Exxon Mobil (NYSE:XOM) stock is trading at its highest level in over a year, with a dividend yielding nearly 6%. But institutional investors are out of patience for the company. An activist fund called Engine No. 1 got enough support to oust at least two directors at the May 26 annual meeting. The vote not only reflects a change in attitudes at Exxon, but also a trend across energy stocks.
The upset could not have happened without major support from institutional investors, who control 53% of XOM stock. As Conor Sen of Bloomberg tweeted, “Engine No. 1 persuaded Blackrock et al to make a change at Exxon, one of many companies they collectively control.”
What BlackRock Wants
BlackRock CEO Larry Fink, whose firm contributed several executives to President Joe Biden’s administration, called for a “tectonic shift” in his 2021 letter. “No issue ranks higher than climate change on our clients’ lists of priorities,” he wrote.
If institutions act on that belief, it will have an impact on all energy stocks. Houston is as closely tied to oil as Detroit was to cars 40 years ago. But over the last decade, technology has produced cheaper substitutes for fossil fuels. Electricity from windmills and solar panels is now the cheap power source.
In the case of Exxon Mobil, Engine No. 1 wants more investment in clean energy and greater discipline in capital allocation, including lower gas and oil prices. It also wants top executives like CEO Darren Woods penalized for past performance. In Woods’ case, he made $75 million while the company’s market cap fell $200 billion. The proof point is that XOM stock has outperformed rival Chevron (NYSE:CVX) since Engine No. 1 launched its campaign.
What Exxon Mobil is Doing
Telling Exxon Mobil to take climate change seriously, however, is a little like telling the Chicago Tribune to take the Internet seriously in 1995, or Altria (NYSE:MO), then Phillip Morris, to take lung cancer seriously in 1970.
Exxon Mobil specializes in oil and gas. Under Woods, the company has found vast new deposits off Guyana and doubled-down on fracking in the Permian Basin in Texas. Its most recent quarterly report, announced May 5, showed earnings of $2.7 billion, or 65 cents per share fully diluted, on production of 3.8 million barrels of oil per day.
The problem is that downstream operations — refining and selling oil products — are still suffering from low margins. Demand for gasoline declines with every electric car sold. Future demand for natural gas declines with every new wind farm or solar farm that goes into production. But Exxon’s capital budget for 2021 remains in the $16 billion-$19 billion range.
Will Anything Change for Energy Stocks?
The sea change has already begun. The market is treating oil stocks like Exxon and Chevron, which sports a 5.16% yield, the way it treated cigarette stocks a generation ago. Reserves and capital budgets are declining. Cash is going out to shareholders instead of back into the business.
Other integrated oils, like BP (NYSE:BP), Total (NYSE:TOT) and Royal Dutch Shell (NYSE:RDS-A), seem all-in on an environmentally conscious approach, at least rhetorically. Total has controlled SunPower (NASDAQ:SPWR), a solar panel producer, for years. BP says its goal is “net zero emissions” by 2050. And a court recently demanded Shell cut its emissions by 45% by 2030.
Climate Consciousness Is Here to Stay With Energy Stocks
The oil press is calling the Exxon vote a “day of reckoning.” For investors, they should consider that debt levels and dividends now matter more than oil production.
For instance, Permian player EOG Resources (NYSE:EOG), after earning $1.62 per share, announced a special dividend at $1 per share “to demonstrate our commitment to returning cash to shareholders.”
Forget about investing in energy stocks in hopes of a return. Buy oil and gas stocks for dividend income. That’s what is going to be sustainable.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.