There Will Be Toil

Threading a needle seems an inappropriately delicate phrase for a global behemoth like Exxon Mobil, but it is exactly what the company and the other oil majors are being asked to do. 

They are coming under increasing pressure by activists and governments to reduce greenhouse gas emissions and to shift more aggressively to renewable energy. The companies are also coming under pressure from investors to cut spending and to focus on their most profitable projects. All while being able to increase earnings and generate enough cash to pay investors dividends.  It is a conundrum that was highlighted in May by a Barron's Guide to Wealth cover story, "The Oil Company of the Future." 

Exxon made another try at threading the needle earlier today when it announced that it would maintain annual capital spending through 2027 at between $20 billion and $25 billion and that it expected to double its earnings from 2019 levels. Exxon's presentation can be found here. 

Some $15 billion of that spending will be on low-carbon businesses. Avi Salzman of Barron's wrote today that the low-carbon investment is "four times as large as the company’s previous plan."  For Exxon it is an ambitious step, but as Avi notes, European rivals have already raised the ante. TotalEnergies of France plans to spend 25% of its capital budget on renewables and electricity, while Exxon's low-carbon plans account for just more than 10% of its capital budget. 

Exxon also says it will take actions  "that are expected to reduce absolute corporate-wide greenhouse gas emissions by approximately 20%. The company also reaffirms it plans to achieve the goals of the World Bank for zero routine flaring no later than 2030."

It may not be enough to convince environmentalists that John D. Rockefeller's company is turning green, but it's clearly a shift that Exxon's newest board members, who had raised climate-change concerns in their proxy battle, had sought.

The investor reaction was muted today. Exxon shares initially surged, along with the broader market, but sagged with the market (and the price of crude oil), ending down slightly at $59.79.  The stock is up 45% for the year so far, outpacing the broader market.

Wells Fargo analysts, who have an Overweight rating on the shares, seemed pleased with today's presentation. They wrote: 

The updated plan leans more heavily on cost reductions, margin enhancements, lower capex, less growth, and a stronger balance sheet. This offers greater resiliency and confidence in a favorable outcome in our view. 

Paul Sankey of Sankey Research, however, was disappointed by the capital spending plans. "That is more, or loads more" spending,  he told Reuters,  adding that "less capex is more cash return."