It’s been a tough week for big oil.
The world’s second-biggest listed oil company, ExxonMobil, now has a couple of board members who want it to stop producing oil.
Meanwhile, Royal Dutch Shell has been told by a Dutch court that it needs to make more effort to cut its emissions.
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So what does this all mean in practice? Particularly if you’re an investor in said companies?
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Yesterday, ExxonMobil lost a battle with a tiny activist hedge fund called Engine No. 1. The fund owned a 0.02% stake in Exxon (which, while small in percentage terms, is still about $50m worth of shares).
Engine No. 1 had proposed a binding shareholder vote to force Exxon to put some of its candidates on the board to push through strategic changes which will push the oil company to “diversify beyond oil and fight climate change”, reports Bloomberg.
As it turns out, Engine No 1 won. It secured the backing of BlackRock and other big shareholders, and it managed to get at least two of its candidates voted onto the board. So now, of 12 board members, Exxon now has at least two who are opposed to the current fundamental purpose of the company. That is going to make for some very interesting strategy conversations in the coming months.
Meanwhile, Royal Dutch Shell has been ordered by a Dutch court to “accelerate and deepen its emissions cuts”, reports the FT. Shell has been told to reduce its emissions by 45% by 2030, which is a lot faster than Shell had originally planned.
On top of that, as the FT reports, Chevron shareholders have also voted for a resolution that calls for the group to “substantially reduce” its emissions.
It would be a mistake to dismiss all this. Much of the time these things are just talking points – a bit like when shareholders vote against company bosses paying themselves ridiculous amounts, and the bosses tut and say they’ll take it “into consideration”, then take the money anyway.
This isn’t the case here. The Exxon vote is likely to lead to change – and it also illustrates the immense power of the big passive funds here. They might not be able to do this kind of thing themselves (they can’t sell the shares), but clearly they can throw their weight behind a smaller player whose activism they approve of.
It raises another interesting issue about shareholder democracy – did BlackRock ask all the people who invest in its index trackers whether they wanted to back this particular vote? Clearly not. (You can read more on this here, it’s an issue I can see us returning to).
And while Shell plans to appeal the decision against it – and its enforceability is unclear – it’s a very obvious marker of the direction things are moving in, as Helen Thomas points out in the FT. “There is little doubt this judgement will increase the pressure to be more ambitious on climate change pledges – and it provides the tools for further legal challenges.”
So what does all of this mean?
The consequences of making it harder for Big Oil to produce oil
Let’s start with the obvious point. If you make it harder for oil companies to produce oil, then there will be less of it around. If there’s less of it around, it will cost more than it otherwise would have.
And as Louis Gave of Gavekal pointed out before this ruling, “growing ESG constraints and restricted access to capital mean that Western oil firms are not exactly falling over themselves to drill new wells, or deploy new rigs.”
Now, as highlighted by the FT’s Javier Blas on Twitter, “Big oil will likely have to reduce capex even further” with Exxon and Chevron following “Shell/BP into managed output decline. That’s bullish oil price”.
Secondly, the oil companies who are allowed to meet demand – that is, the ones run by Saudi Arabia, Russia, Iran, and all the other cuddly members of oil cartel Opec-plus – will reap the benefit of that, assuming they can maintain a bit of discipline when it comes to pumping the extra oil.
I’m still not keen to invest in Saudi Aramco or Russia in general, but I make those arguments from an ethical point of view (I have an increasingly old-fashioned attachment to democracy and relatively secure property rights) rather than a valuation one. Investors with a different view to mine could certainly be forgiven for investigating further.
Thirdly, it boosts the argument that investors should consider the western Big Oil majors as a tobacco-style investments. Put simplistically – their growth prospects might be limited, but they are still throwing off piles of cash while their existing business gradually runs down, and they have nothing to spend that cash on.
So as an income investment they almost certainly still make a lot of sense. One caveat is to keep an eye on just how far they go with the “going green” strategy – if the cash starts being splashed on highly speculative “green catch-up” projects then you might have to reconsider.
Finally – and somewhat more troublingly – there may be a risk of putting the cart before the horse here. Raising energy prices is certainly one way to encourage the energy transition. But this is a big task ahead of us. The gap between a “fossil-fuel powered today” and a “green tomorrow” might be bigger than the optimists think.
As a result, the whole green trend might be getting a bit ahead of itself. We’re sceptical that the shift will happen as rapidly or smoothly as some prices imply. What does that mean for investors? We cover that very topic in the latest issue of MoneyWeek magazine – subscribe now to get your first six issues free.
