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Energy companies endured some of the toughest treatment from shareholders last year as climate and financial activism coincided. Will a change in fortunes give them an easier ride in 2022?
Since Insightia’s Activist Investing Annual Review 2022 highlighted the phenomenon in February, Russia’s invasion of Ukraine has led to spiraling inflation, not least for oil and gas prices. That should make energy companies more profitable, especially in the short-term, while faster-than-expected increases in interest rates to curb inflation could bring down valuations for capital-intensive projects to increase renewable energy capacity.
Will shareholder activism in the sector be curtailed by this sudden change of fortunes?
The first quarter suggests a slight easing of activist concerns. According to Shareholder activism in Q1, Insightia’s statistical report on current trends, there were public activist demands at 20 energy companies worldwide in the first quarter, or 6% of the total, down from 23 and 7% in the same period last year.
Climate risk is investment risk
BlackRock, the investment powerhouse whose CEO Larry Fink memorably wrote “climate risk is investment risk” two years ago, has been under pressure in Texas for its supposed antipathy toward oil & gas companies. In March, Fink told his shareholders that the world will need to “go from dark brown to lighter brown” before adopting 100% green energy. But he also said that recent events (meaning the war) “will actually accelerate the shift toward greener sources of energy in many parts of the world.”
Indeed, the French supermajor TotalEnergies found itself in a dilemma when it was the sole oil company of its size to not commit to exiting the Russian oil market in protest at the war in Ukraine. Clearway Capital, a new ESG activist fund, successfully led the effort to convince management otherwise.
ClientEarth, a campaign group interviewed in the latest issue of Insightia Monthly, has sued the directors of U.K. supermajor Shell, accusing them of failing to prepare for the energy transition.
Shareholders have also begun taking environmental arguments further afield. Bluebell Capital has two campaigns involving coal use at RWE and Glencore, while Starboard Value said Hunstman’s “environmental goals lack[ed] rigor and vision, leaving it underprepared for future regulatory and competitive pressure,” in an unsuccessful proxy contest at the chemicals company earlier this year. Carl Icahn is among several investors tracking the utilities space.
The blip test
Yet higher commodity prices have been a boon for energy stocks. The S&P 500 Energy Sector index, a basket of around 20 securities, has traded up 38% year-to-date, compared to an 8% decline for the S&P 500 Index as a whole. Net asset value has traded up even more, suggesting investors are still underweight the index.
However, Mark Viviano, a portfolio manager at Kimmeridge Energy Management, told Insightia last month that short-term swings in profitability should not distract from the important conversations between shareholders and energy companies in their portfolios.
“ESG isn’t going anywhere,” he said in an interview. “This is a critical moment when companies have to double down on their commitments, including to the energy transition and environmental stewardship.”
Andrew Behar, CEO of As You Sow, told Insightia in an interview that engagement with companies and shareholders during this season’s proxy campaigns had not been greatly influenced by spiking oil prices. “It’s hard for an oil company that has been losing money for 10 years and saying, ‘don’t look at the short-term,’ to say it’s all rosy now,” he said. “Investors are smarter than that too.”
Old vulnerabilities remain
Although Viviano is quick to admit that higher commodity prices can make companies less vulnerable to activist campaigns, he is optimistic about opportunities in the sector, pointing out that the industry enjoys significant dispersion thanks to differences in asset quality and execution. “The ability to retain a low reinvestment rate is going to be the litmus test for how companies are positioned,” he said in the interview.
Rising free cash flows give management teams more choices, he adds, compared to periods when smaller producers skirt with bankruptcy, while dealmaking rises in bullish periods. Kimmeridge had a large position in U.S. shale company Oasis Petroleum before it merged with Whiting Petroleum and is a big believer in consolidation.
Green shareholders haven’t been blown off course either. Indeed, while the activist tactics may change, the biggest companies face intensifying versions of the same underlying demands year-after-year, a reflection on how high expectations are and how disappointing the transition has been.
Majority Action, a campaigning group, led a 2020 withhold campaign against Lee Raymond, a former Exxon Mobil CEO, in his capacity as lead independent director at JP Morgan. Raymond resigned before the vote and this year Majority Action is targeting the CEO and lead independent director of Chevron at the supermajor’s May 25 annual meeting. Mark van Baal, founder of Follow This, the group that filed a greenhouse gas reduction proposal, said Chevron’s pledge to reduce carbon intensity by 5% was “disappointing tokenism, not a serious attempt to confront the climate crisis.”
CURE, the Coalition United for a Responsible Exxon, endorsed a shareholder campaign to replace four board members at the Texas-based supermajor, one of 2021’s seminal campaigns. Six months later, it gave the reconstituted board a “D-” on its mid-term report card, citing the exclusion of Scope 3 emissions from its greenhouse gas reduction targets, the “tiny fraction” of revenues being devoted to low-emission investments, and the lack of transparency on changes to its lobbying practices.
“You’ve got five new members, that’s disappointing,” said Behar of the company’s progress since the proxy contest, before adding that Exxon’s culture has proved resilient to change. “You need a majority [of the board], at least, at this company.”