In my previous post, I discussed the Republican Steering Committee (RSC) Memorandum “The War on American Energy: Ground Zero.” In the first part I pointed out that I shared their concerns about “ESG investing” and even added a few more points to bolster their argument. In the second part I sought to clarify the meaning of ESG from an investor perspective, pointing out that ESG is about material issues which matter to all stakeholders leading to shareholder value creation. I also clarified a common confusion people, including Mr. Elon Musk, are having when they question why ExxonMobil has a higher ESG rating than Tesla. The issue here is that ESG ratings are about a company’s operations and activities, not the positive and negative externalities—the impact—of their products and services.
The RSC memo claims that “ESG Makes Energy More Expensive.” I’m admittedly no expert on the oil and gas industry but I think it’s a rather bold claim to say that “ESG Makes Energy More Expensive.” Even the casual observer knows that there are a number of reasons why energy is more expensive today, including Russia’s invasion of Ukraine, greater demand following the economic recovery from COVID-19, and lingering effects from a massive snowstorm that hit Texas last year. Opinion obviously varies on whether climate change is at least a partial cause of such an unusual weather event in Texas.
The memo further argues that “ESG decreases investments in oil and gas producers by choking off the flow of capital to creditworthy businesses.” A good place to test this assertion is with ExxonMobil. It has very much been in the spotlight since 2021’s Engine No. 1 campaign which successfully placed three new directors on its board. While Mr. Mike Pence referred to them in a derogatory way as “environmentalists,” they are actually people with deep experience in the energy industry. Experience, remarkably enough, that was lacking in previous boards. Oh, and I should mention that in its 2022 Proxy Statement the company states “The Board unanimously recommends you vote FOR each of the ExxonMobil director candidates.”
Now let’s see what the company has to say about whether climate change is real or not and whether it has the resources it needs to be a successful oil and gas company.
Indianapolis – Circa September 2019: Exxon Retail Gas Location. ExxonMobil is the World’s Largest … [+]
ExxonMobil is the largest U.S. oil major with a market cap today of around $378 million; Chevron is in second place with $303 billion. The company is the 14th largest company in the world by market cap. The only oil and gas company ahead of it is Saudi Aramco. The rest are in tech (Internet business models and semiconductors), financial services, pharmaceuticals, and Berkshire Hathaway.
With all due respect to these new directors, it would be giving them too much credit in their short tenure to be the reason for the company’s press release of May 25, 2022, that states, “ExxonMobil said today it plans to grow shareholder value by delivering solutions that help meet the global need for energy and for lower greenhouse gas emissions to address climate change (emphasis mine).” Or for the statement on the Climate Change page of its website that states, “We believe that climate change risks warrant action and it’s going to take all of us—business, governments and consumers—to make meaningful progress.” I couldn’t agree more.
The company further elaborates:
“EXXONMOBIL’S ROLE
Taking action on climate change
We are committed to providing affordable energy to support human progress while advancing effective solutions to address climate change. Our climate change risk management strategy consists of four components:
Critics of the company will say these are insincere and flowery words that are not met by the company’s actions, such as its strategy and how it allocates its capital. Fair enough to evaluate the company on what it is actually doing. Climate change deniers will either be disappointed in what the company is saying or will try to give them a pass by arguing that ExxonMobil is being forced to pander to the heathen Woke ESG crowd which is trying to take down the American energy industry. I am dubious about how worried the company with the 14th largest market cap in the world is about these folks.
