- Activist investors successfully changed the agenda of certain oil majors in 2020
- Sentiment has shifted in favor of companies that voted against ESG-strategies
- EU oil and gas majors that have doubled down on ESG are underperforming US peers
Last year proved to be a watershed moment for oil and gas companies in the global transition to clean energy, with Big Oil facing a series of boardroom and courtroom battles in the hands of hardline climate activists. The world’s largest publicly-traded oil company, Exxon Mobil (NYSE:XOM), lost three board seats to Engine No. 1, an activist hedge, in a stunning proxy campaign. Engine No. 1 demanded that Exxon needs to cut fossil fuel production for the company to position itself for long-term success. "What we're saying is, plan for a world where maybe the world doesn't need your barrels," Engine No.1 leader Charlie Penner told the Financial Times. Engine No. 1 enjoyed a stunning victory thanks to support from BlackRock (NYSE:BLK), Vanguard and State Street (NYSE:STT) who all voted against Exxon’s leadership.
Next was its close peer, Chevron Corp.(NYSE:CVX), with no less than 61% of Chevron shareholders voting to further cut emissions at the company’s annual investor meeting a week ago and rebuffing the company’s board which had urged shareholders to reject it.
Finally, a Dutch court orderedShell (NYSE:SHEL) to cut its greenhouse gas emissions harder and faster than it had previously planned. Never mind the fact that Shell (LON:RDSa) already had pledged to cut GHG emissions by 20% by 2030 and to net-zero by 2050. The court in The Hague determined that wasn’t good enough and demanded a 45% cut by 2030 compared to 2019 levels. The past two years have been especially challenging for Shell shareholders after the company announced a major dividend cut with the quarterly dividend falling to 16 cents from 47 cents, the first dividend cut since WW11. Meanwhile, the company’s debt had ballooned massively from $1bn in 2005 to $73bn in 2020.
Luckily for these oil and gas supermajors, investor sentiment has once again shifted in their favor.
Shifting Sentiment
In May, Exxon recorded a major victory after its shareholders supported the company's energy transition strategy at the annual general meeting. Only 28% of the participants backed a resolution filed by the Follow This activist group urging faster action to battle climate change; a proposal calling for a report on low carbon business planning received just 10.5% support while a report on plastic production garnered a 37% favorable vote.
Following in the footsteps of its larger peer, in June, Chevron shareholders voted against a resolution asking the company to adopt greenhouse gas emissions reductions targets, indicating support for the steps the company already has taken to address climate change.
Just 33% of shareholders voted in favor of the proposal, according to preliminary figures disclosed by the company, a sharp turnaround from last year when 61% of shareholders voted to support a similar proposal.
It’s clear that ESG and climate activism are now taking a backseat amid the global energy crisis. Encouraged by last year’s victories including rules that made it easier to put public policy-related questions on proxy ballots, an analysis by the Conference Board of data supplied by Esgauge has revealed that climate activists have filed 389 environmental and social proposals with member companies of the Russell 3000 index so far this year. However, the share of support for environmental proposals has dropped from 37% in 2021 to 33% this year, reflecting a growing aversion by asset managers to tying managers’ hands on climate-related issues. Russia’s invasion of Ukraine has also forced investors and companies to think more about energy security.
It’s also the reason why European oil and gas majors that have doubled down on ESG are underperforming their American peers.
Over the past 12 months, Exxon Mobil and Chevron shares have returned 84.8% and 60.4%, respectively, significantly higher than Shell’s 33.9% and BP’s 35.9% returns over the timeframe. Shell and BP (NYSE:BP) have doubled down on their clean energy investments over the past few years, and have failed to make any major oil or gas discoveries. In contrast, Exxon has continued its exploits especially in South America. The company recently announced that it had made two more discoveries at the Sailfin-1 and Yarrow-1 wells in the Stabroek block offshore Guyana, bringing discoveries on the block to more than 30 since 2015.
Exxon revealed that the Sailfin-1 well was drilled in 4,616 feet of water and encountered 312 feet of hydrocarbon-bearing sandstone, while the Yarrow-1 well was drilled in 3,560 feet of water and encountered 75 feet of hydrocarbon-bearing sandstone.
Exxon says it has ramped up development and production offshore Guyana at a pace that "far exceeds the industry average”, Exxon’s two sanctioned offshore Guyana projects, Liza Phase 1 and Liza Phase 2, are now producing above design capacity and have already achieved an average of nearly 360K bbl/day of oil. The supermajor expects total production from Guyana to cross a million barrels per day by the end of this decade.With ~11 billion barrels found to date Guyana is home to one of the largest oil discoveries over the last decade.
Exxon’s two sanctioned offshore Guyana projects, Liza Phase 1 and Liza Phase 2, are now producing above design capacity and have already achieved an average of nearly 360K bbl/day of oil. The supermajor expects total production from Guyana to hit 800,000 barrels per day by 2025 and cross a million barrels per day by the end of this decade.
In the final analysis, it appears that Shell’s and BP’s ESG strategy is no longer a winning formula for fossil fuel companies with shareholders rewarding companies like Exxon and Chevron that stay focussed on their legacy businesses.