Big Oil caught between profits and purpose
Activist climate investors pose new threat amid low-carbon push
Exxon Mobil is among the oil firms that have been pressured by activist investors to cut spending and to look at their long-term carbon impact.
WASHINGTON – A couple years back, when Mark Viviano worked as a Wall Street analyst studying the inner workings of the oil and gas industry, his colleagues would ask if investing in the sector was just a sucker’s bet.
The Paris climate accords has been signed. Nations were gradually shifting away from fossil fuels. In the long run, oil and coal companies’ revenues and profits would inevitably shrink.
Viviano, however, isn’t so sure. A long-haired managing director at the private equity firm Kimmeridge Energy, he is taking large stakes in oil and gas companies and using that leverage to force them to adapt to the coming low-carbon world.
And Viviano is not the only one. With oil prices low and stock prices cheap, a handful of well-funded investment firms also are buying up so-called activist positions in oil and gas firms aiming to shift them away from expensive exploration projects and adjust their businesses to the realities of an uncertain oil market.
“It’s a relatively one-sided debate. The issue you run up against at oil companies is complacency,” Viviano said. “A lot of investors are saying I’m going to abandon the oil sector. But we’ve been vocal the answer is engagement and getting these boards to understand the world is changing.”
Climate change has moved up on the agenda in the corporate boardrooms of oil companies, but the industry continues to debate how fast it must respond to policies and public attitudes that will reduce demand for its core products.
At last week’s CERAWeek by IHS Markit energy conference, industry leaders clashed over the outlook for fossil fuels, with the CEOs of European oil majors such as BP and Royal Dutch Shell arguing that transition of clean energy is quickening while their counterparts at Hess of New York and Repsol arguing that petroleum demand will continue to grow with the world’s population far into the future.
Activist investors such as Viviano are embracing the sooner, rather than later view. The hedge fund giant D.E. Shaw & Co. has built up a sizeable position in Exxon Mobil and is reportedly pressuring the oil giant to cut spending, amid investor criticism it is not taking the long-term impacts of climate regulation seriously enough.
Also pressuring Exxon is a new investment firm, Engine No. 1, which has the backing of the California State Teachers’ Retirement System, the country’s largest retirement fund with more than $250 billion in assets.
“Exxon Mobil shareholders deserve a board that works proactively to create long-term value, not defensively in the face of deteriorating returns,” Engine No. 1 said in a statement last month.
The Texas oil giant declined a request for an interview. On Wednesday, Exxon outlined a five-year plan to increase its earnings and grow its dividend while working to lower emissions in support of the Paris climate goals.
Boardrooms shudder
The moves by the activist investors like Viviano, Shaw and Engine No. 1 are not only sending shudders through the boardrooms of energy companies, but also oil fields in Texas and around the globe, where efforts to cut investment in drilling projects would be keenly felt.
While used to criticism on climate change, oil companies have not expected big hedge funds and private equity firms to join in and launch shareholder campaigns to oust directors and change business practices, said Andrew Logan, senior director of oil and gas at Ceres, a nonprofit that advises investors in sustainable investing.
“A proxy fight is a $10- to $15 million bill. You have to mail the ballots out to every investor and hire proxy firms and PR. It’s like running a political campaign,” he said. “It raises the stakes for the industry as a whole. You see companies moving faster even without a campaign against them because they know it’s in the quiver of investors.”
Investors want to see oil companies decrease the number of expensive exploration projects and clean up their operations. The thinking goes that the world won’t need as much oil in the future, and what it does need will have to have small greenhouse gas footprint.
So-called sustainability investors have pushed that view for years, even as American oil companies downplayed such an outlook, trumpeting projections that petroleum demand will continue to climb for decades.
With the coronavirus pandemic depressing oil demand and prices, the oil industry’s finances fell into disarray. Last year, the credit ratings firm Moody’s downgraded 68 oil and gas companies worldwide, more than twice as many as the year before.
At the same time, oil companies are losing the support of large financial institutions such as JP Morgan Chase and Bank of America, which have announced plans to shift their investment portfolios away from fossil fuels towards reaching carbon neutrality by mid-century.
“In the end society is lining up with this objective,” Mark Carney, former governor of the Bank of England and now vice chairman of a New York investment firm, said during a recent event hosted by Bloomberg Live. “You’re left with three options. Have a plan for net zero or wind down your business over the next 10-15 years. Or you think you’re separate from society and don’t think the rules apply to you.”
And those that resist could end up in the sights of activist investors.
Proxy fight
Viviano has built a $200 million stake in Ovintiv, the successor company to the more than 100-year old Canadian firm Encana, which has large drilling operations in West Texas.
Earlier this year, Viviano said he was done negotiating with management. Kimmeridge Energy launched a proxy battle, asking shareholders to support it plan to replace three of Ovintiv’s board members with its own and cap spending at no more than 70 percent of the cash the company takes in.
“If you want to be a public company you’re going to need to convince investors you have a viable business in a low carbon future,” Viviano said.
Like virtually all oil companies, Ovintiv has watched its stock price decline steadily over the past decade, amid concerns around oversupply, a price war between Russia and Saudi Arabia, and the coronavirus pandemic. But the company’s approach to climate change has invited extra criticism.
The investment giant BlackRock warned Ovintiv’s board last year it needed to set emissions reduction targets in line with recommendations made by the Financial Stability Board, an international body established by the world’s wealthiest counties to monitor the global financial system. If it didn’t, Black Rock said, executives needed to provide, “an evidence-based justification for why that is in longterm shareholders’ interests.”
Ovintiv has so far resisted setting emissions targets, Viviano said. The company did not respond to a request for comment, but said in a statement last month that it was working hard to drive down emissions and “maintain the scale of our business.”
Opportunity knocks
That objective is out of line with what more investors want to see. In their calculation, the oil sector is shrinking, and companies needs to produce oil and gas as cleanly and efficiently as possible if they are to survive
And if they can do that, there is money to be made, particularly as Wall Street sours on oil and gas companies and energy stocks trade at bargain prices, Viviano said.
“Under almost under scenario oil demand should be resilient over the next decade,” he said.
“This is a generational opportunity because (investor) sentiment is as bad as I’ve ever seen it.”