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Tuesday, January 26, 2021

Environmentalists push dividend hikes to cut big oil’s reach

Climate activists seeking to pull investors into their camp are pushing Exxon Mobil and Chevron to limit money spent on exploration in favor of higher dividends and more share buybacks.

Shareholders will vote Wednesday on proposals that would urge the two biggest U.S. oil producers to cut what they spend opening up new oil fields and instead hand the money to investors. Environmental critics say future climate rules will soon make it unprofitable to pump. The companies say demand will grow for decades, even if carbon limits are imposed.

“The business model that worked for the last century won’t work this century,” said Natasha Lamb, director of equity research and shareholder engagement for Arjuna Capital, the investment company that proposed the shareholder measures. “We simply can’t burn all the carbon that’s on reserve. We’d like to see them shrink their business and return more money to shareholders.”

Such environmental appeals have so far shown little chance of success during annual meetings. Yet, in recent years, they’ve transformed the events from bland, little-noticed formalities for the companies to platforms for activist groups to highlight environmental and corporate-governance causes.

Sidewalk protests continue to be a staple, and there will be one this year outside Exxon’s gathering in Dallas involving groups alleging that Exxon misled the public and shareholders on its early climate-change research. Increasingly, though, such protests are giving way to buttoned-down, direct appeals to long-term investors to reconsider the business model.

In this case, the companies may be fighting more than just environmental activists. Between advances in renewable energy, government policies promoting low-carbon activity and improved technology for recovering current resources, the world may have already found all the hydrocarbons it will ever need to burn. It’s not just activist investors saying it — energy analysts associated with Wall Street institutions like Morgan Stanley are broaching the subject.

“Time is against them because every year these things seem to be gaining steam,” Allen Good, an analyst at Morningstar Inc. in Chicago, said of Exxon and Chevron. “Given the coalition of groups assembled against them, at some point the companies probably will have to address these issues.”

This will be the first time Exxon stockholders weigh in on such a resolution, one of four climate-change related issues on the ballot. Chevron investors overwhelmingly rejected the proposal at last year’s meeting with a 96.8 percent “no” vote. Chevron, which will meet at its corporate headquarters in San Ramon, California, has five proposals related to climate change.

“Investors are concerned Exxon Mobil risks eroding shareholder value,” Arjuna, a Marion, Massachusetts-based unit of Baldwin Brothers Inc., said in the resolution distributed to Exxon holders. “In the face of global climate change, we believe investor capital is at risk from investments in projects that may prove economically stranded.”

In the proxy filing mailed to shareholders, Exxon urged opposition to the proposal.

“The company addresses the potential for future climate-related policy, including the potential for restriction on emissions, through the use of a proxy cost of carbon,” Exxon said in the document. “The proxy cost seeks to reasonably reflect the types of actions and policies that governments may take over the outlook period relating to the exploration, development, production, transportation or use of carbon-based fuels.”

Exxon and Chevron have maintained or raised dividends even as the two-year slump in oil markets eroded cash flow and forced much of the industry to curtail payouts, slash payrolls, cancel projects and tap capital markets for borrowed money to stay afloat. Exxon was stripped of its top rating by S&P Global Ratings last month for the first time since the Great Depression.

Exxon is scheduled to pay out $3.3 billion in quarterly dividend payments next month. Chevron, whose obligation for the quarter is about $2 billion based on figures compiled by Bloomberg, also urged shareholders to reject the proposal.

“The proposed dividend policy is unwise because it is based on a flawed, if not dangerous, premise: that stockholders would be best served if Chevron stopped investing in its business,” the second-largest U.S. oil producer said in its proxy response to the proposal.

Scott Silvestri, an Exxon spokesman, declined to comment beyond what’s in the company’s proxy. Kurt Glaubitz, a Chevron spokesman, deferred to the board of directors’ response mailed to stockholders.

If such a future were to come to pass, it would mean a sea change for the energy industry. Ever since the first oil boom in western Pennsylvania in the 1860s, oil and gas companies and pioneers have made and lost fortunes on the frontiers, betting thousands, then millions, then billions that they would strike black gold in the scrub-strewn plains of west Texas, the tropical seas of Brazil and the icy swells of the Arctic Ocean.

“Oil companies increasingly need to consider a number of demand scenarios that may not require much exploration at all,” Morgan Stanley analysts including Martijn Rats said in a May 20 research note. “Even if the oil price recovers, the rebound in exploration spending may only be relatively modest. Business models that rely solely on exploration may face challenges for some time to come.”

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