Monday, September 14, 2020

Strategic CSR - Exxon

The article in the first url below offers some hope that investors are becoming more serious about the idea of climate change as a potential threat to business in certain industries. The focus is on Exxon's recent removal from The Dow Jones Industrial Average, which illustrates the growing weakness of the oil and gas industry:

"When trading begins next week, the blue-chip benchmark will include only one energy stock: Chevron Corp., which will represent just 2.1% of the price-weighted index, according to an S&P Dow Jones Indices analysis. In the broader S&P 500, the group isn't faring much better: Its weighting has shrunk to less than 2.5%, leaving energy as the least influential of the 11 represented industries. That is a dramatic fall from the end of 2011, when energy stocks accounted for 12% of the market."

There is historical context, too, that is specific to Exxon:

"Although the removal from the Dow is largely symbolic—much less money tracks the 30-stock index than follows the S&P 500—Exxon's departure has historical significance. The company is the longest-tenured member of the benchmark, having joined in 1928 as Standard Oil of New Jersey. It is also a reminder of Exxon's fall from the top echelon of American industry. As recently as 2013, Exxon was the largest U.S. company with a market value above $415 billion. It has since shrunk to less than $180 billion and has been eclipsed by the technology giants such as Apple Inc., Amazon.com Inc. and Microsoft Corp. that now drive the American economy."

The reaction by investors to Exxon's decline is as important as the news itself:

"Usually, market contrarians say a sector that is so beaten down should be ripe for bargains. But many investors remain skeptical of an energy rebound, pointing to muted expectations for global growth and spotty earnings. Energy is by far the worst-performing S&P 500 sector this year, down 40% while the index as a whole has gained 6.6%. The underperformance is nothing new: Energy was also the weakest performer in 2018 and 2019."

Of course, this decline partly reflects the dramatic drop in oil price in recent years (accelerated this year), but also reflects the news from oil and gas companies about large write-downs this year (see Strategic CSR – BP) that, in turn, represents a growing concern that a large part of each firm's value is based on reserves they will not be allowed to extract. As such, the headline here is Exxon, but the trend is industry-wide:

"Exxon shares are off 41% this year, while Chevron is down 29%. The pain is even more acute among some of the oil-field services companies and shale drillers. Schlumberger has dropped 52%, and EOG Resources Inc. has fallen 47%. Only one company in the S&P 500's energy sector, Cabot Oil & Gas Corp., is up for the year."

For more detail about what the WSJ describes as Exxon's "stunning fall from grace," see the article in the second url below:

"Just seven years ago, Exxon was the biggest U.S. company by market capitalization. It has since lost roughly 60% of its value, with its market cap now at around $160 billion. … Analysts estimate Exxon will lose more than $1 billion this year, compared with profits of $46 billion in 2008, then a record by an American corporation. … At the heart of the problem: Exxon doubled down on oil and gas at what now looks to be the worst possible time. While rivals have begun to pivot to renewable energy, it is standing pat. Investors are fleeing and workers are grumbling about the direction of a company some see as out of touch and stubborn."

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e

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