Hedge fund that beat ExxonMobil says it will have to cut oil output

The activist investors who invoked the perils of climate change to win a stunning proxy battle against ExxonMobil this week said the supermajor would need to cut oil production, indicating they would keep pressing management to shift strategy in response to the shareholder vote.

“They need to position themselves for success,” said Charlie Penner, who ran hedge fund Engine No 1’s campaign against the company. “You would certainly believe that would mean less oil and gas production going forward.”

Engine No 1, named after a firehouse sign in San Francisco, launched its audacious effort in December, nominating four directors to Exxon’s board and warning of the “existential risk” posed by its commitment to fossil fuels.

The show of chutzpah pitted a hedge fund founded last year against the world’s most famous oil company, with colossal geopolitical heft and financial clout.

One of Wall Street’s most expensive proxy fights culminated in Wednesday’s unusual annual meeting, when ExxonMobil attempted what critics described as the company’s version of a senatorial filibuster, delaying the closure of voting while it held an impromptu hour-long break before chief executive Darren Woods fielded questions about the company’s strategy.

Exxon thought this was ideological . . . Our idea was that this was going to have a positive impact on the share price

It was the first time Exxon had dealt with a contested shareholder vote of this nature.

“Like many things we’ve seen in this campaign, the way they operated the meeting was beneath such an iconic company,” Chris James, Engine No 1’s founder, said in an interview with the Financial Times.

“Watching that meeting yesterday was such a perfect example of how they don’t realise the world has changed. It was all on display.”

In the end, Exxon announced shareholders had elected two Engine No 1 nominees after a preliminary vote count. The fund expects a third to be announced when the official vote count is in, likely in the middle of next week.

Engine No 1 will keep a close eye on management’s behaviour, Penner said. Some analysts have suggested Exxon’s management could simply ignore the fund’s new directors.

“I wouldn’t recommend it,” he said.

BlackRock and Vanguard, Exxon’s two largest shareholders, both backed some of the directors nominated by Engine No 1 — a rebuke to the company’s management that environmental campaigners said heralded a new era for Wall Street’s approach to climate risk.

But Engine No 1 was clear that its campaign was as much about Exxon’s financial underperformance in recent years as it was about climate.

“Exxon thought this was ideological,” James said. But Engine No 1 was a “capitalist group, definitely not a non-profit”, he added. “Our idea was that this was going to have a positive impact on the share price,” he said.

The hedge fund is not calling for Exxon to repeat the kind of move into renewable energy that BP has undertaken.

“BP spending a billion dollars to buy half of a wind farm that Equinor developed, that’s not a great business model and it was punished by the market,” said Penner, referring to the UK oil major’s recent deal with the Norwegian company.

Penner said Engine No 1 would give Exxon time to develop a new strategy — but as the world moved to cut carbon emissions, the changes would still be profound. An energy transition happening faster than expected had undermined Exxon’s assumptions about long-term demand for its oil, Penner said.

“What we’re saying is: plan for a world where maybe the world doesn’t need your [oil] barrels,” he said.

It would be a sharp departure for a company currently producing oil and gas to the equivalent of almost 4m barrels a day, or more than 4 per cent of the world’s total, and has made long-term plans for big new crude oil projects in the US and off the coast of Guyana.

Exxon said it “welcomes the new directors” and would “share our plans in detail with them and listen to their perspectives”.

Engine No 1’s success has led to claims that a new age of shareholder activism may have begun. The fund holds a stake of just around $50m in a $250bn company that less than a decade ago was the world’s largest by market capitalisation. Other companies are in its sights.

“Our ambitions are clearly broader than Exxon,” James said.

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