“The idea of Exxon advancing an energy transition may not seem far-fetched.”
Next month, General Electric, America’s first great technology titan, will become three stand-alone companies. Despite more than 100 years of technological and industrial dominance, GE, in recent years, had fallen into terminal disrepair, reeling from poor management, diminished returns, high debt levels, and questions about its financial integrity.
GE’s fate is a sobering acknowledgment that the American industrial landscape is brutal and unforgiving. In recent decades lumbering corporate giants have been felled by agile and deadly digital velociraptors.
It also foreshadows a day of reckoning for another industrial colossus caught up in a similar wave of creative destruction, scientific and technological advancement, and aggressive new competition: the global energy market.
And the leading candidate to be the GE of this new era is ExxonMobil. Three years ago, the activist investor Engine No. 1 launched an aggressive shareholder campaign warning that Exxon was woefully unprepared for the energy transition. “A refusal to accept that fossil fuel demand may decline in decades to come has led to a failure to take even initial steps towards evolution, and to obfuscating rather than addressing long-term business risk,” it said at the time.
Exxon’s smoggy future
If anything, this long-term prognosis is even more true today. Exxon’s continued overwhelming dependence on fossil-fuel revenue makes it poorly prepared for an accelerating energy transition in which the vast majority of growth will go toward decarbonization, renewable energy, and fast-growing energy transition sectors.
By 2040, cumulative energy investments are expected to increase to more than $60 trillion, according to McKinsey’s Global Energy Report, across 400 sectors, technologies, policies, costs, and fuels seeking to exploit three emerging energy megatrends: decarbonization, power decentralization, and digitization.
That is not good news for Exxon. Despite record-breaking profits over the past two years, a vast majority of that profit was made from selling fossil fuels or their chemical and plastic byproducts.
But that is not what investors want to hear. “Going forward,” McKinsey predicts, “there is projected to be a substantial shift in investment from fossil fuels to renewables.” Next year, it predicts, low-carbon technologies will overtake fossil-fuel investments.
Future growth for Exxon is also not promising. According to McKinsey, earnings from green technologies are expected to quadruple by 2040, while earnings from oil and gas are going in the opposite direction.
Going nowhere
ExxonMobil continues to dramatically underperform for shareholders over any relevant time period. This decline also continues to occur while oil and gas are still the dominant forms of global energy. For example, despite $91 billion in profits in the past two years, GE stock is valued at little more than it was a decade ago. Back then, Exxon’s market cap and share price were competitive with Apple, Microsoft, and Google. Today, Apple’s market cap is six times greater than Exxon’s. In 2014, Apple traded around $30 a share, compared to Exxon’s $100 a share. Now, a share of Apple costs almost $200, while Exxon has barely budged above $100.
Exxon is not helping its case. Last year, its CEO, Darren Woods, stunned investors, admitting to the Financial Times that he was focused on fossil fuels because “we don’t have a viable set of alternatives.” Nor were investors thrilled with Exxon’s $60 billion purchase of methane gas rival Pioneer last October. This deal helped raise Exxon’s fossil-fuel production to the highest levels in its 140-year history. Since the announcement, the stock has dropped by 10 percent. Still, Exxon critics say, it continues to pursue the most aggressive spending plans in the industry to chase production growth.
Remember Kodak? Kodak was the GE and Exxon of picture-taking. And then came the iPhone.
But there may be an even deeper concern. What if Exxon’s even minimal transition efforts fail? Last year, Woods announced a new Low Carbon Solutions (LCS) business to “achieve societal ambition and ultimately achieve new zero.”
He said the unit would pursue more than $20 billion in “lower emissions opportunities” such as developing new technologies and deploying low-carbon projects, including carbon capture and sequestration (CCS), hydrogen, new energy efficiency processes, and developing advanced energy-saving materials.
It sounds impressive until you realize that Exxon earned $35 billion from its traditional fossil business last year and just $2.7 billion from its new low-carbon division. $2.7 billion in earnings is nothing to sneeze at, unless other businesses completely overshadow it. And that is Exxon’s problem.
Kodak haunts Exxon
Remember Kodak? Kodak was the GE and Exxon of picture-taking. And then came the iPhone. The iconic photo company was extinct in less than a decade, despite its best efforts to adapt to the digital revolution.
According to veteran Kodak watcher Quentin Hardy, who now oversees Google Media, Kodak was fully aware of the death spiral it had entered but could do nothing about it. “Kodak knew digital would overtake film. They knew the transition was underway from a chemical business to a physics business. Most importantly, they knew there were prisoners of their existing cash flow and could not do a 180 into digital hardware without destroying the stock,” he says.
Swapping fossil fuel shares for a green energy future?
There may be a way for Exxon to avoid Kodak’s fate. CEO Woods should be paying very close attention to GE CEO Larry Culp’s bold moves to break up GE and his belief that the departing GE divisions are now better off as stand-alone companies.
What if Exxon did something similar? What if Exxon spun off its Low Carbon Solutions business and offered Exxon shareholders a chance to swap some of their Exxon stock for a new company whose only purpose and mission was to capture the new energy investment opportunities laid out by McKinsey, and not be encumbered by Exxon’s legacy fossil-fuel business?
What if, instead of fighting the carbon transition, Exxon and its investors could gradually de-risk and dilute their existing Exxon “classic” stock by replacing it with new stock in Exxon’s incubated “green” companies? Instead of hindering progress, Exxon could become an energy-like VC spin-off machine, systematically transitioning its fossil-fuel business while incubating and launching the next Nvidia or Microsoft of energy.
What if, instead of fighting the carbon transition, Exxon and its investors could gradually de-risk and dilute their existing Exxon “classic” stock by replacing it with new stock in Exxon’s incubated “green” companies?
Instead of being a struggling internal division, Exxon’s low carbon could become a new, well-capitalized independent company associated with Exxon’s historic brand and heritage and run by a highly incentivized new generation of best-in-class engineering and energy systems talent.
Talk about the ultimate Exxon investment hedge underwritten by Exxon! It almost sounds too good to be true. While Exxon may not welcome the self-created competition, it would signal to the rest of the world that it is now part of the solution and not the source of the climate crisis.
But it’s more than a climate issue. It’s Woods’ fiduciary duty to investors to study every possible way to grow Exxon while protecting the planet.
And it sure is more profitable than villainizing Exxon critics. While Woods may be able to use Exxon’s public affairs muscle to muzzle these political challenges, he can no longer ignore that the market is ascribing higher growth multiples to companies doing everything Exxon is not doing in the race to decarbonize the world.
As Engine No. 1 observed three years ago, “the idea of ExxonMobil advancing an energy transition may seem far-fetched.” Still, by adopting creative efforts like those of GE, Exxon will be able to better align itself with new market sentiment than its decades-long pursuit of continued fossil-fuel growth.
Perhaps it’s time for Woods to pick up the phone and call Larry Culp.
