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Exxon Under Pressure From New Activist Fund

12/06/2020 | 10:15pm EDT

By Cara Lombardo and David Benoit

Exxon Mobil Corp. is facing the threat of a proxy fight from a newcomer activist investor with a sustainability bent that wants the beleaguered energy giant to act faster to remake itself.

Engine No. 1 LLC, an investment firm launched by Chris James last week, is preparing to send a letter to Exxon's board urging the Irving, Texas-based company to focus more on investments in clean energy while cutting costs elsewhere to preserve its dividend. The letter, a copy of which was viewed by The Wall Street Journal, identifies four people the firm plans to nominate to Exxon's 10-person board.

The San Francisco firm has the support of California State Teachers' Retirement System, the big pension investor, and expects other shareholders to be sympathetic to the cause, given widespread frustration over Exxon's share performance, a person familiar with the matter said. Calstrs holds a more than $300 million Exxon stake, while Engine No. 1 has one worth around $40 million, this person said.

Their combined ownership is smaller than what is typical for an activist taking on a company of Exxon's size, and it is possible the campaign will fall flat. Still, Calstrs holds sway as the country's second-largest pension fund and there have been instances of well-timed campaigns led by small shareholders gaining traction with other investors and yielding results.

"Without having seen the letter, we will decline to comment," said Casey Norton, an Exxon spokesman.

Key to the outcome will be the reaction from larger shareholders, especially Vanguard Group, BlackRock Inc. and State Street Corp., which together control nearly 20% of Exxon's shares. BlackRock and State Street are part of Climate Action 100+, an investor group that pushes for companies to take swifter action to combat climate change. BlackRock, in particular, has a history of singling out Exxon for not moving quickly enough to address climate risks, and it cited those concerns earlier this year when it voted against two Exxon directors and in favor of separating the chairman and CEO roles. The directors were elected and the roles weren't separated.

Exxon, which just seven years ago was America's most valuable company, today has a market value of around $176 billion after the pandemic crushed demand for fossil fuels and laid bare prior strategic missteps. With its shares down 40% so far this year, there has been speculation Exxon could attract an activist investor seeking to harness frustration among shareholders.

Engine No. 1's letter calls on Exxon to make four primary changes: 1) add independent directors with diversified energy-industry experience; 2) reduce capital expenditures, particularly on projects that are unlikely to break even with sustained low oil and gas prices; 3) formulate a plan to invest in growth areas such as renewable energy; and 4) realign management incentives.

"We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation," the firm writes.

Engine No. 1 launched with $250 million under management and primarily manages Mr. James' own fortune from technology investing. Its focus is on so-called impact investing, which seeks to push companies to make changes that are beneficial in the long run to stakeholders such as workers and shareholders alike.

Its team includes Charlie Penner, a former partner at activist hedge fund Jana Partners LLC, where he helped run campaigns at companies including Whole Foods Market. He also led Jana's successful joint effort with Calstrs in 2018 to push Apple Inc. to add features to help parents limit their children's screen time.

Companies of all kinds are facing pressure to reduce their impact on the environment. As rivals such as BP PLC and Royal Dutch Shell PLC have begun investing in renewable energy -- a strategy that their investors haven't rewarded so far -- Exxon was seen as somewhat of a holdout, with Chief Executive Darren Woods vowing instead to spend more on oil exploration to increase production.

But recently Exxon has been taking actions to address shareholder concerns. Last week, it retreated from Mr. Woods' ambitious plan and said it would cut billions of dollars from its capital spending every year through 2025 and focus on investing in only the most promising assets. It also signaled it planned to take a write-down of as much as $20 billion on the value of natural-gas assets -- a move it had long resisted -- mostly stemming from the disastrous purchase of XTO Energy Inc. a decade ago.

Mr. Woods said the moves would help the company focus on improving earnings and strengthening its balance sheet to maintain the dividend. The dividend currently yields a whopping 9% and costs the company about $15 billion a year.

Exxon shares have risen about 9% since the announcement.

The window to officially nominate directors to Exxon's board doesn't open until later this month, and Engine No. 1 says in the letter it hopes Exxon will consider its nominees before that: Gregory Goff, the former CEO of refiner Andeavor, which was sold to Marathon Petroleum Corp.; Kaisa Hietala, who previously led the renewables business of Finnish refiner Neste Oyj; Alexander Karsner, an executive of Alphabet Inc.'s innovation lab who served in the Energy Department under President George W. Bush; and Anders Runevad, former CEO of Vestas Wind Systems AS.

--Christopher M. Matthews contributed to this article.

Write to Cara Lombardo at cara.lombardo@wsj.com and David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

12-06-20 2214ET

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Sales 2021 277 B - -
Net income 2021 18 829 M - -
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