Analysis-Exxon Mobil’s megadeal to test climate-aware shareholders

By Svea Herbst-Bayliss, Tommy Wilkes and Simon Jessop

BOSTON (Reuters) – Exxon Mobil (NYSE:)’s $60 billion bid for Pioneer Natural Resources (NYSE:) would expand the top U.S. oil producer’s footprint in the country’s biggest oilfield, raising questions for shareholders over its transition to low-carbon energy.

Negotiations between Exxon and Pioneer are advanced but have not yet led to an agreement over the acquisition of the largest oil producer in Permian basin.

The deal puts focus on the Permian and signals Exxon, valued at $436 billion, is sticking to is fundamental business and is pursuing a strategy of consolidation which makes climate sense to some investors, bankers and industry analysts said.

Despite pressure on global corporations to move away from fossil fuels in favor of cleaner energy like wind and solar, Exxon has not bet big on renewables like many peers. So far, shareholders profited as the share price more than doubled since early 2021 when activist investors publicly pushed for changes.

Right now “activists are criticizing companies for not focusing on their core business, telling them to separate their renewable businesses,” said Jim Rossman global head of shareholder activism and advisory defense at Barclays.

“The tapping out of growth, the consolidation and the focus on efficiency … if you’re a climate-aware investor that’s not a bad thing, necessarily,” said Andrew Logan, senior director of oil and gas programs at Ceres, a nonprofit that pushes companies to pay more attention to climate change.

Big Oil is responsible for the bulk of human-induced greenhouse gas emissions and pressure for action is building.

Public activist tussles in the sector, however, have been rare with 20 months of war in Ukraine stoking energy security fears that led many shareholders to give executives a pass on climate goals, for now.

“Investor pressure has decreased; they’re backtracking… the big investors are enabling this,” said climate investment group Follow This founder Mark van Baal.

U.S. energy firms have been among the biggest winners so far, with Exxon’s price gaining around 75% since the start of last year against a 10% drop in the .

LAGGARD

The deal comes two years after newcomer investment firm Engine No. 1 in 2021 put three new executives onto Exxon’s board, partly amid criticism over its moves on climate.

But Engine No. 1 also urged Exxon to focus on its best assets, including production in the Permian basin, arguing investments there deliver more than far-off, costly projects.

“Short-cycle Permian assets make more sense against the backdrop of a long-term energy transition than mega projects that would take decades to start earning a return,” said Charlie Penner, the hedge fund’s former head of active engagement.

Privately, investors worried if Exxon bowed out of production, someone else would pick up the slack and nothing would be gained for shareholders or energy transfer.

Since then, despite committing to spending $17 billion on carbon capture and storage technology, biofuels and hydrogen in an effort to lower the carbon footprint of its operations, Exxon remains a laggard among its global peers.

Analysis of Exxon’s net-zero plan by the Climate Action 100+ group of investors in October 2022 showed that 73% of the company’s capital expenditure was not aligned with its chosen International Energy Agency scenario benchmark.

While Engine No. 1’s campaign at Exxon is remembered for its climate component, bankers and lawyers also said that the firm won its Exxon board seats largely because it made economic arguments.

Similarly, more recent activist campaigns could even suggest climate change is not playing a big role at all, bankers and analysts said. Investors acknowledged that many worry less about cutting carbon emissions and more about making returns as markets look more skittish again.

Investors Starboard Value and Ancora Group Holdings this year urged Algonquin Power & Utilities (NYSE:) to find a buyer for its renewable energy division, arguing its core utilities business is undervalued.

Elliott Investment Management, meanwhile, wants NRG Energy (NYSE:) to find a new CEO, refresh its board and review its purchase of security system company Vivint Smart Home (NYSE:).

Similarly, oil major Shell (LON:) is being pressured by Third Point to break up for financial reasons rather than anything to do with climate change.

“The discipline activists have enforced has held,” Ceres’ Logan said adding “No one has really done anything crazy.”