So what is the company doing and how well is it doing? One can get a good sense of this from the company’s excellent 100 page presentation at its March 3 “2022 Investor Day” virtual webcast. This is well worth reading by both those concerned about how ESG is inhibiting fossil fuel production by U.S. companies (they should breathe a sigh of relief) as well as by those who are worried about too much fossil fuel production by U.S. companies (they should be concerned these companies aren’t transforming their business models fast enough). The presentation should assuage Mr. Pence’s grave concern that these three new directors “are now working to undermine the company from the inside.” According to its presentation, the company:
· Delivered $23 billion in earnings and $48 billion of cash flow from operations
· Repaid $20 billion of debt
· Projects strong earnings growth through 2027 under the modest assumption of a price of $60 per barrel of oil (now at around $95 today and as high as $120 this year)
· From 2022-2027 expects cumulative cash generation potential of ~$100 billion in excess of Capex and dividends which can be made available for shareholder distributions
· In the Permian Basin it anticipates a 50 percent increase in capital expenditures over 2021 between 2022 and 2027, >$5 billion in free cash flow by 2027, and double-digit returns at <$35 per barrel
· Plans to invest over $15 billion in lower emission investments between now and 2027
· On a slide “Growing Value in a Net-Zero Future” it projects that the vast majority of its cash flow in 2050 will come from low carbon solutions
· Sizes the markets by 2050 as:
o Traditional Oil & Gas: ~$6.5 trillion
o Chemicals: ~$5 trillion
o Carbon Capture and Storage: ~$4 trillion
o Hydrogen: ~$1.5 trillion
o Biofuels: ~$1 trillion
· States that it wants to “Lead Industry In The Energy Transition” in all three of its business segments: Upstream, Product Solutions, and Low Carbon Solutions
The entire tone of the presentation is confident and bullish. It sees plenty of opportunity in oil and gas. Figure 1 shows past and projected through 2025 production levels. A glance at the projections suggests these three new directors aren’t undermining the company’s production plans ExxonMobil also sees significant opportunities to support the energy transition, such as through carbon capture and storage, hydrogen, and biofuels. There is nothing to suggest any concern about the ESG brigade starving the company of capital. Its strategy looks carbon heavy to me, but experts on climate change, the oil and gas industry, energy security, and providing affordable energy to all Americans can be a better judge of that. And wouldn’t it be better to be having a constructive conversation about this by people with very different views than weaponizing the issue of climate change for political purposes?
ExxonMobil Past and Projected Daily Barrel Oil Production Equivalent in Millions
But back to ExxonMobil. How does the company stack up in terms of its deeds matching its words about climate change? An assessment by Climate Action 100+, a coalition of 700 investors with $68 trillion in assets focused on the world’s largest 167 carbon emitters who account for 80 percent of industrial emissions, shows that ExxonMobil has a long way to go. This initiative conducts an annual benchmarking analysis. The most recent one is based on data from company disclosures as of December 31, 2021.
Table 1 compares ExxonMobil to some of its largest peers in terms of greenhouse gas (GHG) emissions targets and decarbonization strategy. It does poorly compared to Eni, Shell, Chevron, and BP; is about the same as Sinopec; and only Saudi Aramco is worst (Saudi Aramco is basically doing nothing). Eni and Shell get full credit for having a Net Zero GHG Emissions by 2050 (or sooner) ambition. BP and Sinopec get partial credit. ExxonMobil, Chevron, and Saudi Aramco get none. Also note that a U.S. company, Chevron, is the only company in this group to get full credit for a Decarbonization Strategy.
Carbon Reduction Targets Assessment by Climate Action 100+
Table 2 shows ExxonMobil’s performance according to the other five criteria, although the methodology for evaluating “Just Transition” is still under development so there are no scores. ExxonMobil gets no credit for Capital Alignment; in fairness to them, only Eni gets even partial credit. ExxonMobil and Saudi Aramco are the only ones to completely fail on this. Yet ExxonMobil is making at least some progress on Climate Policy Engagement, Climate Governance, and TCFD Disclosure. On the latter, it is only Chevron who clears the bar on all the criteria.
Other Carbon Reduction Topics Assessment by Climate Action 100+
December 31, 2021 is now seven months in the past. In its assessment of ExxonMobil, Climate Action 100+ highlights the fact that on January 18, 2022 the company published its “Advancing Climate Solutions 2022 Progress Report” in which it announces the ambition of having net-zero Scope 1 (the company’s operations) and 2 (purchased energy) emissions by 2050. (For 2020 the company reported CO2 equivalent Scope 1 emissions of 105 million tons and Scope 2 of 7 million tons.)
While this is clearly a positive step forward, it largely ducks the much bigger issue of Scope 3 emissions—i.e., those that come from those who use its products. The company provides an estimate of Scope 3 emissions of 650 million tons for 2020 but there is no discussion about what the company is doing with its customers to help reduce them. However, should the company accomplish the projections in its Investor Day deck about its switch to low-carbon solutions, this will clearly have some impact.
