Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Rex Tillerson, CEO of Exxon Mobil, has a point.

Responding at Wednesday's shareholder meeting to questions about the oil major's role in contributing to and tackling climate change, he rounded off one answer with this:

Just saying "turn the taps off" is not acceptable to humanity.

Unless you're reading this on a solar-powered computer in an off-grid redoubt, you should be inclined to agree. The world still runs overwhelmingly on fossil fuels.

But while Tillerson's comment drew applause in Dallas, it didn't quite draw a line under the issue. What it did underline, obliquely, is a growing problem for Exxon that led to the board's first defeat on a shareholder vote in years.

The problem with the answer is that, among most of the company's shareholders, no one is really asking Exxon to "turn the taps off." Shareholder proposals did include calls for Exxon to put a climate expert on its board and to adopt measures to set targets for reducing greenhouse gas emissions from both its operations and products. Neither amount to a stop-work order and were rejected anyway.

What these really amount to, however, is an expression of disquiet. Exxon has a well-deserved reputation as a well-oiled -- in every sense -- corporate machine, raising its dividends through thick and thin, decade in and out. The stock has long traded at a premium to its global peers.

Premium Grade
Exxon has long enjoyed a wide premium to its global peers on valuation metrics like price-to-book
Source: Bloomberg
Note: Peer group average includes Chevron, Royal Dutch Shell, BP and Total.

But at least some investors worry the machine may not be built to last in a world that may be on the cusp of far-reaching changes in its energy markets.

I've written here about the potential implications for the industry of Saudi Arabia's plan to reduce its dependence on oil revenue. And this isn't the only sign that change -- potentially far-reaching change -- is afoot.

On Thursday, Dong Energy announced plans for a listing valuing it at potentially $16 billion. As fellow Gadfly Chris Hughes wrote, it's an odd beast of a company that has pivoted from drilling for oil and gas to building offshore wind farms -- and yet is likely a must-have European IPO for investors.

On the same day, oil traders worldwide were high-fiving because oil prices nudged back above $50 a barrel. That the market now cheers a level half of $100, and that it has taken a medley of diasters from Canada's forests to the Niger Delta to get there, tells you we are living in a very different world from only a couple of years ago. Earlier this month, French oil major Total spent $1.1 billion to buy a battery maker.

This isn't about the taps being turned off now. It is about the possibility that Exxon's taps get turned down a little sooner than previously expected, or they have to compete with cheaper taps held by others. You may have noticed that much of the U.S. coal industry currently operates in chapter 11, despite the fact that we still burn a lot of the stuff.

That is why the vote Exxon's board lost is telling. The "proxy access" measure, passed with about 60 percent of the vote, allows a group of shareholders who have held at least 3 percent of Exxon's stock for at least 3 years to nominate up to a quarter of the board. In presenting it, the New York City pension system's representative cited the need to give shareholders a "meaningful voice" in setting Exxon's long-term strategy for managing risks -- including those posed by climate change. Another measure, which didn't pass, called for Exxon to separate the roles of chairman and CEO and was also presented, in part, as strengthening the company's ability to manage the same risk.

The most striking element of this is that solid, dependable Exxon is having its governance and planning capabilities called into question in this way. There seems to be a growing sense that, maybe, the business model isn't quite as robust in the face of today's challenges as management maintains. This also came through in a report published by Wolfe Research after the company's first quarter results last month. Analyst Paul Sankey wrote:

[Exxon] has earned the right to limited disclosure. But equally, the company may be at a historic moment in terms of the perennial struggle for reserves replacement & growth -- it was just downgraded from AAA by S&P on stated concerns over spending to maintain those very business drivers. But the historically-earned limited disclosure is more limited than ever. 

Importantly, Sankey wasn't writing about climate change but rather Exxon's lack of clear answers to his questions about more immediate issues of spending and profitability. The wider point is that, like the shareholders seeking a greater say at Exxon, the feeling is out there that the company may face "a historic moment" -- and we can't be completely sure it is fully prepared.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net