Investors ‘Mistrust Exxon’s Vision’ as Management Doubles Down on Oil and Gas
Investors are not reacting well to ExxonMobil expanding its commitment to extreme oil and gas exploration, according to a review of the company’s recent stock performance by the Institute for Energy Economics and Financial Analysis.
“Based on Exxon’s stock price compared to the other oil majors,” write IEEFA Director of Finance Tom Sanzillo and guest columnist Kathy Hipple, “investors mistrust the company’s vision of the future or its ability to execute that vision. It’s no wonder, given Exxon’s massive write-offs of failed investments, including the nearly four-billion-barrel tar sands write-off in 2016 and ongoing losses related to the company’s ill-timed investment in natural gas.”
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While shares in colossal fossils like Chevron, Shell, BP, Total, and ConocoPhillips are up 25 to 60% over the past two years, “Exxon’s stock price has dropped more than 10% against the broader stock market gain of 30%,” Sanzillo and Hipple add. “Its return on invested capital has declined from 31% in 2005, to 16% in 2014, to 7% in 2017.”
At a time when investors are setting new expectations—or leaving the fossil sector altogether—that’s not entirely surprising.
“Investors are now demanding that companies either exercise ‘capital discipline’ (code for limiting spending on new oil and gas projects) or actively pivot toward a low-carbon future,” the two analysts write. “But Exxon has done the opposite, doubling down on new oil and gas projects around the world, despite having taken impairments on past oil and gas investments. Pick a continent, any continent, and Exxon plans to drill there for oil or gas. The company appears to have no belief in—and no plans for—a low-carbon future. Indeed, its outlook has oil demand continuing to rise through 2040.”
Not that the company hasn’t been warned: although its 2040 outlook was met in a public briefing with “uniform hostility” as far back as 2015, Exxon still predicted tar sands/oil sands output quadrupling by 2040 as recently as January 2018. Its official outlook for 2040 shows fossils supplying 77% of global energy demand, compared to only 4% for renewables.
Sanzillo and Hipple trace Exxon’s decline to three “converging trends”: the transition in the global energy sector, the preeminence of technology companies, and the massive transfer of wealth now going on from one generation to the next.
“When pressed by a majority of shareholders to address how technological advances and global climate risk policies will affect its business, the company issued a head-in-the-sand climate risk report we concluded was defective, unresponsive, and inadequate,” they write. “Meanwhile, the growth of technology companies has captured the imagination—and dollars—of investors seeking to own a stake in a future they perceive as increasingly driven by companies like Amazon, Apple, and Google.”
On top of that, “Exxon’s underperformance may also signal that divestment from fossil fuels has accelerated. The largest generational wealth transfer in history is under way, and Baby Boomers are expected to leave $30 trillion to heirs who prize good corporate citizenship.”