[04/08/21] In Defense of Exxon

A Google search of terms like “Exxon’s Problems” generates an almost endless array of articles and podcasts with scary titles like: “Exxon Mobile stock is in trouble due to strange management,” “Where it all went wrong for Exxon,” “Getting booted from the Dow,” “10 Exxon Mobile lawsuites you should know about,” “Whistleblower accuses Exxon of fraudulent behavior,” or “Exxon: An oil giant in crisis.” Judging by the business media and investment pundits, Exxon is doomed, done for, unless it makes an immediate and sharp turn away from fossil fuels, and toward becoming an alternative energy (solar, wind) company.

And yet, looking at facts―stock prices―Exxon’s situation isn’t that bleak: The return on Exxon’s stock during the most recent quarter (January-March, 2021) was an eye-popping 36.8%, against a 5.8% for the S&P 500, and compared with 24.6%, 17.0%, and 8.2% quarterly returns for its major peers, Chevron, BP and Royal Dutch Shell.

What’s going on here? Exxon handily beating its major oil & gas competitors? Wasn’t Exxon declared by the media mortally wounded due to its continued commitment to fossil fuels, and refusal to join the herd of oil companies vowing to become green, by shifting to alternative, sustainable energy sources? Apparently there is still a sizable number of investors who believe that as the world economy recovers from Covid and oil prices rise, a solid demand for oil and gas will persist for decades to come, even as alternative energy sources slowly gain transaction. Perhaps in the very long-term (2050? Beyond?) demand for oil and gas will vanish, but didn’t the great economist John Maynard Keynes say: “In the long term we are all dead”? Meanwhile, a company like Exxon committed to oil & gas may fare well during the foreseeable future. And, mind you, a switch to alternative energy isn’t without risk: governments can change their very generous subsidies to wind, solar, and electrical vehicles, technological changes may make yours obsolete, etc.

And it’s not only Exxon’s performance in the last quarter that should give us a pause. Its long-term past performance (2001-2019) wasn’t too shabby either. For the period 2001-20019, Exxon’s annual average return was 6.5% (S&P 500: 6.4%), against 10.8%, 5.1%, and 6.2% for Chevron, BP and Shell, respectively. Last year, 2020, was particularly bad for Exxon’s Stock (down 35.9%, compared with declines of 25.6%, 40.6%, 40.8%, for Chevron, BP, and Shell, respectively). But much of this damage to Exxon’s stock was compensated for in first quarter of 2021.

But underlying it all is a much more important issue. The main usefulness of capital markets lies in their offering wide choices for investors to own stakes in companies pursuing different bets on the future and operating diverse business models. What’s the use to investors if, say, all telecom companies were to offer the same investment strategies and mix of products to customers? Same with oil companies. Why should all energy producers pursue vigorously alternative energy sources? Isn’t it better for investors to have the choice of at least one major oil company (Exxon) essentially sticking with fossil fuels? (Exxon still invests in environmental projects, like technologies critical to lowering emission.) So, rather than forcing a strategic change on Exxon’s management―as active investors currently try to do―isn’t it much easier for investors who disagree with Exxon’s strategy to switch to more alternative energy committed companies? Why limit the choice of all investors and their ability to diversity risk by forcing a uniform strategy on all energy companies? Such limitation of investors’ choices doesn’t make any economic sense, or even common sense.

Summarizing, though I doubt it, Exxon’s strategy my turn out foolhardy in the future, but it’s a choice that should be left for management and investors to make.


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