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The Case for Change

As the Wall Street Journal put it late last year, “It has been a stunning fall from grace1 for ExxonMobil.

No public company in the history of oil and gas has been more influential than ExxonMobil (NYSE: XOM). It is clear, however, that the industry and the world it operates in are changing and that ExxonMobil must change as well. 10 years ago, ExxonMobil was the largest company in the world by market capitalization and the #1 company in the Dow Jones Industrial Average (DJIA). Prior to our campaign, however, its market capitalization had been cut in half and ExxonMobil had been kicked out of the DJIA. Further, this historical underperformance occurred with growing oil and gas demand and yet the Company has no credible strategy to create value in a decarbonizing world.

ExxonMobil has underperformed the S&P 500 and each of its proxy statement peers (BP, Chevron, Shell and Total) for the last 3-, 5- and 10-year periods, both before the COVID-19 crisis and after COVID-19 but prior to our arrival.

Chart comparison of Total Returns Pre-Covid and Total Returns Prior to Engine No.1 Public .

*Bloomberg. Pre-COVID returns are as of February 19, 2020. Post-Covid Returns are as of December 4,2020 close, the last trading day prior to Energy No. 1’s public engagement with ExxonMobil.

Over the last 10 years, ExxonMobil’s total shareholder return, including dividends, has been negative (15)%, versus +271% for the S&P 500. Exxon’s deteriorating financial strength has caused the market to question the reliability of its dividend in recent years. Last year for the first time in decades ExxonMobil failed to increase its dividend, and its CEO said, “The beauty of the dividend is that it is flexible.”2

Engine No. 1’s Ask of ExxonMobil

We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must:

Refresh the Board with highly qualified, independent directors who have track records of success in energy and can help the Board, which prior to our campaign had no independent directors with any outside energy experience, position ExxonMobil to successfully evolve with changing industry dynamics. While the Board has added three new directors in an effort to ward off our campaign, none of them have successful and transformative energy experience, and two of them have no energy experience at all.

Impose greater long-term capital allocation discipline by applying more stringent approval criteria for new capital expenditures including lower required break-even oil and gas prices. We believe this is crucial given that by our estimates ExxonMobil destroyed over $170 billion in shareholder capital through poor capital allocation over the last decade.3 As the Wall Street Journal has noted, ExxonMobil “had been unable to fund its dividends through free cash flow alone in 2019 before the pandemic.”4

Implement a strategic plan for sustainable value creation in a changing world by fully exploring growth areas, including more significant investment in clean energy, to help the Company profitably diversify and ensure it can commit to emission reduction targets, as well as optimization of commercial operations, all with the benefit of a Board better qualified to consider such opportunities. As Forbes has noted, ExxonMobil has not “enunciated any kind of holistic strategy for navigating the carbon transition,”5 which we believe is a fundamental threat to long-term shareholder value.

Overhaul management compensation to better align incentives with shareholder value creation. CEO Darren Woods earned $75 milion over the last 4 years (2017-2020) despite ExxonMobil’s market cap declining ~$200 billion, underperforming both its closest competitors and the S&P 500 which was up 68%.

Investors Have Already Benefitted from Engine No. 1’s Campaign, But Gains Could Prove Fleeting Without Real Change

Since we launched our campaign, ExxonMobil’s share price has increased, although not nearly enough to make up for the billions in value that have been destroyed. However, we believe that preserving these gains and creating long-term value creation will require real change.

Index Share Price Chart.

Meet Engine No. 1’s Nominees

While the benefits of Engine No. 1’s campaign have been tangible, high profile investor pressure cannot last forever. We believe the lack of directors with successful and transformative energy industry experience to the Board, which persists today, played a large part in the value destruction at ExxonMobil over the last decade. New Board members with relevant energy experience are needed in our opinion to drive transparency and create the accountability needed for long-term value creation for all ExxonMobil shareholders.

We urge you to learn more about our nominees’ successful and transformative energy experience so that you can make an informed decision about how to vote your shares in this important election. The choice is yours.

Heard on the Street

Financial Times
‘We have performance issues with the company,’ said Simiso Nzima, investment director and head of corporate governance at California Public Employees’ Retirement System, the largest US public pension fund. ‘Exxon had carried out many years of destruction of corporate value, he said, including the recent writedown of about $20bn worth of assets it now deemed non-strategic. It’s not surprising that you’re seeing an activist investor,’ he added. March 3, 2021
Financial Times
‘All our traditional engagement tools have failed,’ said Aeisha Mastagni, a portfolio manager at the fund [CalSTRS]. ‘What we need here is a whole new strategy, a whole new culture, a whole new way of thinking inside that boardroom … We want this company to be more resilient and strategic,’ said Mastagni, ‘because the low-carbon transition is coming, the world is changing, and Exxon needs to change with it.’ March 3, 2021
… Exxon’s debt has ballooned to $70 billion, and it may have to borrow more to pay dividends. Paul Sankey of Sankey Research explains that Exxon’s ‘original definitive strategy of being immune to market vagaries is dead.’ After a ‘decade of strategic errors,’ Exxon is ‘exactly where it never wanted to be: subject to oil markets and global GDP recovery.’ Nor has Woods enunciated any kind of holistic strategy for navigating the carbon transition, short of daring lawmakers to impose a national carbon tax. December 29, 2020
‘This is a real game changer,’ said Jackie Cook, director of sustainable stewardship research at Morningstar, who has tracked shareholder climate proposals for years. ‘Challenging fossil fuel companies on their climate governance should be easy pickings for well credentialed activist investors – especially with the backing of large pension funds. There’s no evidence that Exxon’s board, as it’s presently structured, is capable of making a dramatic turnaround.’ December 7, 2020

1“Stunning Fall from grace” – Christopher M. Matthews (Sep. 13, 2020). Exxon Used to Be America’s Most Valuable Company. What Happened? WSJ.
2Phil Gresh (Aug. 2, 2020). Assessing Implications of 2020-21 Capex Cuts. JP Morgan.
3Bloomberg. Period 2010-2020. (Enterprise Value chosen as of 12/31/2010 and 3/31/2021 so as to not penalize the company for the poor commodity price environment at the end of 2020 – EV as of 12/31/2020 was ~$60B lower that as of 3/31/2021).
4Jinjoo Lee (Mar. 19, 2021). Oil Investors Hunt for Cash Gushers. Wall Street Journal.
5Christopher Helman quoting Paul Sankey of Sankey Research (Dec. 29, 2020). Forbes Energy Awards 2020: NextEra Energy, Bigger Than Exxon, Greener Than Tesla. Forbes.