Exxon Should Be Its Own Activist
Exxon Mobil Corp. just isn’t used to being treated this way.
This month has been traumatic for many, but the biggest of Big Oil had it worse. From February 1 to last Friday, Exxon’s stock fell 15 percent; its worst six-day losing streak since the dark days of October 2008 (it’s up 2 percent Monday morning). That’s $56 billion up in smoke — or as if Occidental Petroleum Corp. just vanished.
Exxon’s fall began with fourth-quarter results that were horribly weak: weak on production, weak on cash flow and pretty weak on explanation. Several analysts noted the contrast with Chevron Corp.’s new CEO Mike Wirth, who took questions on his company’s call the same morning, while Exxon, as usual, led with its head of investor relations. One analyst, Paul Sankey of Wolfe Research, even wrote in a subsequent report about clients “baying for an activist.”
At the risk of stating the obvious, “activist” is not a word that usually appears within a mile of the name Exxon.
Grumbling about Exxon’s aloofness isn’t new. What’s changed is the context. Aloofness has to be earned; and, lately, Exxon hasn’t.
The past week was rough, but the crown has been slipping since at least 2016:
Similarly, Exxon’s dividend yield was historically relatively low, reflecting both its high standing and multi-billion-dollar buybacks. But the buybacks have stopped; and, remarkably, Exxon now yields more than Chevron:
Exxon has suffered a series of strategic setbacks. Some, such as the ill-timed acquisition of XTO Energy Inc. in 2010, were self-inflicted. Others, like U.S. sanctions blocking the company’s Russian ambitions, were just bad luck.
The backdrop, however, has been a steady decline in return on capital employed. This metric, long championed by Exxon itself 1 , is the central pillar of the company’s mighty valuation. This chart using data from Doug Terreson at Evercore ISI shows the relationship:
Charting Exxon’s returns versus Chevron’s over time, you can also see just how deserved Exxon’s big premium was a decade ago — and why it’s less so today:
This isn’t just the oil-price crash at work: Exxon’s return in 2013, when Brent averaged $109 a barrel, was half that of 2008, when it averaged $99. Like all the majors, Exxon went on a spending spree after 2006, driving up costs just before the crash exposed the damage done.
Exxon still beats its closest peers overall on return-on-capital. But being first in a group of laggards isn’t the best pitch to investors, especially the generalists that have deserted the sector wholesale since 2014. And those that are tempted to return have many other options:
- Want oil-price leverage? ConocoPhillips, which shed its downstream business, offers it in spades, as fourth-quarter results showed. It also has an explicit strategy to keep spending low, target a $50 breakeven oil price and even buy back stock.
- Want production growth? Exxon has spent billions building a position in the epicenter of U.S. tight-oil growth, the Permian basin. But it is playing catch-up with the likes of Pioneer Natural Resources Co. Chevron, meanwhile, isn’t a latecomer to the basin and pays low-or-no royalties on most of its acreage there.
- Want free cash flow? Consider this: Despite the recent drop, Exxon’s enterprise value remains 11 percent bigger than that of Royal Dutch Shell PLC, even though the latter is forecast to generate 54 percent more free cash flow over the next three years, according to figures compiled by Bloomberg.
- Want the safety of diversification and integration in case oil falters again? This has long been one of Exxon’s strongest suits. But this chart of a synthetic Exxon I created on the Bloomberg Terminal suggests even here, there are other options:
When CEO Darren Woods takes the stage next month for Exxon’s annual analyst day, he can point to some recent successes, notably replacing reserves last year (another sore point). But after Exxon’s missteps of the past decade, it cannot count on the traditional benefit of the doubt.
Evercore ISI’s Terreson has been pushing Big Oil toward more-explicit targets for translating their huge spending budgets into shareholder returns and distributions. This is especially pertinent for Exxon, which, in contrast many of its peers, is raising capex significantly. Specific returns targets, as well as a schedule for renewed buybacks, would provide benchmarks to hold management accountable.
Those targets should extend to Exxon’s individual divisions. For example, one reason fourth-quarter results caused such whiplash was that downstream profits, in particular, were far lower than expected. Modeling such sprawling enterprises is a persistent problem (Chevron’s downstream numbers also provided a nasty surprise). Greater transparency and hard targets would help Exxon’s case.
One thing Exxon likes to boast about is its giant resource base over and above its proved reserves. Yet, as I wrote here, this offers nebulous support for valuation because much of the near-term project queue doesn’t look compelling; and beyond that, there’s little transparency anyway.
On this front, Exxon should look at its rivals across the Atlantic. Shell, for example, has taken radical steps since its acquisition of BG Group PLC in 2016, including divesting its Canadian oil-sands business. BP PLC, meanwhile, has spent much of the past decade dealing with the aftermath of its Macondo disaster. But it has managed to raise tens of billions of dollars to meet the cost by selling off swathes of its asset portfolio, often at multiples above where its stock traded.
The point here is that Exxon’s mammoth resource base — and downstream and chemicals infrastructure — must contain some juicy assets that aren’t being valued properly and could be similarly monetized, with the proceeds going to restoring buybacks.
It would be a brave activist indeed who would take on a $321 billion behemoth like Exxon. Even so, as last year’s shareholder vote on climate-change disclosure showed, the company isn’t immune to such pressure.
Indeed, the very idea that it was would pose a huge risk in itself. You only have to look at the recent example of General Electric Co. to realize how a combination of enormous scale, century-old incumbency and an iconic brand can breed overconfidence that ultimately proves destructive. As bruised as Exxon’s ego might be now, it offers a chance for some radical healing.