Both Exxon Mobil and Chevron had their credit ratings downgraded recently. While that is not something that BlackRock needs concern itself about, all three companies are facing hostile shareholder resolutions at annual meetings today (May 25).
S&P downgraded the credit rating for Exxon Mobil from ‘AAA’ to ‘AA+’, leaving only two US companies with the gold standard triple A rating – Johnson & Johnson and Microsoft. A few days earlier, it had downgraded Chevron’s rating to ‘AA-’ from ‘AA’. This is despite the fact that ExxonMobil and Chevron said they would reduce 2016 capital expenditures by about 25%. For Exxon, S&P said: “We believe Exxon Mobil’s credit measures will be weak for our expectations for a ‘AAA’ rating due, in part, to low commodity prices, high reinvestment requirements, and large dividend payments.” For Chevron, S&P said: “We anticipate Chevron will significantly outspend internally generated cash flow to fund major project capital spending and dividends this year and generate little cash available for debt reduction over the following two years.” The other large US credit rating agency, Moody’s, also downgraded both companies for fundamentally the same reasons.
What all this is saying, in sentences that would be comprehensible to the bloke standing next to you in the pub, is that neither company has the money to pay dividends to its shareholders… unless it borrows that money.
And both, according to most sources, already have a lot of debt. Since they don’t have the cash to pay dividends, they don’t have the cash to pay off their debts either. So they’re borrowing (ultimately, from investors), to pay dividends (to investors). It’s not sustainable.
Although most of the other exploration and production companies in the US have also been downgraded by both S&P and Moody’s, most have also suspended dividend payments. Not so Chevron and Exxon, which latter actually increased its dividend in the first quarter of the year. Consistent dividend payments are often the reason why many asset managers, institutional investors and shareholders hold companies in their portfolios. If this strategy of borrowing from Peter to pay Paul fails – and it is untenable without significant increases in both free and operational cash flow – then investors will begin to divest, and for purely short-term financial reasons rather than long-term, stranded asset risk ones.
But that’s not all these two oil majors are facing this year.Both are also, among a whole raft of resolutions, some of which already received substantial support at Occidental earlier this year, facing US-style ‘Aiming for A’ resolutions. Unlike BP, Shell and Statoil, these are opposed by management rather than supported by it. BlackRock is facing a resolution sponsored by The Stephen M Silberstein Revocable Trust that calls for a report that “evaluates options for bringing its voting practices in line with its stated principle of linking executive compensation and performance, including adopting changes to proxy voting guidelines, adopting best practices of other asset managers and independent rating agencies, and including a broader range of research sources and principles for interpreting compensation data”.
BlackRock also is the target of an ongoing SumOfUs petition campaign that as of 19 May had attracted nearly 74,000 signatures, including more than 1,500 BlackRock iShares clients, over 1,750 BlackRock investors and more than 2,000 BlackRock customers.
ISS, however, does not recommend support for the Silberstein proposal, citing: “implementation of the resolution could result in the firm imposing undue influence on Stewardship Team’s decisions, which could be contrary to their fiduciary duty to clients on whose behalf securities are voted. The board of BlackRock has a responsibility to its own shareholders, while the votes of the funds’ proxies are intended to be independent of that interest.”
ISS notes that: “When the Stewardship Team [a team of 20 governance specialists] has concerns about a company’s compensation policies or practices, it generally first engages with the management or the board of such company, in order to explain the Stewardship Team’s concerns and encourage change rather than vote against compensation.” Nevertheless, there is growing frustration at the dichotomy between BlackRock’s and other large asset owners’ “policies” and their “voting practices”. Which leads us to the Exxon and Chevron votes.
The ‘Aiming for A’-like resolution at Exxon, co-filed by New York State funds and the Church Commissioners among a number of other co-filers, reads in part: “Shareholders request that by 2017 ExxonMobil publish an annual assessment of long term portfolio impacts of public climate change policies, [that] should analyze the impacts on ExxonMobil’s oil and gas reserves and resources under a scenario in which reduction in demand results from carbon restrictions… consistent with the globally agreed upon 2 degree target.”
ISS recently issued guidance for its clients that supports a majority of the shareholder resolutions Exxon is facing, including the 2-degree risk one. It also advises support for an independent chair, for a director nominee with environmental experience, for proxy access, for a report on lobbying payments and policy, for acknowledging the imperative for a 2-degree limit, and for a report on minimizing fracking impacts.
On the other hand, Glass Lewis is far less supportive of the resolutions at Exxon, being against a director nominee with environmental experience, against the lobbying resolution and against the fracking disclosures. However, it is FOR the 2-degree risk resolution. The Chevron proxy statement has almost a carbon copy set of the shareholder resolutions at Exxon, and ISS’ advice is, similar to that at Exxon, to support most of them.
That’s what the proxy advisory firms say.
Clearly support for the resolution is building among public, SRI and activist firms. But how will other types of shareholders, such as asset managers, vote? For BP, Shell and Statoil, the outcome was relatively clear. The resolutions were supported by management and this paved the way for even large asset managers to support them; obvious from the almost 100 per cent support for all three resolutions.But the resolutions at Chevron and Exxon, opposed as they are by the board, are a different matter entirely.
Ownership profiles from ISS and GL show that Vanguard, State Street and BlackRock are the three biggest owners of both companies. Vanguard owns just over 6 per cent of both Chevron and Exxon, BlackRock owns 4 per cent of each, and State Street owns almost 6 per cent of Chevron and around 4.4 per cent of Exxon. Those are substantial voting blocks. Reliable sources say, for example, that Vanguard simply abstains on environmental and social shareholder resolutions… unless they are supported by management. BlackRock would not disclose how it was going to vote at Exxon and Chevron, and State Street did not respond to enquiries. The rest of the largest shareholders – apart from Norges Bank and Dimensional Funds – are all regular abstainers or management-voters according to voting records. Yet, they cannot have abstained from the European votes.
It remains to be seen whether these large asset managers will withhold support from resolutions with the same intent and purpose as those already passed in Europe simply because management opposes them. If support is withheld, then that would be putting policy and principle before common sense.