No public company in the history of oil and gas has been more influential than ExxonMobil (NYSE: XOM), and yet the Company has failed to evolve with the industry’s transition, resulting in significant underperformance to the detriment of shareholders.
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 and after the COVID-19 crisis.i
ExxonMobil’s Return on Capital Employed (ROCE) for Upstream projects has fallen from an average of 35% from 2001-10 to ~6% in recent years, even during higher oil and gas prices.ii
ExxonMobil has the highest debt level in its history, the worst net debt to cash from operations ratio among the Oil Majors, and has had its debt downgraded twice by S&P since 2016 (and is on negative watch).iii
We believe this underperformance is the result of fundamental issues at ExxonMobil.
The Company has failed to:
- Properly allocate capital.
- Develop a long-term strategic plan to enhance and protect value in the face of rapid industry change.
- Sufficiently align management compensation with value creation for shareholders.
- Install directors with the relevant energy industry skills and experience required to protect and enhance long-term shareholder value.
iBloomberg. Current returns are for the 3-, 5- and 10-year periods ending December 4, 2020, last close price before Engine No. 1 public engagement with the company.
iiExxonMobil 10-K’s for each of 2001-2010 and 2015-2019.
iiiJP Morgan estimates; ExxonMobil public filings. “Oil Majors” as used herein refers to BP, Chevron, Eni, Equinor, ExxonMobil, Shell, and Total.
The Path Forward
We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation by:
- Refreshing the Board with highly qualified, independent directors who have track records of success in energy and can help the Board, which has no independent directors with any outside energy experience, position ExxonMobil to successfully evolve with changing industry dynamics.
- Imposing 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.
- Implementing 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.
- Overhauling management compensation to better align incentives with shareholder value creation.
While ExxonMobil may disagree with us, we believe given the Company’s long-running underperformance, it is time for shareholders to have their say.