- Exxon Mobil's management seems like it's become increasingly shareholder-unfriendly.
- Specifically, the company has increased moves to stop shareholder strength, ignored climate change, and maintains very high capital spending.
- The company has a respectable asset base that justifies its valuation. However, the company's other moves should be paid attention to.
- We see the company like Occidental Petroleum - great assets but bad management.
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We've written about Exxon Mobil (XOM) a number of times so far. The company, as one of the largest publicly traded oil company, with a $200 billion market capitalization, has dropped more than 30% YTD. While we feel the company has an impressive portfolio of assets, we feel the company has made a number of shareholder-unfriendly moves recently that put investors in a difficult position.
Concentration of Voting Power
As wealth in the United States gets increasingly concentrated, one of the largest sources of concern is the increased concentration of voting power among some of the largest shareholders. This is an issue for two significant reasons.
In a world of increased popularity of ETF investing, some of the largest ETF groups, like The Vanguard Group, are seeing their power increase dramatically. That massive increase in power is affecting how votes happen - research on the subject is still happening. However, most research agree that these major firms either vote in line with company recommendations or against ESG issues.
As Exxon Mobil continues to recommend positions that are against the interest of the common shareholder, the position and how these firms vote normally result in them passing.
Exxon Mobil Shareholder Positions
Exxon Mobil has recently recommended against several positions meant to strengthen shareholder power.
Exxon Mobil's recent shareholder meeting had 2 proposals to increase the strength of common shareholders. For those who are wondering, both measures failed after being put to a vote and Exxon Mobil recommending against them. The company recommended against an independent Chairman and a proposal to decrease the requirement for a special meeting from 15% to 10%.
This is significant for a number of reasons. First, there's no good reason not to have an independent chairman of the board. However, obviously board memberships in America have become much more of a I'll scratch your back if you'll scratch mine. Warren Buffett discusses overpaid board of directors here, but it's clear that more oversight is required.
The second is the proposal to lower the threshold for a special meeting. The current criterion is 10% on "showing of good cause" - however, of course, that's subjective and requires a court battle. Of course, there's no real reason for the company to recommend against this, besides, again, to entrench management's current position.
Given management's decision on other topics, as we'll discuss below, cementing its power like this is bad for shareholders.
Exxon Mobil Climate Change
The next major risk is management's continued fight against climate change.
As the body of evidence supporting climate change grows, as can be read about here, scientific consensus about human-caused climate change is growing significantly. Publicly, it's still debated. However, the ones doing the research have, for the most part, come to a consensus. Obviously, there's still significant debate about the best way to respond.
However, Exxon Mobil has put significant effort into hiding this evidence and manipulating the public opinion. In contrast, Exxon Mobil's European peers are focused on rapidly responding to climate change. Given rapid increases in pressure to remove reliance on oil, Exxon Mobil, by not positioning itself better, is simply fueling this movement and hurting its long-term position.
Given that Exxon Mobil faces significant risk from climate change, by continuing to avoid responding, unlike the company's European peers, Exxon Mobil is hurting its shareholders.
Exxon Mobil Capital Spending
Exxon Mobil's last poor move is the company's massive and unsustainable capital spending in the midst of a downturn.
Exxon Mobil originally planned a massive amount of capital spending throughout the 2020s in the low-to-mid $30 billion annually for the 6-year period. For reference, the company planned roughly $200 billion worth of spending across this time period. That's a massive amount of capital spending, as much as the company's current market capitalization.
Since then, the company has announced revised capital expenditure plans. However, it still plans to spend roughly $23 billion in 2020. That's roughly 11% of the company's market capitalization. For reference, Chevron (CVX) is planning to spend ~9%. However, Exxon Mobil also has much higher other costs with a dividend yield that's 2% higher than Chevron.
Given the current state of the market, Exxon Mobil is effectively borrowing the entire 4% of this difference. The company was one of the last to cut its capital spending, and it has yet to cut its dividend. That sets up shareholders for potentially more pain going forward. This is especially true, given the amount of uncertainty around Exxon Mobil.
The company can justify its continued capital spending as counter-cyclical investing, but borrowing money just to pay dividends is a poor move regardless of your history of shareholder rewards.
Exxon Mobil Opportunity
However, it's not all pessimistic. Exxon Mobil has significant potential from two major sources of the company's low cost growth project plans.
One of Exxon Mobil's most exciting projects is its Guyana project, which has already started up and is expected to have a $25 Brent breakeven, well below even current oil prices. Production ramp-up has been delayed by one year, but is expected to hit more than 750,000 barrels/day by 2026. Given Exxon Mobil's 45% market share, that means more than $1 billion in annual cash flow.
Exxon Mobil expects 350,000 barrels/day in 2020 Permian Basin production as it grows production. However, it expects significant impacts on 2021 production to the tune of roughly 125,000 barrels/day due to capital spending cuts. That's significant as 2021-2022 was meant to be a significant ramp-up period for the company's production here.
However, the most exciting aspect of Exxon Mobil's Permian Basin production is its focus on $15/barrel breakeven. That's an incredibly low breakeven price, it'd mean more than $20/barrel of profit at current prices. With more than a million barrels/day in production, that's the potential for billions in annual cash flow, with significant room as production expands.
Even though we disagree with some of Exxon Mobil's management's decision and shareholder-unfriendly policies, it's tough to argue the company doesn't have a good and exciting asset base. Unfortunately, like Occidental Petroleum (OXY), the question becomes, will unfriendly management not hurt the returns from the quality assets.
Exxon Mobil Risk
Exxon Mobil has two primary avenues of risk.
The first is the company's continued lack of a response to climate change and the threat it poses along with other moves to decrease shareholder power. These things signify an unfriendly management to shareholders, which, more often than not, tends to result in lower shareholder returns. That's a risk shareholders must pay attention to.
Second, the company continues heavy deficit spending in a world of much lower oil prices, amplified by COVID-19 and the uncertainty it's caused. What happens remains to be seen. However, borrowing money to meet spending obligations, in the midst of such a crisis, amplifies the potential downside faced by investors.
The company has an impressive asset base, but these are risks that investors should pay attention to.
We historically have been, and continue to be, bullish on Exxon Mobil. This is on the basis of the company's strong integrated asset base, growth potential, and historic strength and positioning in the oil markets. However, with that said, the purpose of this article is to specifically highlight some bad moves that the company has made.
Specifically, the company has continued to not present an adequate response to climate change, despite the continued evidence for it. Additionally, the company has continued heavy spending, through borrowing. Even if the company argues spending for capital projects counter cyclically is intelligent, the company's dividend borrowings aren't.
However, with that said, we see Exxon Mobil increasingly like Occidental Petroleum, great assets but poor management.
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This article was written by
The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.
Analyst’s Disclosure: I am/we are long XOM, CVX, OXY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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