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.

It's been a big week for symbolism in the energy sector.

On Thursday, President Donald Trump announced his intention to pull the U.S. out of the Paris accord to limit carbon-dioxide emissions. Only the day before, a hefty majority of shareholders of Exxon Mobil Corp., the world's biggest listed oil major, backed a resolution, over the board's opposition, effectively calling for an annual stress-test of the company's assets under scenarios assuming more stringent climate policies, citing that same Paris agreement.

And yet, as of Friday morning, it was difficult to detect the impact of any of this on one reasonably useful (but by no means foolproof) barometer: the stock market.

Shares of coal miner Peabody Energy Corp. were lower than where they started the week, while electric-vehicle maker Tesla Inc.'s were up (and close to their all-time peak). Exxon's shares, meanwhile, hadn't collapsed.

On the other hand, valuation ison some fundamental level, a belief system. Some stocks appear to embody a bit more fervent belief than others, with Tesla being an obvious example. Don't forget, though, that with 26.5 percent of its float sold short, beliefs around Tesla aren't all utopian.

In contrast, Exxon generates more than $20 billion of operating cash flow in a bad year, so it seems less reliant on faith.

But it is. And Wednesday's vote exposed why.

On one level, it exposed how a series of setbacks had dented Exxon's reputation for discipline and solidity, such as taking a write-down on some oil reserves and losing its triple-A credit rating. A combination of high spending and lower oil prices have left Exxon having to sell assets and borrow in order to maintain its track record of raising dividends for 34 consecutive years:

Exxcess
Exxon's dividend payments far outstripped its free cash flow in recent years
Source: Bloomberg
Note: Cash paid in dividends as a share of free cash flow from operations after capital expenditure.

Clearly, Exxon's ability to fund its dividend organically has undergone previous cycles. Equally clearly, this last cycle has proven to be more extreme.

If the vote's result illustrated some loss of faith in Exxon's management due to past missteps, then the substance of the resolution showed more concern about the future.

In arguing against the resolution, Exxon's board cited a projected need for between $11 and $18 trillion of investment in oil and gas through 2040 even under more stringent climate policies. It also pointed to the annual projection the company publishes showing future energy trends that, under Exxon's assumptions, remain overwhelmingly fossil-fuel based.

Yet investors want a stress-test anyway.

A big reason why Exxon is under pressure is that -- along with its peers and OPEC for that matter -- it invested in complex, high-cost projects on the assumption that tight supply and spiraling demand would make them economic. As the collapse in the industry's return on capital and newfound focus on lowering breakeven oil prices demonstrate, this hasn't proven to be the case as yet.

So the vote represented a backlash against dogmatic thinking. In an excellent blog post on his site dollarsperbbl.com, oil-industry veteran and consultant Harry Benham shows that making two reasonable changes to Exxon's assumptions around growth rates leads to a scenario whereby oil demand falls rather than rises by 2040.

Are Benham's assumptions better? Ask me in 2040, if I'm still around.

The point is that we are at a moment in the energy industry where linear thinking along the lines of Chinese population multiplied by car ownership multiplied by number of trips to the store isn't necessarily your best approach.

Take the crucial debate about electric vehicles. Will demand for them rise by 2 percent a year or 20 percent a year over the next few decades? Before you fire up your Excel spreadsheet and start compounding, consider instead that technology adoption isn't linear but follows what's known as the "S curve."

From smartphones back through to television and, yes, the automobile, we have tended to buy new stuff slowly at first and then go all-in. Instead of a straight line or an exponential curve, reality is more like a virtually flat line followed by an almost vertical line as a new gadget suddenly becomes ubiquitous.

Just like you and me, Exxon's investors don't know if that will be the case with electric vehicles. But there are enough signs it might be -- look at what's happening in the autos business --  that they want Exxon to show them a set of scenarios incorporating these alternative realities.

Because, in financial markets, scenarios create realities, by determining which stocks get bought and sold, which budgets get approved, which way credit ratings move, and who gets hired and fired in the C-suite.

In this context, the president's announcement on Thursday was less a counter-punch to Exxon's shareholder vote and more of a coda. Its delivery, and the market's insouciant response, demonstrated perfectly that the future of energy looks less certain today than it has in decades. And it will be shaped less by politicians of any stripe and more by the impersonal and disorderly flows of money and technology.

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

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

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