ExxonMobil (NYSE: XOM) finally conceded to the multi-year campaign by shareholders and activists to disclose its risk to climate change, a notable departure after years of trying to dismiss the issue.
According to a new filing by Exxon to the U.S. Securities and Exchange Commission (SEC), Exxon said that its board “has reconsidered the proposal requesting a report on impacts of climate change policies” by major shareholders at its annual meeting earlier this year. The company will disclose more information regarding “energy demand sensitivities, implications of two degree Celsius scenarios, and positioning for a lower-carbon future,” the company’s filing stated.
The pressure from activists and shareholders to disclose more information related to Exxon’s vulnerability to climate change are the latest in a series of headwinds over the past few years, Bloomberg writes. The oil supermajor has also had to contend with its inability to find and replace all of the oil and gas reserves that it produces in a given year, and for several years in a row, that reserve-replacement ratio has been under 100 percent, an indication of a declining reserve base.
Also, Exxon’s total oil and gas production has actually declined in four of the last five years—Bloomberg calculates that Exxon averaged 4 million barrels of oil equivalent per day (boe/d) in the first nine months of 2017, down from 4.51 mb/d in 2011. Part of that is because of Exxon’s size—a depletion rate that leads to the erosion of several percentage points from a rather large number is still a large number.
On top of that, Exxon’s shale activity is only beginning to ramp up, having spent billions to acquire acreage earlier this year. Bloomberg says that these obstacles now have Exxon trading at a discount relative to other energy companies in the S&P 500 Index, the first time that has occurred in 20 years.
But the climate disclosures open up a new area that might raise some concern for investors. In May 2017, shareholders passed a resolution calling on the company to disclose more details regarding financial risks to climate change. The resolution passed despite Exxon’s fierce opposition.
There are several areas of concern for shareholders. First is the vulnerability of shareholder value to climate regulation. That is, should the U.S. or any other government put prices on carbon, or engage in a regulatory crackdown that forces certain oil and gas reserves to remain in the ground unproduced, it would amount to a serious destruction of shareholder value.
That concern has been floating around for quite a while, but more recently, another threat to Exxon’s shareholders comes from the possibility of peak oil demand. Exxon’s executives have continuously waived away any concern about the long-term health of oil demand, but a growing number of executives at large oil companies (see: Royal Dutch Shell) are predicting a peak in oil demand in the next decade or two.
If oil demand peaks, it would almost certainly lead to a peak and decline in prices. Or, at the very least, a hard ceiling on how high prices could possibly go. Again, this would mean investing in Exxon is not nearly as attractive as everyone currently believes.
That poor investment case is why shareholders want to know the full extent of the risks. And the allegations from several states attorney generals that Exxon knows and understands these risks very well is the basis for an investigation into the oil major.
Now, Exxon seems to have succumbed to the pressure, and has finally agreed to offer up more information, with details set to be released “in the near future,” Exxon’s SEC filing read.
Meanwhile, Exxon has, at least verbally, said that it supports the goals laid out in the Paris Climate Agreement. Exxon’s CEO has offered support for biofuels, low-emissions fuels, carbon capture and other technologies as a means to achieve emissions reductions.
Still, analysts say the oil major has vulnerabilities. “Acquisitions have not worked for them in the past, not necessarily disasters but usually they haven’t played out,” said Brian Youngberg, an analyst at Edward Jones & Co., according to Bloomberg. “Maybe Exxon needs to consider a little more broader strategic moves on the asset side.” He suggested Exxon follows in the footsteps of companies like Royal Dutch Shell and Chevron, who sold off underperforming assets. Edward Jones & Co. has a “hold” rating on Exxon’s shares.
On a related note, the FT reports that about 225 institutions, controlling more than $26 trillion in investments, banded together to push the 100 largest greenhouse gas emitters to do more to address climate change. These institutions include heavy hitters, such as HSBC, Pimco and pension funds like the massive California Public Employees Retirement System (CalPERS).
But even as Exxon seems to have announced a major position change, some say the devil will be in the details. The Union for Concerned Scientists says that Exxon’s SEC filing offers very little information about what it will disclose.
“Here are just a few climate-related challenges that the company has yet to address: Climate-induced flooding at its refineries, lawsuits by municipalities seeking to recover costs of adapting to climate-related sea level rise, the fact that its oil and gas reserves may never be recoverable, and ongoing investigations by state attorneys general who charge the company deceived its investors about the reality and seriousness of climate change,” Kathy Mulvey, a climate accountability campaign manager at UCS, said in a statement.
By Nick Cunningham of Oilprice.com
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