency resolution seriously, the first thing you should stop doing is literally pouring more fuel on the fire. So stop building new fossil fuel infrastructure. Stop building new gas stations. So that's what we're doing.”
Sure Woody’s doing his work in Sonoma County, but still not exactly music to Exxon’s ears.
Exxon’s woes have come to the attention of some intriguing activist investors. Jeff Ubben cut his teeth as a money manager at Fidelity and made his fortune running the $16 billion hedge fund ValueAct. Ubben, who left his fund last year, said at the time “Finance is, like, done. Elizabeth Warren is right,” according to the FT. Now Ubben seems to be a man on a mission, telling Bloomberg this fall: “I’m on a crusade. I’m late in life. I’ve got five years to fix the harm I’ve done.” And: “Currently if you’re a big oil CEO, you’re basically bullied into share repurchase,” he said. “So I go in there and I say, ‘listen, don’t do that. Let’s go find the long-term shareholders who wants to invest in companies that are fixing the problem.’”
That was in September. On Monday, Exxon announced Ubben was joining its board. The move was supported by hedge fund DE Shaw which had been agitating for change at Exxon. Another activist investor, Engine No. 1, wants to install its slate of four directors on Exxon’s board. CNBC’s David Faber reports that Engine No. 1 has the support of California pension giant CALSTRS. It also put out a detailed white paper this week which shows the market value of oil companies versus green companies over time (p. 1), EV sales projections (p. 4) and investments in alternatives by oil companies (p. 19.)
“It’s easier for the company to dismiss people they see as activists — who they don’t see as serious people — than to dismiss their own investors,” says Naomi Oreskes, a professor of the history of science at Harvard who has released reports detailing efforts undertaken by Exxon to mislead the public about climate change. “Especially when the investors are not individual investors but funds — the Harvard endowment, Rockefeller endowment, or BlackRock.” (Those institutional investors have pushed for action on climate change.)
All this effectual agitation would have been unthinkable a decade ago when Exxon swatted away shareholder proposals calling for action on change like so many flies.
So what is Woods and Exxon to do? Like Randy Nelson said, it’s a tough spot. Exxon can try to go more into alternative energy projects like the European giants BP, Shell and Total have done. Nelson thinks that strategy has its pitfalls. “Even if they succeed and become an alternative energy producer and develop offshore wind, for instance, the returns are going to be less than what they've historically enjoyed in fossil fuels,” he says. “You'll hear from BP and Shell that they understand the distribution of energy and how to manage complex projects and building an offshore wind farm has certain engineering similarities to building offshore oil and gas platforms. So we're really set up to do that. I just don't buy it.”
Glickman points out by the way, that Exxon’s green initiatives at this point are mostly carbon capture and carbon sequestration, which can mean harvesting released gases from refining processes and putting carbon into the ground often in the service of drilling for more, you guessed it, oil.
So should Exxon stay the course as a traditional oil and gas player? Not a clear path there either, of course. The problem Nelson says is “they're over employed.” Exxon, he says, is a “much more complex organization than an independent company, even a large independent like ConocoPhillips or Occidental. Because of that they're going to always be more expensive than their peers. The best thing to do would just be to slowly shrink along with the market. As the market for hydrocarbons declines your volume is declining along with it. The problem with that is companies don’t like to shrink, they like to grow.”
Steve Coll points to another cultural problem. “If you assume that technology is going to continuously disrupt the energy business, just the way it has disrupted every other business, then don't you need a pipeline of young talent, a different culture, a diverse workforce, a kind of creative environment in which you can rapidly adjust and even lead when new technology emerges? And that's not what Exxon had.”
Berkshire Hathaway’s Charlie Munger weighed in on the dilemma of Big Oil last week in a Q&A with Yahoo Finance’s Julia La Roche when he was asked to compare oil companies to the newspaper business: “I think the oil and gas industry will be here for a long, long time,” Munger said. “As a matter of fact, it'll be here for a long, long time if we stop using as much hydrocarbons in transportation. The hydrocarbons are also needed as chemical feedstocks. I'm not saying that oil and gas is going to be a wonderful business, but I don't think it's going away. And I don't think it's like the newspaper business.”
"Not going away. Not a wonderful business.” Pretty much sums it up.
Finally I asked Elliot Berman what he thought of Exxon now getting religion and going green half a century after he worked with the company to do just that. Berman chuckled. “My experience with Exxon top management was they were interested in what the stock did, not learning about the planet,” he said. “They were amoral. Not immoral, but amoral. Some people or companies are interested in the environment, but Exxon was not interested in doing good, it was interested in the bottom line and making a buck.”
That used to be enough in the days before stakeholder capitalism and it may even still be, for a time. At some point though, time will run out for Exxon.
This article was featured in a Saturday edition of the Morning Brief on March 6, 2021. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
.Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer