Exxon Mobil ‘s better-than-expected first-quarter earnings show how the company has emerged from the depths of the pandemic, when credit-rating firms began to question its debt load, and investors wondered whether it would be able to keep paying its dividend.
But even if Exxon’s balance sheet looks stronger today, tough questions remain. The company faces skepticism about its plans to combat climate change, and a challenge from activist investors who want four new independent directors to join its board. CEO Darren Woods spoke with Barron’s after the release.
One topic that got some attention during the company’s conference call was its growing emphasis on its carbon capture and sequestration business. Exxon has focused heavily on carbon capture as a solution to climate change, even as competitors have been investing more heavily in areas like wind and solar power.
Analysts have questioned whether Exxon’s strategy will be a substantial moneymaking business, or if it will mostly be a way to offset its own carbon footprint. The following interview has been edited and condensed for clarity.
Barron’s: I was curious if you think there needs to be a national price on carbon—either a tax or cap and trade or something like that—for you to make money on carbon capture? Do regulators sound like they’re interested in putting a price on carbon now?
Woods: For a long time as a company, we’ve taken a position that the most effective way for the U.S. or any economy around the world to incentivize cost effective reductions of CO2 is to have an economywide, predictable, transparent price on carbon, or a carbon tax. That provides the incentives in the economy, and allows the market to allocate resources.
There’s going to need to be some market incentives, government policies and regulations to support investment in CO2.
This drive around the world to reduce CO2 is essentially a new market. As a company, we’ve got a long, long history of bringing new ventures to market. The big difference here is this is a new market that doesn’t exist, and there aren’t incentives to drive the activities and the investments. I think that’ll be one of the things that governments have to put in place. You see that with the tax breaks you get on electric vehicles, and some of the tax incentives for wind and solar to catalyze and accelerate penetrations of those technologies. The big difference there is they’re going into existing markets that have some incentives already. Eliminating CO2 from industrial emissions, that doesn’t have the same type of market structure to support it. Government policy will be important.
Without a carbon price, is there a business model?
I think that’s going to be a function of whether a market develops for CO2 reduction credits. What we are seeing is the very early stages of the carbon credit market, where many companies have made commitments to reduce their CO2 footprint, often in very hard-to-decarbonize sectors of the economy. And so they’re looking and willing to pay for carbon reduction steps. There is the potential that if that was to grow, and more companies wanted to find offsets, that market could develop. And depending on the depth of that market it could then support some of these investments.
We’re in the very early stages. It’s an emerging market and we want to see how that grows and what that opportunity looks like. What we are trying to do and why we’ve come out with our low carbon solutions business and have made some proposals about an Innovation Zone in Houston is the idea of being in early. We’re making sure that we can bring some of the experiences that we have in this space to the table and help society more broadly and certainly governments make sure that they’re weighing all the costs and benefits and allocating resources most effectively.
Activist investors are challenging Exxon right now. And one of their complaints is that you received $75 million in compensation in the last four years despite the market value of the stock falling. Is that an indication the board isn’t independent enough and that it needs new members?
First of all, the compensation programs are managed by our compensation committee, which is all independent directors. And they recognize the long-term nature of the business and the fact that you make decisions today that manifest in the results over a time period of five to 10 years. Most of my compensation is based on that much longer-term horizon.
When I came in 2017, working very closely with the board, we recognized—given the changes that we were seeing in the macro environment, given the shale revolution and the impact that was having on the broader industry—that we needed to have a strategy that recapitalized the business with investments that had the potential for higher earnings and higher cash flow. And so we started off on a very ambitious and somewhat bold strategy—even though the market was down in that time frame and people were pulling back—of leaning into the market to bring in very attractive investments, and position ourselves for future success.
We were also very focused on restructuring the organization. We went through a significant restructuring in 2018 and ‘19. We realigned our upstream and downstream businesses, significantly reduced costs. All that work is starting to manifest itself. The board has been very involved in repositioning the company and really laying the foundation for the success that we’re starting to see. If you look at the earnings that we projected on a $50 real-price basis, we’ll double them by 2025.
Write to Avi Salzman at [email protected]