Another big controversy in the oil and gas industry is political lobbying. The basic question is “Are these companies saying all the right things about climate change while slipping money to groups like the American Petroleum Institute to lobby against climate change by supporting politicians who either don’t believe it is real or who are more concerned about the short-term viability of the energy industry?” (Which is looking pretty good to me.) On March 21, 2022 the company published its “2021 Climate Lobbying Report.” The report states that:
“ExxonMobil acknowledges the risks of climate change and has long expressed support for the goals of the Paris Agreement (emphasis mine). Our policy principles, outlined in this report, and associated lobbying are consistent with helping society achieve its ambition for a net-zero future. Our direct lobbying activities are aligned with limiting average global warming to well below 2 degrees Celsius, and include strong support for policies that will incentivize emission reductions.”
The report also assesses 51 oil and gas industry associations in terms of having “supporting policies that will help society achieve its ambition for a net-zero future.” They found two only partially aligned and two completely misaligned
Fair enough here for skeptics to wonder if their lobbying money matches their words since no dollar figures are reported by ExxonMobil or given for any of these organizations. My point is a different one. What do the deniers of climate change who are panicked about presumed anti-American ESG ecowarriors taking down the oil and gas industry make of these statements by the company? A very rich company that is generating $100 billion in excess cash flow over the next five years.
I must also ask what the anti-Woke/anti-ESG crowd makes of the company’s broader statements about ESG and sustainability. ExxonMobil has been publishing a “Corporate Citizenship Report” since 2008. In 2017 it was renamed the “Sustainability Report.” It’s most recent one is organized in terms of Environment, Social, and Governance. Yes, the dreaded ESG! The “Social” part of the report includes a section on diversity and inclusion which states, “Diversity of thought, ideas, perspectives, skill, knowledge and culture makes ExxonMobil more innovative, resilient and better able to navigate the complex and changing global energy business.” This section also notes that the representation of women executives has increased by 69 percent since 2009 and that number is 80 percent for minority executives.
In 2009, the company formed an “External Sustainability Advisory Panel (ESAP)” which is “composed of academics, nongovernmental organization representatives and former government officials with expertise in environmental, social and governance issues.” One of them is Jane Nelson, Director of Corporate Responsibility Initiative at Harvard University Kennedy School of Government. The ESAP “publishes an annual independent review of the company’s Sustainability Report” which represents their views “on the progress and quality of ExxonMobil’s sustainability reporting and transparency.”
Going further, ExxonMobil notes that “The United Nations adopted the Sustainable Development Goals (SDGs) to achieve significant progress on global economic, social and environmental challenges by 2030. Although directed at governments, the private sector and civil society play an important role in support of governments’ national plans.” It also states that “ExxonMobil contributes to certain aspects of all 17 SDGs. In this report, we feature eight SDGs to which we are making significant contributions.” These are shown in Table 3.
The Eight Sustainable Development Goals of Special Focus by ExxonMobil
Having reviewed the issue of climate change—and ESG and sustainability more generally—through the eyes of ExxonMobil, I politely suggest that the climate change denying anti-Woke/anti-ESG crowd needs to clarify which of the following four statements best represents their position.
1. ExxonMobil is my kind of company, so if it thinks climate change is real and ESG and sustainability are important, I agree with them. I’m buying more shares!
2. ExxonMobil is waging a very clever PR campaign to appease and distract the fossil fuel haters while continuing to do what it does best, drill for oil and gas, and has no real intention of doing anything else, ever. I’ll buy more shares when the price of oil and their share price go down.
3. ExxonMobil is being pressured by the progressive and radical Left to say things it doesn’t really believe and knows aren’t true, but it’s standing strong and not deviating from its traditional business model. I will buy more shares once it’s clear we’ve won this cultural war.
4. ExxonMobil is a major disappointment to me if it really believes in climate change, the need for an energy transition, its need to transform its business model, and all this other ESG and sustainability anti-American hoo haw. I am selling my shares today.
My view? I think ExxonMobil is beginning—but only beginning—to recognize the real threat of climate change, what this means for the viability of its current business model, and its need to transform itself for the good of its shareholders. Although it wasn’t its choice to get three new board directors, they are helping the company in this regard. Much more needs to be done. I am very supportive of them doing so. The open and more important question is whether Mr. Pence, the RSC, and others in their camp feel the same way.
