The Activist Tackling an Oil Giant

How a minnow activist is tackling complacency inside a titan of the oil industry.

Exxon Mobil is a big company. It has a market cap of about US$260 billion. Australia’s mining giant, BHP, has a market of US$185 billion in comparison.

So when you make a declaration to challenge one of the biggest companies in the world then you’d want to be sure of yourself. A new hedge fund formed in December 2020 appears to have this surety in spades. The fund goes by the name Engine No.1 and was founded by an investor named Chris James— along with two other veterans of the hedge fund industry.

Some Clout

According to Engine No.1’s website, Chris has a history of building “asset-heavy companies in industries in transition.” He’s also been an investor in the tech sector for nearly three decades. 

Prior to Engine No.1, Chris was the founder of Partner Fund Management (PFM) and co-founder of Andor Capital Management. PFM is based in San Francisco while Andor is a VC fund based in New York.

Andor was shut down in 2016 by co-founder Daniel Benton—the second time in a decade the fund had been shut down (the fund was also shut during the GFC in 2008). The firm had a successful run for 15 years though and Benton now runs his own private family office called Benton Family Office.

Benton has been described as, “one of the top technology investors of his generation.” But what of Chris James? He is the main man taking on Exxon Mobil after all.

Well, Chris has built a career growing companies from the ground up in multiple industries it seems. Not only multiple industries, but industries in the process of long-overdue transition—like oil & gas.

Widening Scope

The major theme Chris has noticed during his career to date is ‘too many companies who fail to factor in external forces—like their impact on the environment. He believes a company’s performance and its broader external impact are ‘intrinsically linked.’

A natural target for this view and Chris’s new fund is oil giant ExxonMobil.

You could argue no public company in the history of oil and gas has been more influential than ExxonMobil. To give some context, the company was the largest company in the world by market cap only 10 years ago. It was the largest company in the Dow Jones Industrial Average for a long time too. Prior to Engine No.1’s latest campaign though, ExxonMobil’s market cap has halved, and it has been booted from the Dow Jones all together.

ExxonMobil - once the largest company in the world.

And all this sloth against a backdrop of growing oil and gas demand the past decade. Engine No,1 in its capacity as a new breed of shareholder activist believes ExxonMobil has been bereft of a ‘credible strategy to create value in a decarbonizing world.’

Changing Tide

One thing is clear, the industry and the world ExxonMobil now operates in are changing. ExxonMobil must change as well.

We think Engine No.1 might be onto something in this case. Of note is the fact Engine No.1 has achieved almost immediate results after sending a letter to Exxon’s board on December 7, 2020.

Chris and his team went straight for the jugular. They demanded a new focus on clean energy and changes to the 12-member board of directors at Exxon. It was a bold move for a company with just a 0.02% stake in a $260 billion company.

A Rebuttal

The ExxonMobil board refused to commit to a carbon-neutral strategy after reviewing the letter. And the arm wrestle began. Engine No. 1 formally launched a proxy battle in March 2021 with a view to forcing a change of direction.

All this from a small activist born months ago, against a company who can trace its history back to 1870, when John D. Rockefeller founded the Standard Oil Company.

Engine No.1 has since secured two crucial board seats in a huge win for the activist. It wants four seats in total but two is a good start. Their other objectives? They want ‘corporate governance reforms, a review of Exxon’s climate action plan (and its impact on the company’s finances) and greater public disclosure of its environmental and lobbying activities.’

That is a big roster of changes. But even before the vote, Engine No.1’s campaign was clearly having an influence on Exxon. In the past few months, ‘Exxon has proposed a $100 billion carbon capture project in Houston and committed $3 billion to low-emission technologies through a new venture,’ according to news site Penn Live.

Exxon denies any of these investments were due to pressure from Engine No. 1. That is hard to believe.

These are some of the biggest investments Exxon has proposed in sustainability in recent years, and they came right after Engine No.1 popped on the scene and post the election of a new U.S. president who has made fighting climate change a priority.

Pensions Onboard

Engine No.1 has also elicited support from other major Exxon investors, like the California Public Employees’ Retirement System and the New York State Common Retirement Fund. Both these pension funds have been laying pressure on Exxon to do something about its lagging (non-existent) sustainability strategy for some time now.

But who really cares you might say? All this demand for change is straight out of the hedge fund playbook, right?

Well, yes. But the difference, in this case, is the emphasis Energy No.1 is putting on sustainability and a clear connection between sustainability and long-term profits. And it makes a strong case that the reason Exxon’s financial position has been deteriorating is because of its failure to invest in low-carbon technologies.

Exxon has clearly been focusing on short-term gains from fossil fuels at the expense of its long-term future in a global economy. The economy now puts a premium on sustainability and a penalty on carbon-intensive activities like the production of oil & gas. The switch to long-term gains in favour of short-term profits is long overdue.

Adding might to the fight, the willingness of U.S. pension funds and BlackRock ($7.4 trillion in assets under management) to support Engine No.1 shows the tide is turning. The Exxon board might finally be waking up as a result.

David vs. Goliath?

The significance of David taking on Goliath may not be the story here after all. Is it more about the sheer weight of activist funds leading pension funds toward sustainability?

Either way, companies and executives that fail to invest in the transition to low-carbon energy will increasingly risk the assault of hedge funds and pension funds (super funds in Australia). And Super funds are armed to the brink with a continuous flow of money that may choose to tail the efforts of activist investors.

Despite its initial pushback against Engine No. 1, the board of directors at Exxon Mobil has clearly been shaken. The flood gates may be opened on other industry laggards who are yet to articulate how they fit into a global economy with a firm eye on sustainability.