LONDON -Exxon Mobil’s shareholder revolt has been framed as a climate change issue, but it reflects broader dissatisfaction with the board’s strategy and failure to generate returns for shareholders in recent decades.
Source: Reuters
Many institutional investors are pressing the major international oil companies to reduce their emissions as part of a socially responsible approach to carbon dioxide emissions and climate change.
But long-term underperformance has fuelled shareholder revolts, irrespective of views about the companies’ future role in the future energy system.
In common with other the oil majors, Exxon has failed to generate attractive returns for years, with total returns lagging far behind benchmarks such as the S&P 500.
Exxon’s total return to shareholders has severely underperformed over the last 5, 10 and 20 years, implying the company’s problems are long-term and strategic rather than short-term and cyclical.
Since the start of 2015, shareholders have incurred a compound annual loss of -2.5%, based on share prices and dividends, compared with an average annual gain of +14.4% in the S&P 500.
But even over a much longer period, since the start of the century, Exxon’s compound annual return to shareholders (+4.9%) has languished far below the broad market benchmark (+7.1%).
None of major international oil companies (Exxon, Chevron, Shell, BP and Total) has matched, or even nearly matched, the returns from the broader share market in the last decade.
Since 2015, inflation-adjusted U.S. dollar returns from Exxon, Shell and BP have been negative, and Chevron and Total have been meagre (tmsnrt.rs/3uquAoN).
For most of this century, institutional investors and private shareholders would have done much better by avoiding the oil industry altogether and putting their money in other sectors.
The problem of relative underperformance may have been magnified by evidence of a general bubble in U.S. equity values, which have been trading at the furthest above their long-term trend since the boom of the 1990s.
If the broader market corrects lower, some of the underperformance of the oil majors is likely to disappear, but corporate leaders cannot wait for the rest of the equity market, which may or may not be in a bubble, to deflate.
MUST DO BETTER
The critical question for corporate leaders and shareholders is how best to close the performance gap, whether by squeezing better returns from existing oil and gas businesses or pivoting to new energy sectors.
Outside the traditional oil and gas business, boosting investment in wind, solar, electricity distribution, biofuels, hydrogen, ammonia and carbon capture and storage are all being explored as long-term alternatives.
Alternative businesses are often characterised as having lower returns than traditional oil and gas production, refining and distribution. But the truth is that oil and gas returns have been poor in recent years.
Sticking with the traditional oil and gas business rather than diversifying into other parts of the energy system has become less compelling as a strategy as the returns have remained persistently low.
If the companies decide to adapt their businesses, the secondary question is how far and fast to exit from oil and gas to move into new businesses with fewer CO2 emissions, identifying the maximum risk-adjusted return path.
Oil majors are under pressure from environmental organisations to align their long-term business strategies with the net-zero emissions targets and global temperature goals agreed by political leaders at UN climate conferences.
Environmental campaigners often focus on the future threat to oil companies’ returns from climate change policies that will likely limit the future combustion of fossil fuels.
But pressure on the companies would have been much less urgent and influential if the historical performance of oil and gas businesses had not been so terrible.
Chronic underperformance has forged an irresistible alliance between climate campaigners pressing for a transformation of the energy system and institutional investors frustrated about the negative portfolio impact.
Each of the majors can expect continued intense pressure from shareholders to explain how performance can be improved – by restructuring their traditional business, diversifying into new ones, or both.
