By Scott Deveau
D.E. Shaw on Tuesday sent a letter to Exxon arguing that changes are needed because the oil major has consistently underperformed rival Chevron Corp., said the people, who asked not to be identified because the details are private. D.E. Shaw believes Exxon is overspending, and that its current path is unsustainable and puts its dividend at risk, they said.
The move comes one day after two other investors called on Exxon to make similar changes, highlighting how the oil industry has fallen under the gaze of activist investors after years of disappointing performance and increasing concern about the impact of climate change. Valuations that recently touched two-decade lows have created attractive entry points for activists seeking changes at the world’s largest oil companies.
D.E. Shaw believes Exxon’s failure to adapt has erased over $100 billion in shareholder value over the past five years, the people said. It has urged Exxon to cut capital expenditure to a maintenance level of about $13 billion from a planned $23 billion this year, and to slash its operating expenses by as much as $5 billion, the people said. It could do so by lowering its head count, shrinking its real estate footprint and other measures, they added.
Representatives for D.E. Shaw and Exxon declined to comment on the letter. Exxon shares rose 1.3% in New York to close at $42.80 in New York, giving the company a market value of $181 billion.
The investor, which held a 0.06% stake in Exxon at the end of September, has significantly increased its stake since then, the people said, although the precise size of the position couldn’t immediately be learned.
First-time activist investor Engine No. 1 disclosed this week a $40 million stake in Exxon, and said it planned to nominate four directors to the board. The fund wants Exxon to diversify its business and align executive pay with shareholder interests, among other changes. Engine No. 1 has the backing of the California State Teachers’ Retirement System, which holds a 0.2% stake in Exxon, according to data compiled by Bloomberg. D.E. Shaw’s position is larger than the combined stakes held by CalSTRS and Engine No. 1, the people said.
Paul Cheng, a New York-based analyst at Scotia Capital, said he wouldn’t be surprised to see more activism in the oil sector. Across the industry “performance has been so poor in the last eight years, if companies don’t change then we should not assume there will be better results,” he said.
D.E. Shaw also wants Exxon to improve its environmental reputation and implement other changes, the people said. That includes setting clear and measurable emissions targets and incorporating those into its long-term incentive compensation plans, they said. That comes in addition to the natural reduction the other changes would have on its carbon footprint, they said.
Environmental concerns are rising across the investment world. On Wednesday, the $226.4 billion New York State Common Retirement Fund pledged to reach net-zero greenhouse gas emissions across its investments by 2040, and said it may divest from the riskiest oil and gas companies by 2025.
Executive pay in the industry has also been criticized recently. Activist investor Kimmeridge Energy Management Co. last month cited the issue as it revealed positions in U.S. oil producers Ovintiv Inc., PDC Energy Inc., and Cimarex Energy Co. and called on them to improve their performance and governance.
Exxon has struggled this year amid a collapse in energy prices, with its shares sliding 39%. Unlike its biggest European peers, which have cut dividends and laid out targets to reduce carbon emissions, Exxon has stuck with its current payout to investors. The Texas-based company said last week it will cap capital expenditures at $25 billion annually through 2025, and will take a writedown of as much as $20 billion on North and South American natural gas assets.
It’s not surprising someone is pushing for change at the company because it has been underperforming Chevron for a long time, said Biraj Borkhataria, an analyst at RBC Capital Markets.
“Exxon is in the early stages of the cost reduction story,” Borkhataria said. “To the extent that D.E. Shaw can accelerate this process, I would say it’s positive and should be helpful to shareholders.”
D.E. Shaw has a history of agitating for changes at large companies, including Marathon Petroleum Corp., Emerson Electric Co., Lowe’s Cos., Bunge Ltd. and others.